Category Archives for "Option Trading Blog"

Japanese Candlestick Chart Strategies - Video Lesson
Mar 08

Japanese Candlesticks | Price Action Visualized

By Dale Brethauer | Option Trading Blog

Candlestick Formations

By, Dale Brethauer

In this lesson I will discuss Candlestick Formations as a tool to enhance your currently used indicators.  This information was gained by reading “Japanese Candlestick Charting Techniques”, by Steve Nison. Steve was the first to reveal the startling power of candlestick charts to the Western hemisphere.  He is acknowledged as the leading authority on the subject.

I will review four powerful reversal formation and show how they may be used on my Think or Swim chart.

Candlestick charts are:

  • Easy to understand,
  • Provide earlier indications of market turns,
  • Furnish unique market insight,
  • Enhance Western charting analysis, and
  • Will increase efficiency of your analysis.

Free Candlestick Resources

Stockcharts - Introduction to Candlesticks

Steve Nisons Personal Site (Free/Paid)

Steve Nison's Candle Charts Website

If you have any questions please go to the website, click on contact in the upper right hand corner, and send us a message.

Trading Economic News
Mar 01

Trading Economic News

By Dale Brethauer | Option Trading Blog

In this lesson I will discuss how you may profit from economic news, specifically the FOMC (Federal Open Market Committee) meetings.  Other economic news that sometimes effects the markets are the unemployment report that is released the first Friday of every month.

 I use a straddle or strangle to trade the news but only during times when price is an outlier statistically.  These are strategies that profit if the market goes either up or down by a significant amount WHEN Implied volatility is LOW.  I also utilize the $TLT (treasury bond E.T.F.) to trade the events. This post may even be a warning against this type of retail arbitrage but I want to make the information known all the same.

Economic Calendar Resources:

https://www.federalreserve.gov/monetarypolicy/fomccalendar.com

 

       2018 FOMC Meetings
    
MonthLast DayPress ConferenceMinutes
    
March15Yes4/5
May3No5/24
June14Yes7/5
July26No8/16
Sept20Yes10/11
Nov1No11/22
Dec13Yes1/3

 

 

If you have any questions, shoot me a message through the contact page or through the free membership dashboard (located at the bottom of the page.  All the best!

Winning Capital Allocation
Feb 22

Winning Capital Allocation

By Dale Brethauer | Option Trading Blog

In this lesson I will discuss the proper amount of capital to allocate per trade to give you the highest probability of success.  One of the biggest reasons traders fail is they invest too much on any given trade.  Professionals realize that losers are inevitable and even losing streaks, so they never over invest, but invest the same low amount on every trade.

 I will review powerful equations to determine your trade size and give examples for those trading stock, or short and weekly credit spreads.

 

Keynote:   What we're trying to achieve is a statistical advantage, then spread that over the largest population of trades as we can.

 

"Capital Preservation is the name of the game,  if you don't have any you cant piss in the tall weeds with the big dogs"

- Gordon Gecko, Wall Street

 If you have any questions, shoot me a message through the contact page or through the free membership dashboard (located at the bottom of the page.  All the best!

Financially Strong Stocks - 2018 Portfolio
Feb 15

Financially Strong Stocks | 2018 Portfolio

By Dale Brethauer | Option Trading Blog

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Financially Strong Stocks | 2018 Portfolio

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Finding Alpha | Identifying Financially Strong Companies

By, Dale Brethauer

In this lesson I will discuss the Financially Strong stocks for 2018. Financially Strong stocks have outperformed the overall market for as far back as we have data.

In this lesson I will discuss and show:

  • These stocks outperform the market,
  • How I choose Financially Strong stocks using the Cash Flow Statement,
  • The 2018 Financially Strong stocks,
  • And, the Best way to trade these stocks.

If you have any questions please go to the website, click on contact in the upper right hand corner, and send us a message.

 

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Peak Performance Trading - Video Lesson
Jan 02

Peak Performance Trading

By Dale Brethauer | Option Trading Blog

Hello, this is Dale. I have more than 35 years of experience as a professional stock investor and hedge fund manager. During my journey I've engineered what it takes to be a successful trader.

Today's lesson is going to outline the keys to "Peak Performance Trading".  Successful trading has to be more than determining the trade entry and exit. This however is what most of the literature deals with, it tries to answer the question what should I buy and when should I buy it. This lesson deals with everything but the trade entry and exit.

It is about self-discovery, and moving yourself to a point from which it's possible to be a successful trader for life. This requires a balanced approach to trading. Yes, you definitely need a rock solid trading strategy. A strategy that's been proven to be profitable over time, but in addition you need to incorporate the gray matter between your ears.  It's a balance of these two that will explode your profit potential. It's about a 50/50 split, you can't have a good strategy and not follow the rules, trade too much money, have too much at risk, not have a trade journal and review you’re trading.

The psychology of trading needs to be at the forefront of your efforts to achieve peak performance.  Successful traders do not place trades then feel they need to rely on a lucky rabbit's foot or pray to the market gods to have the trade turn out profitable. They realize that once they've analyzed the market and the trade is placed, they have no control on the outcome. By having these both strategy and the mental game working together, they trade in the zone, taking many small losses but letting their profits run.

 

Peak Performance Trading | The Mental Game

 

First let me share with you some personal experiences with the power of the mental game and how it's turned my trading around. As a young boy playing Little League baseball, I said to myself “you will get a hit”, and I got a hit. Rounding the bases I thought, “Wow that was easy the ball looks so big how could I miss it?” At a very early age I didn't know what I was doing but I was using the mental game to my advantage.

The human brain tends to lean towards negative thoughts/outcomes because it used to be essential for survival. Negative thoughts are more prevalent than not for most people due to this fight or flight mindset.

I ended the year as a homerun king and the batting champion. Later in high school I was having a little trouble with my foul shots, I remembered vividly for my earlier experiences and I told myself “get a hit”. So, I used the same technique telling myself I would make the foul shot, what a turnaround. I used this technique all the way through college ball.

