Contrary to popular belief…whenever you buy an option you are making more than just a bet on which direction the stock will land.
You are also making a bet on volatility…
That’s why it is so helpful if you zone in on an options implied volatility
When I tell this to LottoX members during our live training sessions, I inevitably get the response…why?
Why should implied volatility matter more than the trade’s direction?
Pay attention because this simple question already starts off the wrong way.
Trade direction is important, but so is implied volatility.
What many of you may not realize is this.
With the well-developed trading strategy, your direction is decided for you!
My TPS Setups illustrate this point beautifully.
Embedded in the selection criteria is a Trend, clear, and obvious to the average observer.
Like this example in Virgin Galactic (SPCE)
Getting implied volatility wrong could destroy a perfect setup!
It all comes down to how option prices work and how implied volatility moves.
I know it might seem like a tall order.
But, I’m confident by the end of this newsletter, you’ll grasp why implied volatility is so critical.
To understand why implied volatility is so important, we need to discuss how option prices work.
Brokers derive option prices from three main components:
Other things like dividends and interest rates do impact the prices, but we’ll ignore them for now since they’re also known items you can look up.
We can control the distance between the strikes and current price as well as time until expiration through the contracts we choose.
Unfortunately, we cannot control implied volatility.
Instead, we choose when we enter the trade.
Let me explain.
Think of implied volatility as the demand for options. It’s a proxy for the uncertainty in the stock, and why implied volatility increases into company’s earnings and decreases immediately thereafter.
Check out how this works in Netlfix (NFLX).
NFLX Daily Chart
You can also think of it as the demand for protection, both to the upside and downside.
Implied volatility mean-reverts. In layman’s terms – it moves towards the average over time.
Stocks may move higher or lower for months or years.
Implied volatility doesn’t.
Over time, implied volatility collapses back towards the average.
In fact, implied volatility declines as an option gets closer to expiration.
This is a concept known as contango.
What’s really cool is how option sellers use this to their advantage. They will sell options 45-60 days out and let the natural decay in implied volatility work to their advantage.
They juice up these trade by picking out stocks with high implied volatility compared to the rest of the year.
A great example – they will sell options for several weeks out right before earnings.
As you can see in the Netflix chart, implied volatility is exceptionally high and then collapses immediately afterward.
We know that implied volatility heads back to the mean. So, if implied volatility is high, it is likely to fall. If it’s too low, chances are it will rise.
Now, let’s say I want to buy call or put options on a stock. Since I want implied volatility to work for me, stocks with low volatility are better choices.
On the flip side, if I want to sell options, I like to pick out ones with higher implied volatility.
What happens when I’m really bullish on a stock, but it has high implied volatility like due to earnings?
If I plan to hold the trade through earnings, I would sell a put credit spread, getting implied volatility declines working for me.
However, I can also buy a call option that expires after earnings, but sell it before the announcement.
Doing this avoids the collapse in implied volatility that comes after the release and lets the increases in implied volatility leading into the event work for me.
What about when there is no event?
That’s where my experience and analysis of the broader market comes in.
There isn’t always a right or wrong answer here. A lot of it depends on the specifics of the situation.
Generally, if the trade I’m taking is short in duration (a few days) I don’t worry much about implied volatility decreases. Chances are they won’t have enough of an impact on short-dated options.
But, if I’m doing a long swing trade, then I really need to think about how it will affect the trade.
I know that it can be tough to think about all these things at once when taking a trade, especially in real-time.
That’s why I created my LottoX service. You get access to my streaming portfolio, live weekly training, as well as a rundown of the stocks I’m looking at and how I plan to play them.
It’s the educational opportunity of a lifetime you can’t afford to miss.
Yes, I get animated about trading at times.
So, when a trade doesn’t go my way…well gosh darn it, I get fired up.
No one gets the better of Nathan Bartholomew Bear!
I plan to fight back the only way I know how…with some banging TPS charts!
Every week, I share how I plan and execute these trades in live training LottoX members.
To kick things off right, I came up with three charts that look absolutely fantastic.
These TPS setups cover different time frames, giving you al look at how one strategy can turn into multiple opportunities.
Zillow Group came to my attention mid last week, despite the fact that the setup has existed much longer.
The stock fell off my radar since the short float hadn’t been particularly high.
As I scanned last week for companies that had over 15% short float, Zillow popped back up on my radar.
High short floats help create short-squeezes. In these situations, bearish bets bunch up, selling the stock short en masse.
When the stock drives higher, it creates a cascade of margin calls, forcing those same positions to buy and close out their holdings. In this scenario, price catapults higher, fueled by the tears of these same short-sellers.
So, when I find stocks that exhibit a bullish TPS setup and a short-squeeze potential, I salivate more than if I saw a good steak.
Here’s the chart that got me going.
Z Daily Chart
Zillow’s daily chart might not look impressive if you don’t understand the TPS setup. But, once you comprehend the three pieces, it’s like a lightbulb turns on in your head.
So what are those three components?
Since the pandemic began, I haven’t found too many swing trades that come off the daily chart. So, I’m delighted to finally get a shot at playing one with this name.
In full disclosure, I’ve already started to build a position. But, with the sideways action here, any retracements to the lower end of the Bollinger Bands (blue lines) would be a great spot for me to add to my position.
