Stock Options Spread Trading from TheOptionClub.com

Trading Stock Options As A Business

2009-03-24T09:07:00.000-07:00

It has been about a month since I transitioned away from using Blogger has my primary blogging platform. I am now using a WordPress blog that I host on my own server. All in all, it gives me more flexibility and is working out well.

I have also managed to install a private membership forum. In that forum, there is now a whole series of videos that demonstrate how options may be traded much like a business. Below, I've embedded a video that does a much better job of explaining what that's all about.

It's not ready for prime time, yet. I'm still checking all of the software on the server to make sure it's working. But, with a little luck, I am hoping to have it available the first week of April.

To check out the new blog and to stay informed about the "Trading As A Business" video training course, just click on through here:

Trading Options As A Business Blog

It's a lot of work, but the site is coming along nicely. Go check it out!

Christopher Smith
TheOptionClub.com

President Obama's Address And Jindal's Reply

2009-02-25T09:56:00.000-08:00

I imagine that most people have already seen the president's address and the GOP reply, but I'm going to go ahead and post video of both. I'd be interested in your thoughts and observations, so please make use of the comment feature.

Rick Santelli Responds To Press Secretary Gibbs

2009-02-24T11:16:00.000-08:00

President Obama's Press Secretary attacked Rick Santelli following his Boston Tea Party rant. What's real interesting about the White House response is that it demonstrates a rather thin skin and lack of tolerance for criticism.

Personally, I tend to side with Mr. Santelli about bailing out those who made a bad decision on a home loan. I've made my share of bad decisions, some that cost me a fair bit of money, but no one ever offered me a bailout.

What did I do without a bailout?

I picked myself up, dusted myself off, and got on with the business of life. I guess the Press Secretary would also want to sit me down in his office and pour me a cup of decaf, too.

Christopher Smith
TheOptionClub.com

Rick Santelli Sayin' It Like It Is...

2009-02-24T10:58:00.000-08:00

You've probably already seen this video clip, but if not give it a watch. Rick Santelli, from the floor of the CBOE touched a nerve that is raw with many Americans.

His comments, right or wrong or whether you agree with them or not, and the traders' reactions may provide some insight into the concern that is permeating the financial markets right now.

In fact, I just finished watching Fed Chairman Ben Bernake respond to questions about Rick Santelli's Boston Tea Party rant. After the session with the Fed Chairman concluded, CNBC gave Santelli a chance to respond and then had the anchors go after him.

Bias in our media? I don't know.

What I do know is that the metaphorical arguments offered by Ben Bernake and the CNBC crowd were frustratingly inane.

It makes me worry for our nation's economic future...

Christopher Smith
TheOptionClub.com

Forex Training Videos from Bill Poulos

2008-12-03T20:49:00.001-08:00

Bill Poulos has now released three Forex trading videos in anticipation of launching his Forex Income Engine course. I have seen the course, after pulling some strings with Bill to get an advanced copy of it. Pretty awesome stuff, and if you're thinking about it I wrote up a detailed review.

But that's not the purpose of this post! Three totally free Forex training videos is the reason for this post...

I just figured why make it hard on you to find 'em, so here's all three...

View Forex Video 1

Forex Video 2

Forex Video 3

All three training videos are currently available for free viewing and will load automatically, at least until they're pulled off the server. Just take advantage of them while they're available.

Enjoy!

Christopher Smith
TheOptionClub.com

Forex Income Engine

2008-12-02T07:15:00.000-08:00

You will soon be hearing a lot about Forex Income Engine, which is the latest trading course out from Bill Poulos and Profits Run.

I've known Bill for several years now and consider him a mentor of mine. He was kind enough to share a preview of this latest course with me, so I took some time over the Thanksgiving holiday to sit down and work through the materials.

The course is really well done and the notes I generated from this last weekend have been distilled down into a formal review of the Forex Income Engine course.

Some of you may recall that a little over a year ago, Bill Poulos released another Forex trading course. It was also excellent, but I am sure that the same question that came to my mind is being asked by you...

Why another Forex course?

I have prepared a point-by-point breakdown as to the primary differences between the two trading courses. So, if you're curious to know just What Is The Difference Between Forex Income Engine And Forex Profit Accelerator, a quick reference is now available.

There are a lot of good reasons to be trading in the currency markets. Just make sure you spend the time to learn the ropes and develop a sound trading plan before you do. Either of Bill's courses will get you there and now you have two very different systems to suit your particular need and trading personality.

Christopher Smith
TheOptionClub.com

Think Before He Trades

2008-11-21T17:27:00.000-08:00

You gotta love YouTube... Here's one that was posted on our message board and I thought you might enjoy it.