 

Getting Yourself Out of Your Own Way

 

After graduation I started to work for DuPont, and played competitive golf. As an athlete I was a fairly good golfer, but I always had trouble putting. One day I read a book by Timothy Gallway, called the “Inner Game of Golf.”  His concept was to take your mind out of the performance, by taking the putter back and saying “back”, and when you struck the putt say “hit”. By focusing attention on those 2 points in the swing, it effectively washes out all the mechanical thinking and lets your motor functions (made strong through practice) do what they already know how to do.  The “back – hit” approach was exactly what I had discovered in my earlier life. I utilized this “back – hit” technique to this day, and my putting is now the strongest part of my game.

 

Trading in the Zone

 

Enter the stock market.  I've been trading stocks from over 35 years. I'm a student of the market, I know every oscillator and indicator. How they're calculated how to interpret their signals. My profitability was always fairly good early on, but it wasn't until I took a seminar by Dr. van Tharp on the “Psychology of Trading”, that my trading success really took off. I knew the power of bringing in the mental side of the game. He taught me to embrace losers, keep records, calculate my expected return per trade, have rules, stay with a rock solid strategy, and focus on the execution. All these concepts bought my trading into the zone. That's what I'm talking about here as far as get having peak performance.

In Jack Swagger’s book “Market Wizards” what he did was he interviewed a lot of very successful traders and money managers. He made notes as far as what were some of the keys that these people said made them a success. It’s interesting because not a lot of these successful people talked about trading entry. Most of them talked about the psychology of trading. You must know why you're trading the markets, why are you doing this. You want to make some extra income, you want to help put somebody through college, it's not you're just trading to make a lot of money.

The following are some thing that successful people talked about.  The methodology should limit draw downs, never risk more than one percent of your portfolio, don't over trade your account. You can make a good living trading the markets, but it's not a get-rich-quick scheme. You have to have a winning strategy. Spend your time on market research. Once you spend your time on market research, your trading will become effortless. You must be disciplined. You need to have trading rules. Don't try to predict the market. You need to be patience. Employ an approach that you're comfortable with. Whether day trading, swing trading, buy and hold. Don't stay with losing trades too long, and trade only when you have an edge.

 

Peak Performance Trading Actions:

  • Limit draw downs
  • Never risk more than 1% of your account on any given trade
  • Don’t overtrade your account
  • Research and create a rock solid trading system with rules

My systems:

Option PRO ( Monthly income option spreads on my "core 5" Index/equities)

SPX W.O.R.  ( Weekly income option spreads on the SPX index only )

  • Follow your trading Rules
  • Don’t try to predict the market
  • Exit losing trades at pre-determined levels
  • Trade only when you have an EDGE

 

 

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Trading for Financial Freedom

 

Now, let’s look at Dr. Van Tharp's book, “Trade Your Way to Financial Freedom”. He did a study of losing traders. They were losers because they had no goal. They had unrealistic expectations. They had a need for action they were exposed to too much risk. They jumped out of a trade prematurely and were too quick to take profits. They lacked confidence.  They had no rules, no records, no strategy, they didn't have a trading plan. All those are part of the psychology of trading.

 

Continuous Improvement Model

 

Here’s a continuous improvement model that has helped me along the way. Traders gain an advantage by continually learning and improving. This process model can be seen on the next page. If you use this every day, it'll keep your steadily increase your acumen.

 

Analyzing the Trade Life Cycle

 

You’re starting out here to analyze a trade. And that is the preparation, then you execute the trade, and then when you exit, you'll know the results. You evaluate these results and analyze it. You write it down in a journal, and you begin the process all over again. You learn from every trade you make. Preparation, execution, results, why, analyze it. If you do that continuously all the time your trading will improve. Because you're analyzing what's going wrong, with your methodology.

 

Peak Performance Trading | “The Trading Zone”

 

Let me share another thing with you to help - that I use to help me get into the zone before the day even starts. This is my morning routine. I always come down into my study and the first thing I do is watch the futures on CNBC. I don't care what the talking heads are saying, what I want to know is what happened overnight that might have changed my analysis. Then, I always read my affirmations, remember affirmations? I talked about those in a trading business plan Part I. Please go back and listen to that again. Affirmations are so important.

Now, I always review my trading rules, they're right in front of me. Now, I spend some time entering my trading journal what has been going on. I keep that up to date, and then, before I start my analysis I meditate for about 10 minutes. And this can be no more than just deep breathing.  What I’m doing is clearing my mind from grocery list, from what has to be done during the day, and I'm getting ready to focus on the market.

Once I've done that, I feel I'm in the zone and I'm ready. I'm ready to analyze. I analyzed the big five, Amazon, Google, Priceline, the RUT and the SPX. I look at the chart formations. Is there anything there that needs action? I checked the risk profile and profit zone. I know exactly what I'm going to do for any circumstance that might happen during the day.  And whatever happens in the markets it's not a surprise to me I just go ahead and execute. And that's all because, I've got myself in the zone before the day starts.

 

Peak Performance Trading | Flow Chart

 

Let's talk a little bit about this really cool chart.  What I'm looking at is performance on the y-axis, low and high, poor and ideal. And then on the x-axis is stress level from zero to a hundred. You’ll notice that the peak performance occurs right in the middle. When I have some stress, but not a lot of stress and that is peak performance. When you have too much money on any given trade, you're going to have a lot of anxiety, and that's going to cause you to have very high stress and very low performance.

On the other hand when you paper trade the anxiety is low. I think everybody should start out any strategy by paper trading, if you can't make money paper trading, you're not going to make money when you have real money in the market place. However sometimes it's easy to gloss over any mistakes you might make. Because you don't really have anything invested.

But if you have the proper amount invested, you're going to have a little bit of stress because you're active in the market, but you're not going to be highly stressed. So, your performance level will be extremely high, that's where you want to be. And that's why I spend a lot of time talking about the proper trade size, for your portfolio. That again is also in the trading business plan, I believe that's in Part II.

 

Meditation & Goal Setting

 

Now, what I'd like to do is just go over to meditations. I think meditations really help you to focus what you want to do. One is going to be on affirmations, the others on the power of meditation. And these are taken from a book by Melody Beattie called “Journey to the Heart.” And I've modified them for the trader. Now, the first ones about affirmations, and remember the affirmation is what you want to do and how you're going to accomplish your goal in trading. The second meditation is about taking the pressure off.