Space might be the final frontier. If so, Virgin Galactic plans to make it accessible to the average tourist (along with some suborbital commercial launches as well).
Richard Branson’s latest venture started generating buzz when it signed a recent contract with NASA.
Typically, it’s hard for these momentum names to get going without some catalyst. But with a short float of 28%, it’s got great potential to take off running again.
Let’s take a look at the TPS Setup.
SPCE 15-Minute Chart
Unlike the Zillow chart, SPCE looks at the intraday 15-minute timeframe. That means it should play out early next week.
Since it’s on this smaller timeframe, I would choose weekly options to maximize my advantage. If the squeeze fires (red dots turn green) and it hasn’t taken off, then I just close out the trade and move along.
Lastly, I give you a large-cap stock with even bigger potential.
When Wal-Mart announced their launch of a delivery service meant to rival Amazon, investors quickly clamored for shares.
This setup takes advantage of a medium timeframe, using the 78-minute chart.
WMT 78-Minute Chart
In the Wal-mart chart, the trend came from the seismic move off the bottom on the back of the announcement. While momentum is waning (shorter bars on the histogram at the bottom), this stock should continue to benefit from the continued buoyancy in the markets.
This is a great lesson in how one strategy applies to different charts on multiple timeframes.
Too many traders think they need all sorts of strategies and knowledge to beat the market.
I aim to change all that and show how it’s possible with one tight strategy.
Take the TPS setups for a whirl and see what you think. You know the three pieces now.
And supplement it with LottoX, my educational service that gives you access to my streamed trades and weekly live training.
All aimed to make you a better trader.
I tell people that it took me 8 years to become an overnight success.
In between I struggled mightily to turn a profit, blowing up a few accounts along the way.
Rarely do I dig into this topic much. I prefer to focus on my trades and strategy.
Recently, I realized how important it was to share my experiences with traders just like you.
It gives you a chance to see behind the curtain at what it took to become a multi-millionaire trader.
Despite what you may think, it wasn’t a fast journey. The person who made it so difficult…well that was me.
You see, at some point, we learn enough about the markets, strategy…really all the tools needed to fend for ourselves.
What stands between us and consistent success is what sits between our two ears.
Which is why I want to walk you through what I’ll call the ‘phases’ of my journey.
Hopefully, you see yourselves somewhere in here and take something away that helps you bust through your own obstacles.
Think back to the very first time you thought about trading. Most of us can’t remember. We just seem to recall a point where we were interested.
This ‘awareness’ is like a honeymoon phase of a relationship. Everything seems so new and exciting. The possibilities are endless.
I started in much the same way, eager to figure out how to take this giant, living creature called the ‘stock market’ and conquer it like it was no big deal.
Like many before me, I quickly found out that I sucked at trading. It wasn’t like anything else I’d ever done. The harder I tried the worse I did.
Keep that note in mind, because it will be a theme to this tale.
To salve my bruised ego, I took to learning everything I could get my hands on…and there’s a lot of information out there to touch.
I figured that buried within all the books and webpages I would find the one thing that resonated with me and turned my trading around.
Think of this as my teenage years. I explored a lot, pushed myself and my boundaries, stayed up late trying to unravel the puzzle that was the market.
Sometimes I found some success, but it never seemed to last long.
It struck me, as it does many of us, that if I could follow a successful trader, mimic their moves, I might be able to discover how this whole thing worked.
Spoiler alert – While watching someone trade is invaluable, it won’t make you successful in and of itself.
That’s where I started with the infamous Jason Bond.
Yes, before I became a guru at Raging Bull, I was a full-fledged member.
Jason appealed to me for a few reasons.
First, his personality naturally complimented the areas I needed. Where I would be unsure or frustrated, Jason is the eternal optimist. A former high school gym teacher, and heck of a baseball player, he knows a thing or two about motivation.
Second, he helped me organize myself. I tell my LottoX members all the time how important journaling was to my success. Jason helped drive that home.
All of us are prone to avoid looking at the obvious. A good habit of trade journaling keeps you honest and highlights where opportunities and problems exist.
Most importantly, Jason told me this – I needed to make trading my own.
By this time, I had read and understood so much about the market. And while I half-heartedly attempted to do things my own way, I never really sat down and…cut the crap.
As I looked over my trading, I realized how much garbage and noise cluttered my activity. Buried beneath that was a true winning strategy that I didn’t even realize.
Sure, I had glimpses here and there.
But it wasn’t until I made a conscious decision to stop screwing around and treat trading (and myself) with the respect it deserved that things started to change.
I’ll admit, finally turning a profit consistently is intoxicating. More often than not, I would fight to keep myself in check.
Some devil would sit on my shoulder telling me to increase my size or take a trade that looked good.
That’s where the rules and training I gathered over the prior 8 years finally paid off.
For most people, it’s not enough to know the rules and strategies. You have to practice them, everything from taking a loss to managing a winner.
And the worst part is what they never tell you – markets can and will change. Relying on a strategy to carry you from one year to the next may not happen.
To combat this, I continually re-educate myself in the markets, as well as teach others. Both of these keep me grounded and current.
Hopefully, my story helps you put your own path in perspective and find a way towards success.
One way to help your education along is with my LottoX Service. Here, you get access to my weekly live training as well as my portfolio of trades in real-time, so you can see how I plan and execute my strategy.