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As a stock trader, you only have 2 ways to trade the markets

Stocks only allow you to get long or short stock by buying or selling the underlying asset.

But as an option trader, you have many choices.

Since options are a highly leveraged trading instrument that can multiply the returns of the trader…they are highly desired for option buyers as a way to take bets on the markets

And when many traders all pile into the same option, they impact the price and bid the price higher just from all of the excitement they caused.

But who wants to over pay for options?  

I know I don’t!

Which is why I combine the signals from Options Profit Planner with various credit strategies to put the odds of winning in my favor.

Now let me show you how I trade like a casino by leveraging the power of credit strategies to generate triple digit returns on my trades.

 

Options Profit Planner

 

In order for me to put my money to work, I have 3 main requirements:

  • Paid upfront for my risk in a stock, I do not want to pay to trade!
  • Odds of winning in my favor, I must be the house, not the gambler!
  • If I own stock, it must be at a steep discount and I will hold for years if I need to

So, does buying stocks give you those requirements?  

No!  Actually buying stock doesn’t even give you one of them!

You see, there are many problems with buying stocks instead of trading options.  

Let me explain…

 

The Problem With Buying Stocks

 

Many beginning traders start with stocks as they are considered to be a single-dimension trading strategy.

This means that if you buy a stock at $50 and the price stays the same for 5 years, you have gained or lost no money.  

In other words, trading stocks is a linear relationship, with every $1 dollar change in stock price, you will see a $1 change in your profits or losses.

And if you want to own 100 shares of a $50/share stock, you will have to spend $5,000 to own those shares.

Then what about the average daily expected move?  Well, depending on the stock, it might be as high as 5%, or as little as 1%.  But the higher cost of a stock, the less it will move on a daily basis.  

As a business owner looking to generate wealth in trading, the 1% doesn’t really excite me and is not worth my time to look at.

So that’s why I trade options – since it gives me exposure to a greater quantity of shares in a stock plus bring in a return of 50% – 100% I am seeking on my trades.

And as a seller of options, I can put the house odds to work for me along with a higher chance to return 50% to 100% on my positions.

 

Selling Options – Being The House

 

I always choose to sell instead of buying options when it comes to running my stock trading business.

Why?

Because when I sell options I am able to satisfy my 3 main requirements of trading.

  • Paid upfront for my risk in a stock –  I do not want to pay to trade!
  • Odds of winning in my favor over 50% – I must be the house, not the gambler!
  • If I own stock, it must be at a steep discount and I will hold for years if I needed

Selling options is a lot like being in a casino.  The house has a small but well-defined edge.  The long term goal and realize they will sometimes take losses, both small and large.  

When correctly utilized, selling options is a sophisticated way of entering into equity trades or generating income for your portfolio.  

Let’s take a look at how my options satisfy my trading requirements.

  • Selling options allows me to collect income (the credit of the spread) up front.
  • Odds of winning are over 60%, since you can win if the stock goes up, down, or sideways.
  • Selling options (if assigned on my short puts) allows me to own stock at a huge discount!

So now that it makes a lot of sense to sell options over buying stock, let’s take a look at a couple different ways to trade credit strategies.

 

Option Credit Trading Strategies

 

In order to generate steady income, many traders turn to trading short options instead of buying stock.  

This is because most options expire worthless and this behavior makes selling options work like running an insurance company.

Since options are risk insurance for option buyers, the option seller holds the responsibility of the “insurance provider”.  And for this risk the option seller will charge a premium (the credit on the option) for this risk.

In this article, we are going to focus on the more popular credit trades, the naked put and credit vertical spreads (the credit put spread and credit call spreads.)

Naked Puts

 

This is the go-to strategy for many option sellers since there is the added advantage of owning stock at a significant discount.

Why trade a short put?

A naked put, or short put, is typically traded when a trader assumes that the underlying security will rise between the time of execution and the expiration date of the option.

The trader will execute this strategy by selling a put option with no corresponding short position in their account.  Since there is no additional position, this is considered an uncovered trade, meaning that the trader would be required to own stock if the buyer should exercise their right to the option the seller is holding.  

A put option is designed to create a profit for a trader who correctly forecasts the price of the security will fall substantially, past the breakeven!  But as a put seller, you actually collect revenue on this trade if the option rises, falls, or goes sideways.  