 

Meditation One

 

We can call things into play by what we believe, what we say, what we envision, what we speak, affirmations are one of these powers. Much of the stock market dance, is universal rhythm is out of our control. But while we don't choreograph it, we can work within the part that is ours. With the power that is ours. That's being in the zone and that's focusing on, where the trade should be executed, what is our edge.

We do this by what we believe, if we believe, that we have to fight the entire market and many "nay-sayers" well that's probably going to be true. Our beliefs about what we deserve will change as we journey through our adventure in the market. But there is also much we can do to participate in changing our beliefs and creating a more desirable world for ourselves.

What are your beliefs? Listen to yourself. Listen to what you think, what you say, how you react. Listen to yourself talk about your market experiences, and about what always happens to you. Listen to what you say about what you can and can't do. What do you hear yourself say is what you're going to believe. And that is probably what you're used to perceiving is happening. Try believing something different. Try asking the universe to help you change and correct your beliefs. Take an active part in creating your world and becoming a successful trader. Through affirmations, say those affirmations, say those beliefs, say them out loud. Write them down. Live them.

Now let's read about taking the pressure off. And once again, this goes back to the peak performance model, when you have a lot of pressure and a lot of anxiety, you're performance is not going to be ideal, it's going to be low.

 

Meditation Two

 

Sometimes we need a little bit pressure to get moving. But sometimes we put too much pressure on ourselves. You say, I must be a successful trader, we think and I must do it better and faster. We begin to believe that only by worry and fear and pressuring ourselves, can we become a success. That kind of pressure doesn't get the job done any better or faster. Simply makes us more tense and fearful and stops their creative juices. Too much pressure can take you out of the present moment, out of the zone, and cause poor performance. Let off some steam. Release your emotions. Take a deep breath. The answer will come, success will come.

 

Peak Performance Trading | Recommended Reading

 

I have these in my library. They are dog-eared, and highlighted, I look at these all the time:

“Think and Grow Rich” by Napoleon Hill.

“Trading in the Zone” by Mark Douglas.

“Market Wizards” by Jack Schwagger.

“Way of the Turtles” by Curtis Faith.

“Trade Your Way to Financial Freedom” by Dr. Van Tharp.

“The Art of Exceptional Living” by Jim Rohn.

The last three don't have to do with trading at all, but they have to do with getting mentally prepared for the game.

 

Final Thought

 

The psychology of trading is very important: rules, strategies, checking your ego at the door, cutting your losses short, letting your profits run.  Don't over trade, so, your anxiety level is too high. And then you need to have a rock-solid strategy. You blend the two together and you will have balanced trading. And your performance will rise.

In closing what I'd like you all to do, is swim like a shark, hunt like a lion, bat like Babe Ruth, and trade like a professional.

I have 2 systems I trade and teach/alert to our members – Option PRO & SPX W.O.R.  If you couldn’t already tell, I’m at the stage of my trading career where teaching others and giving back is of the utmost importance to me.  That’s why I’ve added features that most sites charge $300 - $500/month for $149/month with zero up-selling, everything is included.

8 Winning Concepts of Super Traders
Dec 22

8 Winning Concepts of Super Traders

By Dale Brethauer | Option Trading Blog

By, Dale Brethauer

During my journey to financial freedom, I've gained a lot of insight on “how to” become successful in the markets. Today's lesson is entitled 8 Winning Concepts of the Super Traders.

These concepts come from Jack Schwager who authored two exceptionally valuable books. The first one was “Market Wizards”, and the second one was the “New Market Wizards”.  He interviewed the most successful traders of that time. In those books, you can glean a lot of information into what these successful traders did, and what they didn't do.

Well, Jack was asked to give a presentation to the Chicago Board of Trade about five years ago. And he titled this the Eight Concepts of the Super Traders. What I’ll do here in this lesson is review his presentation, because there's a lot of good information that I think will help you to become a success yourself.


Concept 1  |  Trading Method Must Match Personality

 

The first concept was to find a method that fits your personality. Are you going to be a day trader, a swing trader, a position trader or are you just going to buy and hold? It's totally up to you, those are four different methods and there's value in each one of them. Which one are you comfortable with?

Also choose a strategy that you are comfortable with.  As you're going through and testing your strategy, make sure that it has not only a positive expectation, but low drawdowns that occur when the trading system goes through a losing period. All trading systems will go through a losing period, you'll have losing trades and you'll have losing periods. You have to be comfortable with the drawdown.

This may be accomplished by back testing the strategy and paper trading it for a while. Because, during these drawdowns, if you don't have a rock-solid strategy that's been tested and you know what to expect, you're going to lose faith during those bad periods. So, the first concept is to find a comfortable method strategy that fits your personality.

 

Concept 2  |  Hard Work Pays, Gambling Does Not

 

The second concept is of hard work. This is very important. The general public is attracted to the stock market as an easy way to make money. You hear it at cocktail parties, you hear it in discussions.  The interesting part is you pick up the Wall Street Journal or the Investor Business Daily, and you look at the charts and you say, "Oh, I would have bought here, or I would have sold here”.  You don't have the luxury to be a Monday morning quarterback. You must make your decision without knowing the future.

 

It is very difficult to make money in the markets not knowing what's going to happen in the future. Not only that, a lot of people read books, and they say that sounds easy enough, I think I can do that. And they don't put the required work and time into it to become really proficient at it.

 

Example

You wouldn't expect to read a book on brain surgery over the weekend and perform brain surgery on Monday morning, nor would you expect a first class violinist to perform for the first time after taking the first lesson over the weekend. There's a book called “Outliers” and in that book they talk about to really become proficient and become a professional you need to be willing to put in 10,000 hours. The concept of hard work; the stock market is not easy. Put the time and effort into it, and you will be a success. Once you get to the point where you've put the time and effort into it, good trading should be effortless.

