Rarely do I stake my money against the market.
But with stocks roaring back from the March lows off nothing more than hope, I can’t keep on my bull face.
Already, this stance is paying windfalls for myself and LottoX Members.
And I want to share with you my go-to strategies to create payouts… week after week.
We’ll be going beyond the basics of calls and puts today…
But it will be well worth it…
Once you discover the type of risk vs. reward these trade setups offer.
One of the hallmarks of this market has been increasing options activity. We set a record for the most contracts open during last Friday’s expiry.
The makeup of option contracts can tell you a lot about where market sentiment lies. My favorite is the put/call ratio.
Using the put/call ratio, I look to see when its at extreme levels, both high and low.
Here’s a look at the daily chart over time.
Put/Call Ratio Daily Chart
Generally, the put/call ratio sits around 0.7-0.8. When it starts to exceed 1.2, we’re nearing a bottom. If it’s getting below 0.5, we could be near a top.
Most of May and June, we’ve sat at pretty low levels, despite having high implied volatility. Part of this is investors and traders are buying call options rather than putting their money into the market. They don’t want to get caught off guard like they did back in March.
Additionally, I watch for breaks of significant support intraday to tell me the trend has changed.
In this 78-minute chart, you can see how the S&P 500 futures violently broke through the trendline. That gave me a spot to bet against the market when it returned there.
S&P 500 Futures 78-Minute Chart
Also, you can see at the bottom how the squeeze (red dots) told me energy was building up. Once that’s released (green dots), it tends to lead to explosive moves.
Lastly, I look at the Tick chart, which measures the last tick (movement) of the NYSE stocks. There’s about 3,000 of them, so it falls in a range of -1200 to +1200 most of the time.
When the ticks are above 0, that leads to more bullish price action, and the opposite when it’s below. The longer the ticks stay above or below the zero line, the more pressure we see to the up or down side.
NYSE TICK 5-Minute Chart
On Friday, the ticks started bullish enough. But then they fell completely apart, coming down to some of the worst levels in weeks. So, when the market bounced back, I used that opportunity to bet against it.
Now that you have an idea about what I look for to time the trade, let’s move on to the strategies I use.
Playing for a market decline
When I trade for the market to head lower, I pick from one of two options: long puts or selling a call credit spread.
Let me explain the difference and how I decide between the two.
A long put is simply buying a put options (bet on the market going down) for a certain amount of cash. The more the market goes down, the more it pays.
However, long options have a big downside. They can cost a lot of money and they lose value over time. My maximum potential loss is the amount I put into the trade.
Selling call credit spreads is a bet against the market with a twist.
Instead of buying a put option, I sell a call option at or above the current price. Then I buy another call option with the same expiration at a higher price.
This pays me a credit which is the maximum amount I can make on the trade.
In order to collect the full amount, I need the stock to get to expiration and land below the lower call strike, causing both options to expire worthless.
My maximum potential loss is the difference between the two strike prices minus the credit I receive up front.
Unlike the long put option, the call credit spread benefits from time decay. Plus, I can also take it off at partial profit.
So when do I pick one vs the other?
Typically, I will play long puts when implied volatility is low and I expect the market decline to be swift. Increases in implied volatility work in my favor, and I don’t want time decay to work against me.
When implied volatility is high or I expect it might be a small move, I’ll sell a call credit spread. That let’s declines in implied volatility work for me and I don’t need to worry so much about the market tanking to get paid off.
Ready for the next move?
I know I sure am!
You can catch me live with LottoX, my fast-paced options trading service. My portfolio of trades is streamed every day. Plus, there’s live weekly training and education.