If a trader is assigned stock on the short put, the premium collected does somewhat offset the loss on the stock, but the potential for loss can still be substantial.  This is why I require a minimum time horizon of 5 years that I require to hold a stock for when it comes to worst-case trade management.  

KEY TAKEAWAYS:

  • A naked put is an option strategy that involves selling put options.
  • When put options are sold, the seller benefits as the underlying security goes up, down, or sideways in price.
  • Naked refers to an uncovered position, meaning one that has no underlying security associated with it.
  • The risk of a naked put position is that if the price of the underlying security falls, then the option seller may have to buy the stock away from the put-option buyer.

Credit Vertical Spreads

 

Credit Call Spread

A credit call spread is a type of credit option strategy that is used when a trader expects a decrease in the value of an asset.

The credit call spread is equivalent to going short the stock, except there is no unlimited risk potential.

The credit call spread is placed by simultaneously purchasing a call option at a higher strike price and selling a call option at a lower strike price in the same expiration month.

 

 

 

 

This is considered a limited-risk trade since the selling of the call option is covered by the purchasing of a higher-strike call option.  

Risk parameters of a Credit Call Spread are:

  • Max Gains : Net premium received
  • Max Loss : High strike – Low strike – Net premium received
  • Breakeven : short call strike + net credit received

 

Credit Put Spread

 

A credit put spread is a type of credit option strategy that is used when a trader expects an increase in the value of an asset.

The credit put spread is equivalent to going long the stock, except there is no unlimited risk potential.

The credit put spread is placed by simultaneously purchasing a put option at a higher strike price and selling a put option at a lower strike price in the same expiration month.

 

 

 

This is considered a limited-risk trade since the selling of the put option is covered by the purchasing of a lower-strike put option.  

Risk parameters of a Credit Call Spread are:

  • Max Gains : Net premium received
  • Max Loss : High strike – Low strike – Net premium received
  • Breakeven : short put strike – net credit received

Pros vs. Cons

 

Depending on the type of trader, there are many benefits to both buying and selling options.   There are many different option strategies to choose from and each has unique risk associated with it.  

Pros to selling options

 

Smooth Return Stream

Selling options is one of the most reliable and stable sources of returns in the markets.  

Premium selling strategies tend to have extremely high win rates and are a great way to grow trading capital over time.  

Winners Mentality

Most traders tend to feel better when they are winning rather than losing.  This makes sense that traders would benefit from a system that has them winning a high percentage of trades.  

This boosts confidence and leads to less “second guessing” the trade.  This confidence tends to lead to smaller losses compared with traders who are buying “lotto tickets”.

 

Cons to selling options

 

No “Grand Slam” trades

Selling options tends to be “singles and doubles” type of trading.  The knowledge that a big grand slam is right around the corner keeps traders coming back to their screens every day, waiting for that huge opportunity in the markets.  

Unfortunately, option sellers won’t have this rush of excitement like hitting it big at the casino.  

Potential of large losses

Another huge negative is the potential for large losses.  While this is a remote possibility, it does still exist depending on the underlying security traded.  

Traders can mitigate their risk to large losses by trading credit spreads rather than naked options.  This is the “best of both worlds” as the trader can play the house odds while maintaining a controlled and limited risk profile for their account.

 

Final Words

 

To summarize, premium selling is known to generate a wildly profitable and extremely smooth equity curve.  

  • There is the risk of an occasional large loss, but this is mitigated with the use of credit spreads instead of naked options.  
  • The return of a premium selling options book is that of a mean reversion stock trading system, with a large number of small wins with the occasional ‘fat tail’ trade.
  • Selling Naked Puts is one of my favorite strategies since it allows me to purchase stocks at a discount and get paid doing so!
Author: Dave Lukas

 

Each trading day I focus on combining Fractal Energy with my favorite options strategy. 

You see, in order to consistently make money in the markets, I have learned how to identify a stocks underlying trend and then trade around it using technical analysis techniques.

Now, you may have heard some common sayings among traders that hint at this.  Some sayings are “Trade with the trend”,  “Don’t fight the tape”, or “The trend is your friend”. 

But there are a lot of questions that still are unanswered:

  • How long does a trend last? 
  • When should you get in or out of a trade? 
  • What exactly does it mean to be a short-term trader?

To answer these questions, I am going to dig deeper into trading time frames and how to combine this simple concept with Fractal Energy.