Radioactive Trading Review Redux

2008-11-09T18:16:00.000-08:00

A few moments ago I commented on the Radioactive Trading blog to a post addressing the relationship between a long call and a married put. I am re-posting my commentary below, just to keep the record clean.

Before I do that, I want to re-visit the reasons why TheOptionClub.com came into being. I, and a small group of other people, were studying the subject of options and trying to discover how best to trade them. One problem we encountered was that there were a lot of folks out there selling what they said was the best way to trade. Some of the information was really great. So of it was nonsense.

My friends and I formed a group for the purpose of separating the hype from reality, fact from fiction, and simply drill down to the truth about options and trading. That's what TheOptionClub.com is about...learning about how options really work and how they can be used for legitimate trading and investment purposes.

So, my commentary about married puts, call options, and the Radioactive Trading Blueprint are offered in exactly that spirit. I encourage you to learn as much as you can about trading, investing, how options work, and how you can benefit from their use.

Kurt,

It is interesting that this debate about whether a married put and a call option are synthetic equivalents persists. For what it's worth, it's not just Chris Smith that says so...

"This position [the married put] is also called a synthetic long call, because the profit graph is the same shape as a long call's." McMillan, Options As A Strategic Investment, (4th Ed., 2002, New York Institute of Finance), p. 271.

"Many conservative investors purchase stock and then add a protective put to their position to hedge their risk. What they fail to realize is that this position has the same exact risk/reward profile as a long call but at a significantly higher cost." Jabbour and Budwick, The Option Trader Handbook, (2004 Wiley & Sons), p. 45.

I could quote more, but is it even necessary? The point is that it's not Chris Smith who is saying that the positions are equivalent. It's Myron Scholes. It's Fischer Black. ...to argue otherwise means that you have found the Black-Scholes option pricing formula defective.

Come on...

The point to understand about the risk free rate of return is that a call option allows you to adopt an identical risk/reward position as a married put, but with significantly less capital. The market, and the Black-Scholes formula, recognize this and price the positions accordingly.

Is a call option better than a married put?

No. It provides a risk/reward ratio equivalent to owning a married put.

A call option is more efficient, however. Less capital is required for the trade. You have one commission to get in and one to get out, compared with the married put's two. It's also easier to set up a "stop" for automatic execution.

You argue that married puts are better for those who cannot, or will not, apply risk management. I guess we could go with that, but if someone is that lacking in discipline I doubt that they would do the homework necessary to trade any option position.

My guess is that your successful students are diligent and dedicated. If they were not, they would not be successful. At least not in the long term.

Your position adjustments are not simple. They are quite sophisticated, in fact. Those adjustments move your students into some pretty complex multi-legged positions, which is another reason not to create confusion about what position they're actually holding. It's demanding work and requires discipline. If they can handle that, I'm thinking they can handle position sizing.

By the way, the counter argument to the "automatic position sizing" is that the lower capital requirement of the call option provides the investor / trader the choice of whether to accept a risk free rate of return or seek higher returns. Could that lead to over leveraging? Absolutely. But as you and I have discussed there are also good investment opportunities out there that return better than the risk free rate.

The call's low capital requirements also make your core strategies tradeable in a small account. Why not provide the alternative?

So, what about the guy who buys company stock in his retirement account? Does it make sense for him to trade a married put? Quite possibly... It would also make sense for him to sell a portion of the position as soon as he is able to diversify his holdings.

It just seems to me that the married put is being portrayed as more than it really is. It is a legitimate option strategy with real purpose in today's market. It is not always the best tool for any given job, however.

As I said in my review, I agree that The Blueprint has quite a bit to offer. It's greatest contribution, in my opinion, is the tireless focus upon risk management and trade planning.

Where I think it does a disservice is in its mislabeling of option positions and the portrayal of the married put as the ultimate option strategy. This only leads to later confusion as Radioactive Trading students begin expanding their knowledge. Your indication that this will be resolved in future editions is a positive step towards making The Blueprint more valuable.

I would encourage those same folks who were "burned by the snake oil gurus," as you say, to learn the true facts about options and how to use them responsibly. This may very well mean taking advantage of the benefits that The Blueprint offers, but it would also include expanding their knowledge and understanding so as to fully appreciate how options work.

Christopher Smith
TheOptionClub.com

If you're interested to read my review, it remains available on our website.

Review of Kurt Frankenberg's Radioactive Trading Blueprint

I do think that Kurt Frankenberg has done a very nice job of putting together a trading plan for married puts. The reality is that sometimes a married put will make a lot of good sense, but that often you will have better choices available to you. Sometimes that choice will be the purpose of a long call option.