 

The preparation and due diligence occur before the first trade is entered. Look at any professional athlete; take a professional golfer when they hit the ball 310 yards down the middle of the fairway, it looks effortless. And the reason it looks effortless is they have practiced thousands and thousands of hours hitting balls. Their body knows exactly what to do. That's the concept of hard work and it's true in the stock market too. You need to be willing to put in the hours of effort necessary to become proficient in trading the stock market.

 

Concept 3  |  Money Management

 v

The third concept is money management. You need to not only have a profitable system. You need money management that allows you to go through losing trades.  Allows you to go through losing periods, and to stay with it, and stay on course with not a lot of big drawdown. Now, money management alone doesn't work, you're going to need a profitable strategy along with that, but as a professional, you should never put any more than 1% of your portfolio at risk on any trade.

 

Example

You start with a $5000 dollar account.
Your hit a string of losers and you let the losses run out to the point that your account takes a 50% hit.
Now,  you need to make a 100% return on your remaining $2500 account just to break even, that is not a formula I want to follow.

 

Concept 4  |  Winning

 

The fourth concept is winning. The studies of hedge fund managers show that they only have about 65% winners. You don't need a very high percentage of winners, but you got to make sure that your winning trades are more profitable than your losing trades. In other words you have to cut your losses short and let your profits run. Also these successful traders talk about the more you try to optimize your system, the greater chance it won't work. If you've tested the winning strategy and you're trading the winning strategy, don't tinker with it and try to make it a little bit better, because when you try to optimize it, you have a greater chance it won't work.

 

Concept 5  |  Follow Your own Mind

 

The fifth concept is, you have to follow your own mind. You have to have your own strategy, you have to execute the trades.  Sometimes, you might listen to the talking heads, and I would suggest you don't.  I would suggest you do your own thinking, your own strategizing, with your own strategy, and xdon't worry about the talking heads what they're saying.  Don't listen to the talking heads, follow your own mind. And once again, they talked about that the combining methodologies is much worse than having a single, simple strategy.

 

Concept 6  |  Patience

 

The sixth concept is patience. The hardest concept but also the most important. You don't have to trade the market. The market does not trade you; you trade the market when you feel you have an edge. Amateurs go broke taking large losses; professionals go broke taking small profits. Professionals wait for a trade until they can see that they have an edge.

 

Example

The cheetah is the fastest animal alive, however it will wait in the grass patiently, not only for a herd of antelope to go by, but a herd of antelope that has some baby antelopes, and not only that, they're looking for a lame baby ample antelope. Now, the cheetah is faster than any antelope but you look at a lame baby, and now all of a sudden the cheetah has caught a definite edge. Now, that's what we talk about patience. There is no reason to get into the market unless you feel you have the edge.

 

Concept 7  |  Confidence

 

Most money managers, and most successful traders that Jack Schwager interviewed, said that they keep most of their money in their own funds or their own trading strategies.  They feel that that's the safest place for their money to be. Now that's confidence, and that confidence only comes with many years of positive trading and positive expectation, and the work and due diligence that creates that positive expectation.

 

Many of these successful traders know they're going to win before they put on a trade, and that doesn't necessarily mean that every trade is going to be a winner. What that means is that the majority of the trades will be a winner and you're going to have more profit than loss. So, you know, going into the trade that in the long run, it's going to be a winning trade because you're going to wait for the edge.

 

Once you’ve discovered and tested your edge, you can then embrace losing. Losing is part of the game. Amateurs need to be right, and they say, "I'll get out when I break even," and then they put more and more money and down and down it goes, that's not the right thing to do. You have to - when you have a loser, you have to not be in love with that trade. You got to be willing to get out of it. You got to accept losing as part of the game.

 

Concept 8  |  Loyalty

 

Loyalty meaning that you cannot fall in love with any one trade. In other words, if - and I had trouble with this early on because I'm a trained engineer and I would look at my strategy, and put a trade in, and the market would go against me. And I would think, "How dare the market go against me," because I was in love with that trade. I had done the thinking behind it, it was my trade. It went against me; sometimes I even put more money into it.  So, you can't be in love with the trade, you got to be flexible, you got to be willing to say, the market is not playing by my rules and I’m out.

Final Thought  |  You have to love Trading


Jack summarized everything up by saying successful traders love what they're doing; they are passionate. It's more than just a hobby. You have to treat it like a business. You have to put the hours in it. You have to follow the rules. You have to execute the trades. You have to check your ego at the door. "Successful traders love what they're doing. They are passionate."

Think and Grow Rich - Connection to Trading and Lifestyle Success
Dec 18

Think and Grow Rich | Trading & Lifestyle Success

By Dale Brethauer | Option Trading Blog

This is a review of a book that changed my life called, "Think and Grow Rich" by Napoleon Hill. This is probably the best book that I've ever read. You can pick it up on Amazon relatively inexpensively. A lot of the insights that I put into my trading business plan came from this book. What I'd like to do is just review the highlights of this book, but I do suggest you all go ahead and purchase your own copy. My copy is earmarked and underlined, and I refer to it often. It is extremely powerful, and has helped me immensely to become a success in the marketplace.

Napoleon Hill interviewed about 25,000 people before writing his book.  He was asked to do this by Andrew Carnegie.  Andrew Carnegie was one of the richest people at that period, in the Industrial Revolution, and he wanted to know if Napoleon could determine some of the traits of some of the richest people, and could they be duplicated in others. This particular study took over 20 years of him investigating, studying and interviewing. This was not put together lightly, and the results are amazing.

More than 500 of the most successful men this country has ever known told the author their secrets. Napoleon carefully analyzed these men and over 25,000 others over a long period of time. Most said their greatest success came, just one step beyond the point at which defeat had almost overtaken them. Let me read that again. Most said their greatest success came just one step beyond the point at which defeat had almost overtaken them.  The others, that didn't continue on, failed. The purpose of his book is to present to all who want the knowledge the most dependable philosophy through which individuals may accumulate riches in whatever amount they desire. Now, Napoleon Hill talks about riches and we’re talking about success in the stock market, and that definitely relates the money, but riches also relates to all walks of life – your relationships with people and so on and so forth. This book allows you to extrapolate in all different fields.

