Volatility is back.
Coronavirus-immune tech stocks have sold off.
Cash strapped companies are unable to do buybacks, drying up a major source of demand.
Virus cases are again hitting highs— and a safe and reliable vaccine could still be a ways off…
But you know what?
When you day trade, like I do in my Daily Deposits service, you don’t have to try and crack the market’s puzzle…
You just have to be right for the day…
Each trading session, you’re coming in with a clear mind.
And when you close each session in cash, it allows me to sleep like a baby…
Even during this historically volatile period.
How does it work?
Let me give you a brief overview of my Daily Deposits system.
It’s a setup I expect to see a lot more often, and one which can be profitable repeatedly if executed correctly.
My trading doesn’t actually start at 9:30.
It starts at the crack of dawn, when I first sit down at my computer and start looking at these indicators in the futures market.
This is key in figuring out which direction the market is looking to go for that day, since trading momentum is all about going with the trend and not against it.
It’s the same thing with the SPY.
The strategy I have built is based on a very basic and effective set of market indicators.
When looked at together, these indicators are all part of an overall “scorecard” that helps me decide which direction to take the trade.
So…What is this scorecard exactly?
Let’s take a look at what the scorecard reported in the pre market trading session from the other day.
It’s a gauge that gives me a quick overall of the feeling of the markets for the day ahead.
And it’s the way I can get an edge against the markets day in and out without complicated indicators.
You see, many indicators are historically focused, or known as backward looking, and can give false signals.
Think of the premarket as the warm up for a baseball player. Stretching, jogging, throwing the ball, and whatever routine a professional player has, it is all done before the game even begins.
And this is no different in trading…
Every morning you should have a routine in the pre market where you do your “stretching” by reading charts, and get your mind focused on the day coming up by reading news and having your favorite morning beverage.
And what did this four step warm up routine tell me about today’s market?
I start off every morning by looking to see if the US futures markets are positive or negative in the pre market session.
This gives me an understanding of what the markets are currently doing and the direction they are trying to take in the day ahead.
In the trading session this morning, the US futures were all red and pointing to a lower open for equities.
I want to check the international markets and determine how the world is trading in the overnight session.
As the world is a large, interconnected market, the European and Asian markets have a significant impact on how the US trades.
In this pre market session, the Asian and European markets were mixed, showing little to no evidence of a strong directional trend heading into the US market open.
Currencies are the force that drives all economies around the world. A country without a currency, does not have an economy or government to power them.
Which is why I want to focus on the two currencies that I believe impact the US the most, the Japanese and Australian dollar.
Since these FX currencies are showing a risk-on day, they are pointing to potentially strong US open.
“The world runs on crude” is a fairly accurate saying. The world simply cannot shut down it’s demand for crude oil overnight.
It’s important to maintain a close eye on this futures market and how it’s trading in the pre market session.
The other market to keep an eye on is the copper market.
Driven by many different factors, it is important to remember that a stronger copper futures market indicates a stronger global market and US market.
A weaker Copper futures market would in turn indicate a weaker global market and lower US market.
Putting it all together, you gain a huge edge in determining the direction of the markets for the upcoming trading day.
Now, let’s talk about the trade I took today.
Now that I have a clear understanding of what the pre-market session is doing, I start searching for an option to trade.
One of the best approaches I like to use is to make sure I pick an option that has some “bang” to it.
Typically weekly options are one of the best ways to make sure you get that explosion in the options prices.
Like what I saw yesterday…
Every morning, Daily Deposits subscribers get a recap of my pre-market analysis to start their trading day
Every morning I review:
It will teach you how I read and decipher the overnight trading sessions before the bell at 9:30am.
Then, I place my SPY trade based on which direction I think it will move.
To learn more about the strategy, check out my next Daily Deposits training event here.
Silicon Valley’s most “private” company may not be so private anymore.
Palantir, the secretive big data firm initially backed by the CIA, is about to go public this Wednesday.
The company’s co-founder is Peter Thiel, one of the biggest tech investors on the planet.
It’s yet another of a series of software companies, including Snowflake (SNOW), JFrog (FROG), and Sumo Logic (SUMO), to go public in the recent weeks.
But unlike all those other geeky, flip-flops-to-work startups, there’s a more controversial aspect to Palantir.
According to Palantir’s CEO, Alex Karp, it’s tech is used “on occasion” to kill people.
That’s because the company has not only won some very lucrative contracts from companies, but from western governments around the world.
So in a lot of ways, Palantir exists more as a defense contractor like Lockheed Martin (LMT).
I mean, you just can’t imagine one of Karp’s Silicon Valley colleagues— say Tim Cook— saying a thing like that.
But that’s not the only unconventional thing about Palantir— the company is pursuing a direct listing instead of an IPO.
It’s a process that’s a whole lot quicker and involves less scrutiny, since companies just sell existing shares rather than raising new capital.
No matter what way you slice it though, it’s going to be an unusual IPO for sure— so let’s dig in.
An early investor in Palantir was the CIA.
