By: Tom Gentile
on March 29th, 2023
Originally published via our newsletter previously. Subscribe for early access!
I teach my subscribers and anyone who is a student of mine a 3-step approach to trading options.
- SPOT the OPPORTUNITY
- BUILD an ACCEPTABLE RISK OPTION TRADE
- MANAGE THAT TRADE
There are many things to use in your research when deciding on a stock or ETF to consider searching up an option on it to trade. Spot the Opportunity
One can use Fundamental Analysis, like earnings, sales management and or new products to name some.
One can use Technical Analysis, like support and resistance, moving averages, stochastics, etc.
The second item involves, for me and my team, is to use the software www.tomsoptiontools.com . We can look for stock options with low or high implied volatility, tight slippage, and highest reward, least risk or many other scans. Build an Acceptable Risk Trade.
The last step is the Trade Management of an option trade.
The last part of this newsletter will go over some education on the way to manage ones option trade. It will use the case study highlighted last week, both the stock and the option used for education.
Let me emphasize that last statement. We highlighted it last week for educational purposes only – it was NOT a trade recommendation.
— Tom Gentile
C1P: Chief 1-Percenter
Corners of the Market
SPY – SPDR S&P 500
TLT – iShares 20+ Year Treasury Bond ETF
Finally have a day of price action in both equities, SPY chart, and Bonds, TLT chart that shows the inverse trading correlation between the two.
When one of these tow is bullish the other tends to be bearish and vice versa.
The SPY chart shows a definitive bearish reversal day where the TLT shows a definitive bullish reversal day.
The TLT ha had a tough go much of last year even with the fed raising rates and equities selling off, bonds sold off a lot as well.
Since December 2022 TLT has tried to rally only to stall out between 108 and 110.
Despite its bullish action today it look like another stall is possible with the Darknet S signal populating today a bit under 108.
UUP – Invesco DB US Dollar Index Bullish Fund
USO – United States Oil Fund, LP
The seasonal bullish pattern in oil and energy has been mentioned quite often and the knowledge of that pattern being one that ends mid-July has been taught.
The USO was tracked from 2006 to year 2022 and regardless of what USO did price action-wise during that 5-year pattern each year, 75% of the time it ended up higher than it started.
Right now, we would be happy to see a bounce in USO to the horizontal price level emphasized with the solid, green, horizontal line in the chart image above.
Intraday it touched that price level; a more substantial move would be USO closing above that price level.
GLD – SPDR Gold Shares
The price level GLD is trading at is what was highlighted last week as a 100% fib retracement of the prior leg down.
What the chart looks like now is a pattern we absolutely love and point out when we can since it is a pattern that shows up regularly and is based on price, no other indicators, or oscillators.
It doesn’t mean one can’t put other technical studies on the charts when this pattern appears, its just that sometimes an effective technical pattern can happen based just on price.
It needs to ne pointed out there are some Darknet squares showing up as of the last few trading days. These are squares that populate with the Darknet analysis turned on and they indicate a Darknet S signal could be showing up any day now. We will see if this cause a stall or reversal when it does.
Case Study – Trade Management Education
In the last Weekly Newsletter, we offered up what we called a Case Study – which is NOT a trade recommendation nor an actual trade we took.
It was a trade used as education on how we use Toms Tools to find a Stock or ETF to consider an option trade on. We continued the education on how to find an acceptable risk option trade to consider.
Those are the first two steps in the Option Trading process taught and will continue to be taught to all subscribers and students of ours.
The last step in the Three-Step Option Trader Process is to Manage the Trade.
That is what this part of this week’s newsletter will be about.
The case study shown was a Call Debit Spread on Netflix, Inc. (NASDAQ: NFLX).
Below is that option position shown last week.
The chart we showed last week on NFLX showed and we wrote the technical charting reasons this stock was chosen.
A general rule of thumb on trade management is to anticipate a 100% ROI and either sell to close the entire position or sell to close half the position (if one has an even number of contracts) at 100% ROI and let the rest ride.
Or, when it comes to managing a loss considering closing the entire position at a 50% stop.
If you see a technical reason to stop out that happens before the 50% stop hits that could also be a consideration to close the trade.
Here is the current chart (at the time of this writing) for NFLX.
The numbered, red circles show 1 and 2 the 50% and 61.8% fib retracement levels that could be used as a technical stop point. Meaning if the stock closes below either of those two price levels one can consider stopping out.
Numbered, red circle 3 is a technical pivot point that one can use as a technical stop if the stock closes below that.
One other means of stop loss / trade management is to use a percentage of the open price for the option as your stop.
Example: if one bought to open an option at 4 then stop out at a valuation of 2.
Here is the current status of the tools pricing for that Call Debit Spread.
The price it was when we highlighted this last week was a cost of $2.50 or $350 per contract.
Right now, the closing price shows $2.12 or $212 per contract.
None of the technical stop points have been breached and the option is not at a 50% depreciation.
Right now, this is a situation where we would be holding the option trade and anticipating it working out for profit, but if not we have ascertained stop loss management levels. This again, education on a case study not an actual trade.
— Tom Gentile
C1P: Chief 1-Percenter
Stock and options trading has large potential rewards, but also large potential risk.
You must be aware of the risks and be willing to accept them in order to invest in the stock and options market. Do not trade with money you cannot afford to lose.
This is neither an offer to buy/sell/ or recommend a particular stock or option.
Hypothetical or simulated performance results have certain inherent limitations. Unlike an actual performance record, simulated results do not represent actual trading. Also, since the trades have not been actually executed, the results may have under or overcompensated for the impact, if any, of certain market factors, such as lack of liquidity. Simulated trading programs in general are also subject to the fact that they are designed with hindsight.
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