 

Step 1 | Desire

 

The method by which desire for riches can be transmuted into its financial equivalent consists of six definite, practical steps. One, fix your mind the exact amount of money you desire. Two, determine exactly what you intend to give in return for the money you desire. This is just not a take, this is a give, too. Always be conscious of those less fortunate than you, and always be conscious that if you are going to become a success, how are you going to give back? Step three, establish a definite date when you intend to possess the money you desire. Put a timeline on it. Step four, create a definite plan, and that's the business plan that we've been talking about, to carry out your desire and begin at once to put the plan into action. Step five, write out clear and concise statements, affirmation, business plan, everything written down. And the last step is to read your statement aloud. When you read it aloud, you're telling your gray matter, your subconscious, this is who I am, this is what I want, and this is how I'm going to accomplish it.  The object is to want money and become so determined to have it that you convince yourself you will have it. Through some strange and powerful principle of mental chemistry, which she has never divulged, Nature wraps up, in the impulse of strong desire, that something which recognizing no such word as impossible, and accepts no such reality as failure.

 

Step 2 | Visualize

 

Step two is to visualize. Faith is the head chemist of the mind. Faith is a state of mind which may be induced or created by affirmations or repeated instructions to the subconscious mind through the principles of autosuggestion.

Self-confidence formula is I know that I have the ability to achieve the object of my divine purpose in life. I realize the dominating thoughts of my mind will eventually reproduce themselves in outward physical action. I know through the principle of auto suggestions, any desire that I persistently hold in my mind will eventually seek expression. I have clearly written down a description of my definite direction in life. Visualize the plan already being executed, and the enjoyment you and others have received.

 

Step 3 | Auto Suggestion

 

Okay, once you have things written down, and you have them visualized, step three is auto-suggestions, the medium for influencing the gray matter that this is who you are, this is what you want to be, this is how you're going to get there. Auto-suggestion is a term which applies to all suggestions, and all self-administered stimuli, which reaches one's mind through the five senses.

By reading aloud your desire, you are communicating the object of your desire directly to your subconscious mind. When you're reading your affirmation, don't be thinking about your grocery list, don't be thinking about anything. Stay in the present, and fully be committed to the words you're saying, fully understand them, fully appreciate them, and fully be focused on them as you are communicating the object of your desire directly to your subconscious mind.

 

Step 4 | Specialized Knowledge

 

Step four I find very interesting, and that is you need to have specialized knowledge, and specialized knowledge is really pretty easy, if you have a passion for something. I don't care what it is. You have a passion for teaching kids how to play softball; you have a passion for shooting foul shots. You have a passion for balancing your checkbook. You have a passion for raising your children in a positive manner. General knowledge, no matter how great in quantity, is of little use in accumulating – now we're talking about money.

 

Knowledge is power. It becomes power when it is organized into definite plans of actions, and directed to a definite end. If you have a passion for the stock market, make it your hobby. Make it your passion. Read everything there is to know about it. Read the great traders. Read Market Wizards, by Jack Schwager. Read Bollinger on Bollinger Bands. Read Living in the Zone by Douglas. Read all of these books. Read about some previous traders, successful traders like Baruch. Read and understand and become knowledgeable in the stock market. Take the time, just don't – just don't invest in a stock because you heard that they just came out with a new hamburger. Study, study, study and specialize your knowledge.

 

Step 5 | Imagination

 

Imagination is the workshop of the mind, and there are two forms of imagination, synthetic and creative. Through synthetic imagination, one may arrange old concepts and ideas. Through creative imagination, the finite mind of man has direct communication with infinite intelligence. That's pretty powerful. That's pretty powerful.

 

Step 6 | Organized Planning

 

Organized planning is the crystallization of desire into action. You've learned that everything man creates or acquires begins in the form of desire. That desire is taken on the first lap of its journey from the abstract to the concrete, into the workshop of the imagination, where plans for its transition are created and organized. Ally yourself with a group of as many people as you may need for the creation, and carry out of your plan for the accumulation of money, and this again is the – to get together with like-minded people and discuss – discuss your financial freedom, and how are you working to accomplish that.

The author analyzed several thousand people, and 98% of whom were classified as failures. 98%!  That boggles my mind, but what's interesting is that's the same statistic I've heard on how many people lose in the markets. The futures market, the forex market, and the stock market.

 

Let's look at some of these major causes, and we looked at some of these causes when we were putting together our trading business plan, let's see if some of these are similar.

  • Lack of a well-defined purpose in life.
  • Lack of ambition to aim above mediocrity.
  • Insufficient education.
  • lack of self-discipline.
  • Procrastination, lack of persistence.
  • Negative personality. Uncontrolled desire for the “easy way”.
  • Lack of concentration of effort, lack of enthusiasm, egotism.

 

I'm going into the casino, I'm going to put everything on black, and if it hits, I'm going to have a huge payday, for nothing. I'm going to get something for nothing. It doesn't happen on a long term basis. Research the horror stories of people who have won the lottery, something for nothing is curse not a dream come true.

 

My Personal Experience

When I first got involved in the stock market, I was a trained mechanical engineer, and our field was based on the laws of physics, and the laws of physics do not change. Gravity is gravity. Formulas are formulas. I could calculate what was going to happen, and I thought my analysis of the market was just about as correct as the laws of physics, and when it would go against me, I would put more money on that trade, and lose, and lose, and lose, and lose, because my ego said how dare the stock market go against me. You've got to check your ego at the door, otherwise the stock market will chew you up and spit you out.

 

 

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Step 7 | Decisions

 

Decision is the mastery of procrastination. Analysis of over 25,000 people who have experienced failure disclosed the fact that lack of decision was near the top of the list of cause of failure. A lot of times there is no right or wrong answer, it's just what you have decided to do at that point in time, and what's the worst thing that can happen? It could be the wrong decision. Guess what? You need to have rules in place that if you're trade goes against you, you get out. It's that easy. Don’t let fears of failure paralyze your thinking. Make the decision, execute the trade. If it's incorrect, get out. Do not procrastinate and let good trade after good trade after good trade go by. Procrastination, the opposite of decision, is a common enemy which particularly every man must conquer.