In fact, the technology was apparently used to help track down Osama bin Laden, as well as a host of other terrorists in Afghanistan and Iraq.
Additionally, Palantir helps the Immigration and Customs Enforcement agency (ICE) locate illegal immigrants.
So, as you can imagine, there’s a lot of controversy around Palantir.
But Palantir also supports a number of humanitarian efforts.
That includes exposing human trafficking rings, locating exploited children, and solving complex financial crimes.
How exactly does Palantir do it?
Put simply, Plantir provides software capable of sifting through massive troves of data.
That could include anything from cell phone records to airline reservations to social media files.
Basically, Palantir takes all internal data from companies and governments and combines it with external sources of data.
That allows Palantir to create a more intuitive platform for better data visualization, a greater understanding of links between those data sets, and a better archiving of overall data.
The two core products that help Palantir achieve this are Fotham and Foundry.
What the Numbers Are Saying about Palantir
No doubt, the numbers behind Palantir are about to make a big splash.
The trading debut will give the company valuation of around $22 billion dollars.
That’s in large part because of the tremendous scope of the company— they have 125 customers in 36 industries, across over 150 countries.
As a company offers software for data analytics, they’re getting a whole lot of business from both new and old companies.
Although they do not sell their software to geopolitical opponents of the US, the US government remains a huge global customer.
However, as is the case with almost every tech IPO that hits the market these days, Palantir is currently losing money.
The company lost $165 million in the first two quarters of 2020, which is nevertheless an improvement from 2019 when the loss was $588 million.
A large part of these losses came from executive compensation, which traditionally is regarded as a red flag for investors due to the dilutive nature of this cost.
Even after the direct listing, the unique share structure (Class A, Class B and Class F) will allow the key 3 executives to retain majority control over the company, which could negatively impact the company over the long haul.
However, the company has been rumored to go public for a long time, so there could be a huge amount of pent-up demand right from the get-go.
How I’m Trading Palantir (PLTR)
Now that we are familiar with the basic fundamentals of this company, let’s jump to the part we’ve all been waiting for.
I would like to outline my trading plan for the opening of trading for Palantir.
Shares are expected to start trading around $10 with the ticker PLTR.
I will be open minded to trading this stock both long and short.
Although I am less likely to buy the opening print, allow me to elaborate on my two potential plans for both long and short sides.
The scenarios I am considering to get long:
The stock holds a level for more than 30 minutes, preferably above the opening price.
The stock opens weak but is unable to go down further, in which case I would also consider this as a sign of strength and look for consolidation to get long. My stop would be below the consolidation low and target would be dictated by the price action.
The stock closes at highs, in which case I would consider taking the long overnight
The scenario I am considering for a short trade:
The stock opens and immediately rips higher, but stalls and comes right back down through the opening price. To me, that would indicate overwhelming supply. And given the absence of underwriters to support the price, I would short with an absolute stop at high of day.
Remember, these are just rough guides.
Although I will keep these scenarios at the back of my mind, I will wait for signs and confirmation without jumping the gun when PLTR goes live on Wednesday.
To learn the strategies I’m using to potentially trade PLTR, check out my latest IPO trading workshop here.
L earning the ins-and-outs of exchange-traded funds is important whether you’re new to trading or you’ve been doing it for a while. Because trading inverse ETFs, specifically the inverse VIX, is so complex, it is typically best left to traders that have experience and/or a deep understanding of how they work. By doing your research before you begin, you can increase your chances of success and ensure that you’re investing in a trading instrument that aligns with your risk tolerance and your goals.
Image via Unsplash by markusspiske
An inverse ETF, or exchange-traded fund, is an exchange-traded product (ETP) that is comprised of various derivatives and assets, like index swaps or options, in an attempt to help investors profit from a drop in an underlying benchmark’s value.
In other words, an inverse ETF, which is sometimes referred to as a “short ETF” or “bear ETF,” is basically an index ETF that increases in value when its correlating index’s value decreases.
Investors often use inverse ETFs in their investing strategy when they have a risky amount of exposure to a certain region, sector, or index because it allows them to protect their portfolio from that overexposure. As a result, investors get downside exposure in the marketplace and are able to make investments that are a little less risky.
A majority of inverse ETFs rely on daily stock futures to generate their returns. Stock futures, sometimes referred to as futures contracts or just futures, are contracts that buyers and sellers use to negotiate the price and date of a future stock transaction. Once the agreed-upon date rolls around, the buyer and seller are obligated to complete the transaction at the stated price regardless of any changes that might have occurred to the market price. Essentially, they allow investors to make a bet on the direction a security’s price will go in.
When it comes to investing in inverse ETFs, derivatives, like stock futures, give investors the ability to bet that the market will drop. If it does, then the inverse ETF increases by about the same percentage as the decline.
Because fund managers purchase and sell derivative contracts on a daily basis, inverse ETFs are short-term investments. You should really only hold onto an inverse ETF for one day or less since the compounding of daily returns could cause the asset’s performance to stray from your expectations.