 

Options Profit Planner

 

Every day I focused on combining Fractal Energy with Credit Spreads in order to gain an edge in the markets.

I know that not every edge I gain will translate into an edge you can trade right away, but with practice and learning the techniques I use, you can begin your transformation into a more knowledgeable trader.

But first, exactly what is Fractal Energy?

 

Fractal Energy Indicator

 

There are 2 main components of Fractal Energy:

  1. Markets Fractal Pattern
  2. Stock Internal Energy 

 

Markets Fractal Pattern

 

In short, fractals are the mathematical model that explains almost everything found throughout nature.  

Fractals form complex and visually appealing patterns and are used by companies to aid in their design of logos and symbols used for their company.  

I bet you would have no issue identifying FORD is not a fractal pattern… but did you know that Toyota’s famous inter-clocking circle logo is actually based on fractal patterns?

 

Stock Internal Energy

 

Energy is the term used to describe the stored or potential energy a stock has built up.  

Like a spring that is compressed, it stores potential energy and erupts when you release the force that is keeping it held together.

The power of fractals allows me to determine the strength of trends and how much “life” is remaining in a stock’s movement.  

Here’s the power of Fractals:

 

Source: Tradingview

 

Now even though there was a 75% ROI and 35% ROI seen after Fractal Energy signaled. 

But, it’s not wise to buy a stock every time you see a low reading on the fractal energy indicator!

Why?

Let’s take a look at multiple time frame analysis.

 

Combining Fractals With Multiple Time Frames

 

Here’s an example why you want to combine multiple timeframes with the fractal energy indicator as well.

In CMG, if we bought on the daily timeframe the first time fractals broke their lower bands, we would have been left with being stopped out of the trade.

 

Source: Tradingview

 

But suppose you did in fact buy it, then it would be best to play the bear flag that was formed as your signal to exit at the break of the lower support level before the stock plunged lower

Not a very good trade right?

Now let’s take a look at what you might see if you used multiple time frame analysis:

 

Source: Tradingview

 

You were actually buying on a weak candle and the fractal energy was not yet depleted yet!

And without the support of the higher timeframe to make the price rally, you ended up buying into a stock that kept falling.

 

Combining Fractals With Other Technical Analysis Tools

 

Now if you were to wait for fractals to show totally exhausted readings and combined that with a horizontal support level you were able to pick that “V” bottom almost perfectly!

Here’s what I mean…

 

Source: Tradingview

 

Now that the higher time frame has exhausted fractal energy, combined with horizontal support levels, CMG decided to bounce and head up again!

So, even though a single indicator said to buy a stock, it is best to look for confirmation signals by combining fractals with known patterns and other technical analysis techniques.  

 

The Double Bottom

 

For example, let’s take a look at the famous 52-week lows.  Everyone has heard about stocks trading at 52-week lows and generally are considered to be “weak” or bearish when it comes to an investment.  

Even though it’s common that many investors use the 52-week low to reference weak stock, as a technical trader, I actually consider this to be a bullish pattern instead.

Now, let’s take a look at what a double button as a 52-week low pattern 

 

Source: Tradingview

 

So, as a technical trader, this is a pattern that I keep an eye out for as a BULLISH pattern and not a BEARISH pattern.  

What’s so special about a 52-week low anyway?  

Well it’s a technical pattern and this happens to occur throughout the stock market time and time again as traders look for patterns to buy stock.

Pro tip:  Make sure you get out if the 52-week doesn’t support the price.  Without a price floor to find support, the stock will continue to fall and it’s difficult to find the next area of support.

 

Wrapping Up

 

As a trader it’s common to get “tunnel vision” when you are focused on a single chart.  

Before you know it, you start seeing things that you never saw before.  Chart patterns morph into shapes, and you trick yourself into seeing anything that supports your trade idea.

But if you use these tips to your advantage you can get an advantage and head start trading on some of the markets largest moves.

If you kept an eye on the markets for fractal patterns, the trade in CMG rallied 50% from the breakout levels on fractal buy signals.

So don’t miss out as the Fractal Energy indicator continues to pick trades just like this every week!

Click here to sign up to Options Profit Planner now!

 

Author: Dave Lukas

 

Most trading brokerage platforms offer clients an array of charting options and technical analysis tools to choose from. 

And to be honest, if you’re new to the game, they can be darn right overwhelming. 

RSI…MACD…Awesome Oscillator… there is seemingly unlimited number of choices

fyi…yes, that’s a real indicator.  