The best lesson Kurt offers is on risk management. We could discuss trade planning as there are many adjustments choices offered

Happy Halloween!

2008-10-31T08:40:00.000-07:00

Try JibJab Sendables® eCards today!

OptionVue Credit Spread Training And Video Re-Play

2008-10-25T09:17:00.000-07:00

This last week we hosted a webinar exclusive to our community here at TheOptionClub.com. The featured speaker was Steve Lentz, who has been an options educator for the CBOE's Options Institute, the Options Industry Counsel, the Aussie Stock Exchange, and now us...

Steve is currently the Director of Education with OptionVue, as well as a mentor in their affiliated mentoring program. He is extremely knowledgeable when it comes to trading, and he is a superb teacher.

I hope you caught the presentation, but if not you can still view it at:

View The Video Re-Play Now

Steve Lentz tackled the myth about option sellers having an edge in the market.

Is it true? Do option sellers really have an advantage?

Well, watch the video but the short answer is "maybe." It all comes down to an understanding of implied volatility, the option pricing models, and doing a little bit of analysis. Steve showed us the basics of that last week.

He also started talking about credit spreads and the rookie mistakes he has seen so many traders make. We talked about high probability credit spreads and the necessary risk to reward ratios and win rates we need to achieve if we hope to be profitable.

It all came down to "practice, scrimmage, play..." What?

The "practice" part of trading is back-testing, the "scrimmage" is paper trading, and the "play" is money in the market. How many of us have gone to a seminar or learned about some trading idea that got us enthused, then ran home and tried trading it the following week?

I have and so have you. We've all done it. Was it a mistake? Oh, sure it was. So, what's the next step?

At the end of the video, Kevin Ritter from OptionVue outlined an Express Training product that they put tother...just for us.

This last summer Kevin and I worked out a multi-part presentation featuring another of OptionVue's educators. It was awesome. Kevin and I then started talking about their mentoring program. It's an excellent program and well worth the money, but it is expensive...

I wanted to get something that any one of us could afford, because I think that the guy with the $5,000 account should be just as prepared as the guy with the $500,000 account. Kevin agreed and we put together the Express Training product. It's the first time OptionVue has done this and it's just for us.

Now, it's not the full blown mentoring program, but for 30-days we're going to focus on one "bread and butter" trading strategy...the credit spread.

Why the credit spread?

You can trade credit spreads in most market conditions. It's a defined risk trade. It let's us take advantage of theta decay. It gives us an opportunity to create an edge...

...and that's exactly what we're going to learn how to do.

The mentoring program is designed to take us from theory to practical application. We'll learn about credit spreads, but then learn to use a trading system, back-test it, and trade it like a business. We're going to learn how to establish a customized trading plan, how to find appropriate trade candidates, how to open and manage positions, and how to close them.

I'm already signed up.

You're not going to find this high level training anywhere for this price. I know. I've looked. This course is not generally available. It's just for you, me, and the other members.

It includes personal mentoring sessions with Steve Lents. What do you think that would cost if you paid for them ala cart?

Oh, but you need software and data feed, right? It's included. Kevin also agreed to provide access to their on-line educational library.

The only thing I didn't get them to include was the trading account. You'll have to use your own.

This coming Wednesday, October 29, 2008, is the next training session. If you want to join us for the Express Training you must be registered no later than 2:00 p.m. on that day.

The details of the Training package are covered in the video re-play. You can also find the same information and get registered here:

Get The Details And Register Now

Like I said, I am already signed up and will be part of this mentoring class. The opportunity to refine my personal trading, to become more business-like in managing my trading, is just too valuable to pass up. At $499, you may not have such an opportunity again.

Get yourself registered now and I'll see you next Wednesday for class...

Iron Condor Video Training Now On-line

2008-10-06T07:19:00.000-07:00

Good news option traders!

I finally finished up my iron condor video training series. The whole video course is offered free of charge, thanks to the good guys that agreed to sponsor it. The videos cover the basics of the iron condor, gets deep into the greeks, discusses different ways of trading the positions, covers risk management, etc.

Iron Condor Video Training Series

Use the link above to click though to the site and if it sounds like something you're interested in just submit your name and e-mail at the bottom of the page. Once you confirm the subscription, you'll get access to the course.

Hey, you could be learning how to trade iron condors right now! Click through...

Christopher Smith
TheOptionClub.com

Bail-Out Plan Goes Down And The Market Follows

2008-09-29T18:26:00.000-07:00

An amazing thing happened today...

