I hope everyone had a profitable week trading.
Today I’m bringing you some good ol’ Friday Q&A!
But first, let me share with you why I love doing these…
You see, when I first started trading I was scared to ask questions because of my shyness. Even worse, I was often afraid because I thought my questions were dumb…
But once I joined Tim Sykes’ Trading Challenge, I noticed other students would ask questions that I was curious about. Not only did I learn a lot from them, but I also realized that they were facing many of the same challenges I was.
Bottom line: I’m sure you’ll find an answer you’re looking for in one of these Q&As.
So sit back, relax, and allow me to answer your most burning questions…
“Since you think the market’s headed lower … what do you think about buying long-dated puts on the major indexes?”
As you probably know, I very rarely buy long-dated options. It’s just not my style and I don’t like to mess with the strategy that’s made me a millionaire.
But aside from that, there are some other concerns I’d have about getting into long puts on the major indexes right now.
IV is high on options because the market’s been in such an anxious, volatile environment for the past several months.
This greatly affects long-dated puts. If the market decides to trade sideways for a while, overall IV will get crushed — and so will the value of your contracts.
- Uncertain timing
Just because you buy puts with a longer lifespan doesn’t mean they won’t get destroyed if the market has a relief rally.
I’m pretty confident we’ll see lower prices in the major indexes this year, but a variety of factors could cause a number of bounces along the way.
If the road down is particularly bumpy, sprinkled with relief rallies along the way … it’ll be brutal holding long puts.
“If you love trading puts, and the market is currently bearish … why aren’t you trading more in this environment?”
I think there’s a misconception about put traders and bear markets. At least for me, the two don’t necessarily go hand-in-hand.
I don’t just trade puts on any random stock or major indexes. I look for a very specific kind of setup — overextended momentum stocks that are overdue for major downside.
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The problem with this bear market is that none of the garbage stocks I like to short are making big moves to the upside.
It’s much more difficult to find those obvious blow-off tops right now. There’s almost no bullishness anywhere outside of the energy sector.
For my strategy, I need to see huge ramps that I can short into epic crashes. And right now those setups are few and far between…
“Why are some options contracts’ bid-asks spreads so much larger than others?”
There are a lot of nuanced factors that go into options pricing. But I won’t bore you with all of that right now…
The answer to this question mainly comes down to one concept — liquidity.
If an options chain is thinly-traded, the bid-ask spread is gonna be wide. You usually wanna avoid trading options on these types of chains.
If an options chain is widely-traded, market makers will use incredibly small bid-asks spreads. These are the options chains you ideally want to be trading.
But I get it. Sometimes you wanna trade options on a stock with less liquid contracts. And that’s occasionally okay if the setup is perfect.
You’ve just gotta be very careful when you do this. Make sure the spread is reasonable enough that you’ll be able to make your money back on the % move you’re expecting in the stock.
Thanks for the questions, Evolvers!
If you’d like to submit a question for a future Q&A, send me a tweet @thehonestcroock. I love hearing from my students!
Have a great weekend. But don’t forget to study while the market’s closed!