Which is why I want to share the Options Profit Planner system with you. 

I believe it will help teach you how simple it is to trade the markets without the need for numerous indicators. 

This unique system combines the power of Fractal Energy and Bollinger Bands to give both strength of trend and support and resistance information for every trade.

Now let me show you the power of these two indicators combined with a credit trading strategy.

And how I combine them to give me an edge against the pros.

 

Options Profit Planner

 

Options Profit Planner is a system that is designed around key technical analysis and indicators that allow me to find an edge in the markets.

Once I find my trades, I then put the odds of the casinos to work for me by selling options and leveraging credit spreads.

Now sometimes I bite off more than I can chew but that’s ok!  It’s important to make sure you have a back up plan, for a back up plan, for the main plan.

But trading smartly is what keeps me in the game.

And if I need to end up owning the stock, I am ok with that!  Since I only trade stock I feel comfortable investing in to start with.

 

The Indicators

 

Options Profit Planner is focused around technical analysis and indicators to give me an edge against the pros.

The two indicators I use are Fractal Energy and Bollinger Bands to find stocks.

Let’s take a look at what these two indicators are…

 

Fractal Energy

 

Fractal Energy is the cornerstone indicator of Options Profit Planner and its power is used to pinpoint key market reversals.

The power of fractals allows me to determine the strength of trends and how much “life” is remaining in a stock’s movement.  

There are 2 main components of Fractal Energy:

  1. Fractal Pattern
  2. Energy

And when you use the power of this indicator you will be able to successfully determine the strength or weakness of trends on any stock.

Let’s take a look at how Fractal Energy accurately predicted the market selloff

 

Source: Thinkorswim

 

Here is how this breaks down…

Breaking down what Fractals said about the markets at all time highs:

  • The Fractal Energy indicator dropped to new lows, below the lower threshold value of 30
  • Markets struggled to continue trend higher, showing weakness in the stock

Once the Fractal Energy became exhausted and the markets couldn’t get above the upper Bollinger Bands, the SPY plummeted lower.

 

Bollinger Bands

 

Bollinger Bands were developed by John Bollinger as a price envelope designed to define the upper and lower price range levels of a stock.  

For anyone who is unfamiliar with Bollinger Bands here is some background information to learn how this indicator can help you time the markets with superior accuracy.

Bollinger Band Indicator consists of a middle SMA along with an upper and lower offset band.  And because the distance between the bands is based on statistics, such as a standard deviation, they adjust to volatility swings in the underlying price.

How do you read them?

Bollinger Bands help to determine whether prices are high or low on a relative basis, and according to these calculations, price should fall within range 95% of the time!

Let’s take a look at an example on TWTR

 

Source: Tradingview

 

You might notice right away that price tends to fall inside the Bollinger Band nearly every single trading day.  

And if the price did trade outside of the bands, the stock made sure to rebound quickly to get back inside of it.  

 

How this indicator works:

 

  • When Bollinger Bands tighten, there is a high likelihood that price will have a sharp move
  • When the bands separate by an unusually large amount, this is showing a significant increase in volatility or a gap in stock price.
  • Price can exceed and even hug or ride a bands prices for extended periods of time.
  • Price has the tendency to bounce within the bands’ envelope, touching one band and moving back towards the other.
  • You can use the middle SMA or opposite band as target prices and exits for your trading
  • If prices move outside of the band, it’s expected to see a trend continuation until the price moves back inside the band.

Let’s take a look at the SPY’s chart

 

Source: Thinkorswim

 

A review of what you will find in Bollinger Bands:

  • Tightening of bands leads to breakout
  • Stock trends higher, riding upper band
  • Trader can buy the moving average the entire way up
  • Price drops suddenly below lower band and snaps back inside the next day acting as a price barrier

 

Wrapping Up

 

When trading with Fractal Energy and Bollinger Bands, a trader can find market reversals that can put them in a position to generate significant income from selling puts or credit spreads.

By selling puts or a credit spread, the trader will make full profits by the options expiring with little or value.

Additionally, the put seller will be able own the stock at their desired levels and turn this position into an investment.  

And once they own the stock, the trader will be able to ride the price higher after the selloff is over.

And that’s why Fractal Energy is the cornerstone indicator of Options Profit Planner!

Click here to join Options Profit Planner today!

Author: Dave Lukas

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