A group of democrats walked away from their leadership in the House of Representatives and joined arms with a group of Republicans who walked away from their leadership in the White House, and they both agreed to vote down the bail-out plan.

Guess what?

We’re still here. Sure, the market sold off hard today but if you had been paying attention to this blog and studied up on options you likely had a few put options in your back pocket to make the it a bit less harrowing.

As we headed into the weekend, we were told that this bill had to be passed if we were to avoid a total collapse of our financial system. Yes, Wachovia joined the list of failed financial institutions. No sooner than it did, they were bought by J.P. Morgan Chase.

Don’t tell anyone, but I am no financial genius. What I know about the markets is earned from many years of investing, studying, and trading. The sum of my experience tells me that no matter how complex, or “creative”, or sophisticated finances get there are those who owe and those to whom it is owed.

The financial institutions that are failing are victims of their own actions. They loaned money to people they knew, or should have known, could not pay that money back under the terms it had been given to them. It was great fun when housing prices were rocketing skyward, but did they really think the party would never end?

Well, it did and the bill has arrived. So, who shall pay it?

On the one hand you have those who made bad loans, guaranteed bad loans, insured bad loans, and invested in bad loans. You also have those folks who took out loans that they knew, or should have known, they could never re-pay.

On the other side of the equation, you have the rest of the American tax base. The folks who go to work, pay their bills, pay their taxes, and struggle to get some of their income into savings and investments.

Who should pay?

Well, the first group can’t pay because they’re broke. The ones who took the loans they can’t re-pay are defaulting on the loans. The ones made, guaranteed, insured, and invested in the bad loans can’t pay because their portfolio of loans has imploded and the real estate they used to secure the loans is worth a lot less than it was when they wrote the paper. No one wants to loan them any more money, either. Why would they? Look at the mess they’ve already made. How could making more loans to that group make things better?

Oh. But, then there is the Federal government...

Let’s bail ‘em out. Let’s take on the $700 billion dollar mess, pick up these unfortunate “victims” and dust them off. We’ll just add that to the already staggering debt this country already owes. After all, it’s not like our generation will ever be able to pay it off. We’ll stick our kids and grand kids with that. Just like we stuck ‘em with the cost of bailing out Fannie and Freddie. Just like we’ll stick ‘em with a bankrupt Social Security and Medicare system.

Has it ever dawned on you that the Federal government is not very good at fixing financial messes? Has it ever occurred to you that the government is much better at creating financial messes?

I say to hell with the bail out plan...

What? But the world will end. Life as we know it will cease to exist! Or will it...

Will the credit markets dry up? Well, I imagine that those who have money to lend will become a bit more careful about lending it. I’m not sure that’s a bad thing, though.

Will the real estate market disintegrate? I’m pretty real estate will survive. There may be a period of time while foreclosure properties contribute to supply and keep prices depressed, but that’s a market economy and since when did we decide that government intervention in real estate markets is good?

The market is already sorting this mess out. Private equity is funding the purchase of assets at the failed institutions. Those asset purchases are being driven by profit motivations. Someone is going to make money from all of this. Those profits will need to be re-invested. That re-investment creates liquidity.

Oh, but the stock market is selling off and retirement accounts are getting hammered. Yep. But, it wasn’t that long ago that everyone was telling us how great 401k plans are and that we need to save and invest and we’ll all have a great future ahead of us.

The reality is that life is uncertain.

Investing, saving, and just surviving from one day to the next are uncertain endeavors. When crisis arises, we tend to run for shelter and look to the government to make it all better. It’s a peculiar response, because when all is said and done we are the ones who fund the government, along with paying our bills and saving for the future.

With that realization, I am quite comfortable having my representative government pass on this bail out plan. The only reason put forth why this bail out is necessary, or even just a good idea, is the notion that without it all else will come undone and our country will plunge into the abyss.

It’s fear mongering.

The real abyss is the debt this nation owes and the additional debt the bail out plan would create for taxpayers to pay-off. That’s the abyss I fear.

Here’s the bail-out plan I favor. Let’s figure out how to bail-out the tax payer. Let’s come up with a plan that eliminates the staggering debt we currently carry. Let’s agree upon a plan that saves our “golden parachute,” formerly known as “The American Dream.” Let’s bail that out.

I think we’ll survive the fall of Wa-Mu, Wachovia, and even Lehman Bros. The markets will bump and grind along, regardless.

What’s all this mean if you’re a trader?

It’s time to grow up children. It’s time to set aside the childhood fantasy of picking the next big winner. It’s time to learn how to manage risk, create a trading plan, and develop the discipline to trade in difficult market environments.