Because of this, it’s impossible to guarantee that an inverse ETF will accurately reflect an index or stock’s long-term performance. Additionally, trading so frequently usually impacts the fund expenses, causing the expense ratios of some inverse ETFs to reach or exceed 1%.
Investing in inverse ETFs is a lot like holding several short positions, which is when investors borrow securities and sell them in the hope that they’ll be able to repurchase them for cheaper. Unlike with short positions, investors aren’t required to hold a margin account when entering into an inverse ETF, meaning a broker doesn’t have to lend an investor money to trade.
Aside from needing a margin account, shorting requires investors to pay brokers a stock loan fee. When stocks have a high short interest, it can drive up the cost of short selling. A lot of the time, the cost tied to borrowing shares can be upwards of 3% of the borrowed amount, making this trading strategy particularly risky.
Inverse ETFs, on the other hand, often have an expense ratio of 2% or less and can usually be purchased by anyone who has a brokerage account. Basically, it’s both easier and less expensive to trade inverse ETFs than it is to short stocks.
There are quite a few different types of inverse ETFs, including inverse ETFs that focus on certain sectors, like consumer staples, energy, or financials, and those that are used to profit from drops in broad stock market indexes, like the NASDAQ 100 or the Russell 2000.
In some cases, investors use inverse ETFs so that they can make a profit when the market dips down, but there are some that use them to hedge their portfolios. For example, if you own an ETF in the S&P 500, you could hedge, or protect, your portfolio against dropping prices by purchasing an inverse ETF that matches the S&P. Essentially, this lowers your risk level because it gives you a way to profit even if things go wrong.
Though hedging can be really helpful if the S&P index declines, you could end up having losses that offset any profits from your original ETF investment if the S&P starts to rise. In this case, you would need to sell your inverse ETFs to eliminate the risk. Aside from that, inverse ETFs are short-term trading tools, meaning in order to make money from them, you have to time your trades perfectly. When investors poorly time their entries and exits or funnel too much money to their inverse ETFs, they can risk some pretty significant losses.
I nverse ETFs and standard ETFs share a number of the same benefits, such as tax advantages, lower fees, and ease of use. Aside from that, there are a few benefits that are more specific to inverse ETFs, most of which have to do with the different ways that they allow you to place bearish bets. Buying shares in an inverse ETF allows investors to take an investment position similar to what they would have achieved if they were short-selling an index or ETF without needing a brokerage or trading account to do it.
Inverse ETFs are admittedly a bit riskier than traditional ETFs, but because you buy them outright, they carry considerably less risk than other types of bearish investments. For example, shorting an asset carries risks that are essentially unlimited, which can result in investors losing way more than they originally expected to. On the other hand, when holding inverse ETFs, investors can only lose as much as they spent to purchase the ETF. Even if the inverse ETF ends up being completely worthless, the threat of owing a broker or anyone else money isn’t there.
One of the primary disadvantages of trading inverse ETFs is the lack of selection. Since they aren’t as popular as traditional ETFs, investors are usually stuck with less demand and fewer options, which results in them having a bit less liquidity.
Aside from their lack of popularity, another risk associated with purchasing inverse ETFs is that major stock indexes have a long history of rising. In other words, it can be risky to use a buy-and-hold strategy when purchasing inverse ETFs because, historically speaking, indexes eventually make a comeback despite any losses. Because of this, it’s important for inverse ETF investors to closely monitor the markets so that they can exit their position before the corresponding index bounces back.
Inverse volatility ETFs are connected in an opposite relationship to volatility futures contracts based on indexes. The most notable inverse ETF is the VIX, or the Chicago Board Options Exchange Market Volatility Index.
Put simply, the prices of these funds have adverse reactions to the VIX, dropping when volatility peaks, and spiking when volatility plunges.
Inverse VIX ETFs are extremely complex instruments, which is why they are primarily used by experienced traders. Part of what makes them so complex is that a VIX ETF inverse can’t be bought or sold directly. Unlike more traditional inverse ETFs, you have to indirectly short the VIX ETF.
Though often used interchangeably with volatility ETFs, there are also volatility exchange-traded notes, or ETNs. Perhaps one of the largest and most liquid stock market indexes in the volatility realm is the iPath S&P 500 VIX Short-Term Futures ETN (VXX). With the inverse VXX ETF, the S&P 500 moves opposite of the VXX. In fact, there is more potential for gains here than a regular short volatility ETF because the movements of the VXX usually exaggerate any moves that happen in the S&P 500.
When trading on the ProShares Short VIX Short-Term Futures ETF (SVXY), you purchase VIX when you short the ETF, or the VIX stock futures. Because the S&P 500 is the inverse of the VXX, the best way for a day trader to turn a profit is to buy VXX when the index is experiencing a decline and to short VXX when the S&P starts to rally.
W hen it comes to trading inverse ETFs, there are definitely risks, but the rewards make it worth it for a lot of investors. Though knowledge is just as important as experience for almost every type of investing, it’s especially beneficial before you begin investing in inverse ETFs. VIX inverse ETFs are particularly complex, but by familiarizing yourself with them, you can increase your chances of success and your profitability.