 

Step 8 | Persistence

 

You've got to stay with it. You come up with a rock solid strategy, and you're in the middle of a losing streak, you have to stay with it. You've studied it, you know what you're doing, you just stay with it and execute. The majority of people are ready to throw their aims and purposes overboard and give up at the first sign of opposition or misfortune. Persistence is a state of mind, therefore it can be cultivated. Like all states of mind, persistence is based upon definite causes, among them, definiteness of purpose, desire, self-reliance, definiteness of plans, accurate knowledge, cooperation, willpower and habit.

 

There are four simple steps which lead to the habit of persistence. A definite purpose backed by a burning desire for its fulfillment, a definite plan expressed in continuous action, a mind closed tightly against all negative influences. Surround yourself with positive people. A friendly alliance with one or more persons who encourages one to follow through with both plans and purposes, that's what you want. That's what you want.

 

Step 9 | Mastermind

 

Step nine is the power of mastermind. The mastermind may be defined as coordination of knowledge and effort between two or more people, for the attainment of a definite purpose. Once again, that's why I do the nightly trading sessions and have monthly get-togethers with all my mentees, so that us of like minds, and these are all recorded, too, us of like minds can look at this and talk about it and visualize it and all become a success. It's the power of the mastermind.

 

Step 10 | The Subconscious Mind

 

The subconscious mind works day and night, it never stops. You cannot entirely control your subconscious mind, but you can voluntarily hand over to it any plan, desire, or purpose which you wish transformed into concrete form. Going back to the affirmation, write it down, say it out loud, tell your subconscious mind, tell your subconscious mind who you are, what you want to be, and how you're going to attain it.

 

Step 11 | The Brain

 

The brain is a broadcasting and receiving station for thought. When stimulated or stepped up to a high rate of vibration, the mind becomes more receptive to the vibration of thought. Man knows but little concern – little concerning the brain, and its vast network of intricate machinery through which the power of thought is translated into its material equivalent. It is now entering a stage which shall yield enlightenment on the subject. There are over 40 billion nerve cells in the human cerebral cortex, and we know they are all arranged in definite patterns. We also know, from scientific studies, that the human only uses about 10% of their total brain power.

 

Step 12 | The Temple of Wisdom

 

Now, you’ve worked on all eleven steps, and step twelve becomes your sixth sense, the door to the temple of wisdom. You think about the sixth sense and you're looking at a trade, and you say, “That just looks good”. The chart looks good, I like it, I've seen this before. It kind of goes against some of the rules, but I’m going to do it." It’s not just a whim, it's something that is coming from your sixth sense. The sixth sense has also been referred to as the receiving set, through which ideas, plans, and thoughts flash into your mind.

 

The flashes are sometimes called hunches, or inspiration. It is believed to be the point at which the mind of man contacts the universal mind. Through the aid of the sixth sense, you will be warned of impending danger in time to avoid it, and notified of opportunities in time to embrace them. The sixth sense is not something that one can take off and put on at will. The ability to use this great power comes slowly through application of all the other principles outlined in this book.

 

Napoleon Hill summarized everything and said "Being an earnest student of psychology, I knew, of course, that all men have become what they are because of their dominating thoughts and desires."

 

I hope you all enjoyed this synopsis of Napoleon Hill's awesome book, “Think and Grow Rich”. Do yourself a favor, go to a library, go to Amazon, buy it, read the whole book. Like I said, mine is earmarked and underlined, written in the side of the page. I refer to this all the time, I think it's a great work. It helps me in putting together my trading business plan. It helps me to stay focused on what I want to do, and also remember, you don't just want to take, you want to give back to society.

Trading the Iron Condor - Video Thumbnail
Nov 20

Trading the Iron Condor

By Dale Brethauer | Option Trading Blog

Trading the Iron Condor

The iron condor has a lot of advantages. Basically, the iron condor is a combination of two credit spreads, the bull put and the bear call. Some of the advantages are, you don’t need to know the market direction because the market does go up and down, but it goes in a sine-wave-type pattern.

What we’re doing with an iron condor is you’re trying to take advantage of that sine wave and looking for the market to stay relatively in the same position as it oscillates.

 

 

Iron Condor | Nature's High Probability Trade

 

You can yield monthly income on a consistent basis because this is a very high-probability trade. We’re going to couple the bear call with about 90 percent probability of success, and we’re going to couple that with a bull put with about 90 percent probability of success. You’re going to come up with about 80 percent on that.

I have been trading the iron condors for more than 15+ years. The average return, the average win rate on an iron condo is about 75 percent over that long period of time. You don’t have to constantly watch the market. It’s relatively low anxiety. The trades are not concentrated at a certain price level, and they have good returns and controlled risk.

Once again, we’re taking advantage of this rapid decay of premium, called theta decay, in the last 30 days. You can see the option prices. What we’re doing is we are selling out of the money options and then buying one farther for protection. We’re doing this with about 30 to 40 days left.

 

Watching Theta Decay (Money in your account)

 

We’re in the very rapid decay of that premium curve. When you look at once it gets beyond 30 days, the rapid decay is almost exponential. We’re taking advantage of that. An iron condor strategy is to take advantage of that theta decay while keeping risk in check. Basically, what we’re doing is we are selling an iron condor, which is selling a bear call spread and selling a bull put spread.

Quickly, the bull put spread, what we’re doing is we’re going out of the money and we are selling a put that is pretty far out of the money then we’re buying one a little farther out of the money for protection. This can profit if it goes up, sideways or does not come down below the strike price where you sold the put.

With the bear call, we are selling a call that’s out of the money and buying a call farther out of the money for protection. Here you can profit when it goes down, sideways or if it doesn’t come up to the price where we sold the call. You couple these together, you get an iron condor. It’s an advanced option trading strategy using both the bull put and the bear call with the same expiration. The number of call and put spreads will be equal. The position is called a condor due to the shape of the profit/loss graph. It looks like a condor in flight, where this is the profit zone and this is the potential loss. You bought the put and call so you don’t have a catastrophic loss if the market goes against you.

Setting up an Iron Condor on the Russell 2000

 

This is the RUT option chain. We’re going out equal distance from where the price is to sell and then buying one farther out. This is our bull put side. You’ll notice that it’s right around a delta of about .10.
Then down here is our bear call side where we’re selling this strike price and buying this strike price. You notice this delta is right around .10 also. You execute those two and you have an 80 percent chance that the options will expire worthless. In other words, they will expire within the profit zone. Now, there are times it’s going to go out of the zone.  You need to develop rules for exit when the price gets beyond that point.

Here’s an example of setting up an iron condor. The RUT is at 1490. We’re going down to 1400 and sell a put that’s 90 points away. Then we’re going up to 1550 and sell a call that’s 60 points away. Both have a delta of .10.

We’re going to also buy a call back further out of the money to set up our bear call so our net credit on the bear call side is going to be 90 cents. The net credit on the bull put side when we sold the 1400 for $5.50 and bought the 1390 for $4.75 gives us a net credit of 75 cents. The beauty of the iron condor is you’re going to get the credit for both or $1.65.

I tend to go a little farther out and be a more conservative trader. I’m looking around .10 delta and maybe a little bit lower.  I’m never going to take the iron condor trade all the way to expiration because once I capture about 75 to 85 percent of that $1.65 I’m going to get out and mitigate my risk. Every day you stay in, you’ve got risk exposure.

I always look at the profit zone. Here’s the bull put and bear call that we setup. Here’s currently where the RUT is at. The profit zone is right in here. Notice that the zone becomes bigger and bigger the closer you get to expiration. In this case the expiration was November 17, one month away.

 

Understanding the Risk Profile

 

This is the  risk profile. This is where it is at expiration. The green line show where the profit/loss will be at expiration.  The purple line is where it is currently. As days go by, if it stays within this zone, this curve will go up and up indicating increase in profits.

This is the curve that I use to manage the trade. I usually put up a line around six percent for a loss on both the call side and the put side. If it goes outside this profit zone I want to be in a position to say, “Well, do I want to stay in here or should I exit?” It’s the combination of the profit zone and the risk profile that I use to manage the trade.

Iron condors can be very profitable if you follow them on a regular basis. When it gets outside the profit zone you’ve got an exit strategy in place. Also, you know exactly when you’re going to take profit is when you get up to about 75 to 80 percent of the potential profit. That’s how you set up and trade an iron condor.

Credit Spreads Demystified
Nov 08

Credit Spreads Demystified

By Dale Brethauer | Option Trading Blog

Credit Spreads Demystified

Today’s lesson is entitled “Credit Spreads Demystified”. Credit spreads are one of the best option trading strategies that I use. What I will do is to explain the difference between a bear call and a bull put, how you set them up, and how you can profit from them.

Advantages of Credit Spreads

1.  Credit spreads have great returns when coupled with a probabilistic approach to price action.

2. This option trading vehicle will yield monthly income on a consistent basis if you use proper rules, trade management, and deploy the advantage over a large population of trades.

Will you have some losing trades? Sure, but over the long run you will build an equity curve that has very little draw-down.

 

Credit Spread Delta

Most of the credit spreads we’re going to put on have a delta of about (.10).  This delta means that there’s a 90-percent chance that that option will expire worthless, and those are the options that we are selling (green in your account). When we sell premium, time is in our favor. With credit spreads, you don’t have to constantly watch the market. You don’t have to chart-hawk. You don’t have to constantly be watching your computer. It’s a low-anxiety trade. With a credit spread we’re selling, but we never sell naked. We always are going to buy an option further out of the money, and that is for protection against catastrophic losses. The other protection we have is you set up rules whereby if it gets to a certain point, you exit the trade.

 

Best Time to Enter a Credit Spread Trade

Options don't decay at a linear rate, as gets closer to expiration the price of the contract decays exponentially. Therefore, we want to take advantage of that period of ever increasing premium decay (money in our account) by deploying our spreads on that last third of their life.

Think of a credit spread as simply selling one and buying one. You’re going to make money on the one you sell, called the short strike. When you sell an option potential loss can be unlimited so we’re going to buy one, called a long strike, further out of the money.  This is the one that protects you from the unlimited losses.

 

Managing the Trade using the Risk Profile

This screenshot show a risk profile, and this is how you manage the credit spread. The green line is what it would be at expiration. You can see that this is the max profit you can make, and then your loss is truncated by the wing down here, and that’s the option that you bought.  This risk profile is for a bull put. The combination of the one that you sold and the one that you bought gives you this amount of credit.

Every day, just take a look at this risk profile, and the purple line shows you what the spreads value is today. You’ll notice that it’s a curved line, versus the straight lines for the bull put at expiration. As long as you stay to the right of the break-even point just let the spread work. When it goes to the left, and you begin losing, and you’re out of the profit zone, that’s when you want to watch closely and make sure you don’t allow the loss to get out of hand. This is when I use my easy to follow exit rules.

3 things to know before you enter a credit spread:

  1.  How far out you’re going to set up your credit spread.
  2.  The trade's delta.  (delta of .10 - .20 depending on your risk tolerance)
  3.  Understand the risk profile and follow previously defined profit/loss exit rules.

I always put the profit zone on my chart, so that I’ve got a visual look on the chart and follow the risk profile.


The Best Equity|ETF to Trade Credit Spreads

You can set up credit spreads on any stock, but the less-expensive/liquid ones produce a smaller credit. Therefore, I trade the big liquid names like Amazon, Google, Priceline, the Russell 2000, and the S&P 500 indices.

Video Quote:

These are the credit spreads that I got for the big boys — over $1, in most cases. Compare that to common stocks that are trading right around the $50-$100 region, where you’re only getting about a quarter of the credit. On Verizon, you’re only getting about 19 cents.  These credits were all based on a bull put spread just 43 days from expiration with a delta of 0.1, and with a 10-point spread.

The problem with the less expensive stocks, where you get less credit, you might have slippage.  I always put the price in at the mid-point — halfway between the bid and the ask which the floor traders may not be able to fill (slippage), tack on commission and your trade prospects dwindle quickly. That does not occur with the big boys. Let’s say this slips from $100 to $98. You pay commission on that, and it drops down to $95. You only have a 5-percent possible drop.

Final Thoughts

I hope I have demystified credit spreads for you. The thing to remember is to make sure you setup the trade at a delta that suits your risk tolerance, optimize your strike price differences, and now when to take profits and when to kill a bad trade. Happy trading, everyone.

If you have any questions please send a message or join as a free member to see my 2 strategies in action with some sample content from my featured memberships.

Is it better to Buy or Sell Options
Nov 08

Which is Better: Buying or Selling Options?

By Dale Brethauer | Option Trading Blog

Advantages and Disadvantages of Buying Options

Hello, this is Dale, today's lesson is entitled, "Which is Better: To be a Buyer or Seller of Options?" Both have advantages and disadvantages. What I want to do in this webinar is go over the advantages and disadvantages of both and let you decide what makes sense for you.

The Option Buyer

If you're a buyer of options the advantage is you have unlimited potential gain. And you’re limited in your loss because you can't loss any more than the option premium price that you paid. If Apple goes in the direction you think it is, by the amount you think it will move, within the certain time you may have unlimited potential gains. That is the advantage. On the other hand let's say you buy an option. The price on that option might be 5 dollars.  Five dollars times a hundred shares per contract equals five hundred dollars.  That is the maximum you can lose.

Reference:  What factors go into an options price?

 

First Disadvantage of Buying Options

The first disadvantage is you have to pick the right direction. Is the stock going to go up or down?  Not only do you have to be right on the direction, you have to be right on the distance or the magnitude of the move. Finally if you have those two correct you have to be correct on direction and magnitude before expiration. If that move does come to fruition after the option has expired it's worthless to you. Actually, picking the right direction is extremely difficult.  An analyst who does this full time and is paid handsomely for it might do nothing but study a certain company for years. They know the business inside and out. They can still pick the wrong direction for a company's stock price.

 

Second Disadvantage of Buying Options

The second disadvantage is the option buyer also has to pick the right distance, or magnitude, of the move. If he buys an option believing that Apple stock is going to $220/share — and it's sitting at $200/share, what he's buying is something that is out- of-the money. That option has premium associated with it based on the time only. Apple not only has to go in the upward direction, it has to rise at least 20 dollars per share to get to the point where it's at $220/share.  If it goes to $210/share  this would be an example of getting the direction right but the distance wrong. Now, additionally not only does the price of the stock have to reach $220/share but the buyer also has to include the price of the option. Let’s assume about five dollars as the premium on that option. Not only does it have to go to $220/share, but it has to go to $225/share for you to break even. Then for you to make money it has to go beyond that. You have to be correct on the direction and you have to be correct on the magnitude.

 

Third Disadvantage of Buying Options

Finally, if you get those two right you have to have the move occur before the option expires.  Let’s say you go out about a month or two and put on a trade. If the move only comes to fruition 4 months down the road, you’re going to lose everything. The greatest difficulty the option buyer has to contend with is time. If your option contract expires before the underlying price moves in your chosen direction with the appropriate magnitude, the contract is worthless. So you're constantly battling time, referred to as theta decay, instead of having it work for you which I'll get into at the end of this article.

 

Theta Decay Example:

Say you have an option out around 90 days before expiration. For a while there's not going to be a lot of theta decay. In the last 30 days that theta decay becomes exponential. What that means is if you've bought an option that had a premium of $5, and if the stock hasn’t increased in price, the last 30 days that $5 evaporates quickly. You can see that buying has the advantage of limited risk but unlimited profit. That's the "lottery mindset that is so alluring about buying options. Yes, you can make money if it quickly moves in the direction you're looking for. If it slowly moves in that direction and slowly gets to the magnitude you need but takes too long you're going to lose.


Option Buyers: Probability of Success

Let's look at the odds against the buyer being correct. Attribute 50/50 odds to correctly choosing each of these three elements. If you took a coin and flipped it and said "Heads I'm going to buy a call, which is a bullish play, and tails I'm going to buy a put, which is a bearish play," you have roughly about 50/50 chance of being correct. Picking the magnitude of that move is even harder than 50/50.

 

Coin flip example:

I'm going to give the benefit of the doubt and stick with 50%. Is the move going to happen before expiration? I'm going to give that 50/50 odds too, which I think is generous for both the distance and the time. Mathematically if I take 50 percent times 50 percent times 50 percent, I get 12.5 percent. At best the odds of holding a profitable trade on an option to expiration are about one in eight. You may think you have an edge, but study after study shows you really don't. Let me just go back and say that if you are a buyer and you do choose the direction correctly and it happens quickly you may profit handsomely. Other than that the odds are against you that buying options will reward you in the long-term.

 

Advantages and Disadvantages of Selling Options

Reference:  a Naked Put or Naked Call is when a trader sells a position to open without protection.

Let’s look at the seller. The pure seller also (known as selling naked) has advantages and disadvantages too. The advantage is that the trader is collecting premium the entire time the position is open until is expires (hopefully worthless because that means the trade collected the entire premium). The disadvantages is that if you sell an option (naked) then you could sustain serious losses if the trade goes against you.

 

Credit Spreads - Most Effective Way to Trade Options

Reference:  Two popular credit spreads are the Bear Call Spread and the Bull Put Spread

Enter credit spreads. A credit spread is simply selling an option at a certain strike price and then buying one further out of the money for protection. A spread is the simultaneous opening of two or more option positions that offset one another. The set up is short selling calls or puts and simultaneously buying a call or put further out of the money. The most important attribute of any spread is that it can reduce the risk. If you trade a spread you can mitigate some of the risk that you have involved with an offsetting long position. If you go one step further and say I'm never going to let the spread  go all the way to expiration, technically if it moves against me I'm going to get out, you can mitigate your risk even more.

I hope you enjoyed this webinar on whether it's better to buy or sell. I think you guessed it. The next webinar is going to be on demystifying credit spreads either bull puts or bear calls. Hope you enjoyed this post and there's plenty more to come, right a comment or become a free member to find out more about how I build wealth trading options.

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