There is no such thing as security any where in this world. There is only opportunity, and despite the current propaganda our financial markets remain one of the greatest sources of opportunity any where in the world.

If you're inclined to take responsibility for your financial future, now is the time to "step up" to the plate and do something to make your future a bit brighter. McCain and Obama aren't going to do it for us.

My friend and trading mentor, Bill Poulos, is one of the guys that helped me "see the light" when it comes to trading. I've learned a lot of valuable lessons from him. If you're willing to study, work hard, and apply the lessons he teaches there is no reason why you can't enjoy a sense of confidence in your future, too.

Click here to learn more about how to trade in any market...

Washington Mutual And Bail-Out Fail

2008-09-26T06:21:00.000-07:00

U.S. stock futures are pointed to a sharp sell-off this morning, after the proposed $700 billion bank bailout package stalled and Washington Mutual was seized by regulators in the country's largest-ever bank failure.

Yesterday, there was optimism that the bank bailout package would be passed. U.S. stocks rose higher, despite General Electric issuing a profit warning and reports that orders for durable goods had dropped. The Dow industrials closed up 197 points, the S&P 500 added 23 points and the Nasdaq Composite rose 30 points.

The bank package began to unravel, however. A White House meeting blew up in acrimony, with House Republicans refusing a demand from Democrats to come back to the table. The Democrats now insist they will not bring the package to a vote unless Republicans support it.

Adding more fuel to the conflagration, federal regulators seized Washington Mutual and sold it to J.P. Morgan. WaMu was the second biggest originator of "Option ARMs," which were marketed to borrowers via low introductory rates and included various payment options. Those loans often included the option to pay only interest, which caused the borrower's debt to grow with each payment, resulting in negative amortization. When housing prices began to fall just at the time rates were adjusting higher on those loans, borrowers began defaulting at alarming rates, leading to enormous losses for WaMu and others who had extended the credit or purchased securities based on that extended credit.

Make no mistake about it. Our nation's credit market is in crisis. Right now the financial markets are clinging to the hope that politicians can set politics aside and put together a sound bail-out plan. With the Democrats and Republicans at each other's throats in advance of the upcoming election, they may very well invest more time blaming each other for the crisis to win votes rather than working with each other for the good of the country.

With crisis comes opportunity, however. There is a great deal of volatility pushing option prices higher. These markets are no place for the amateur, but if you can avoid the whipsaws and sell-offs there is money to be made.

Mind your risk, and trade well.

Christopher Smith
TheOptionClub.com

A Total Market Melt Down Spurs Government Reaction

2008-09-20T09:57:00.000-07:00

If you just returned from a week long vacation on an island, you would be wondering what all the commotion was about.

For the week taken as a whole, the market experienced just a modest rise. Stocks gained less than 1% — the S&P 500 up 0.3% and the Nasdaq 0.6%. But, that doesn't come close to telling the story...

This last week was one of Wall Street’s most remarkable and turbulent weeks in it's history. A week that overturned a financial order built over decades and changed the face of the financial landscape forever.

Lehman Brothers filed for bankruptcy. American International Group agreed to a bailout that ceded control to the Federal Government. Merrill Lynch agreed to be bought by Bank of America. With Morgan Stanley searching for a buyer, that would have left Goldman Sachs as the last big independent broker.

The week shook the foundations of the world financial system.

The London Interbank Offered Rate rose dramatically during the week, pointing to the reluctance of banks to make overnight loans to one another. At one point midweek, the yield on Treasury bills fell to nearly zero as investors raced to the safest of havens. The financial system seemed to be unraveling at the seams.

On Thursday night and Friday, the government took unprecedented steps to avert what some feared would be a complete melt down our financial markets. All of these problems had their root in large portfolios of defaulting mortgages. Those firms that owned those mortgage backed securities could not sell them, because they were being viewed as essentially worthless. These faltering firms did not have the capital necessary to avoid the losses.

Something had to be done to avert unmitigated disaster. Thursday, Treasury Secretary Henry Paulson and Fed Chairman Ben Bernanke met with congressional leaders. That night they began to craft a plan to buy those illiquid mortgage securities and then auction them off at some later date.

Details were not discussed, probably because no one has really worked them out. Friday's announcement by Mr. Paulson was short and he quickly exited the conference after fielding a minimum of questions. In lieu of details, the plan is being compared to the Resolution Trust Corp., that was formed after the failure of savings and loans associations in the late 1980s.

Money-market funds, a safe haven where institutions and small investors alike park cash, came under unprecedented pressure in their nearly 40-year history. The Treasury Department said Friday morning that it would activate a fund to protect money-market funds.

The Securities and Exchange Commission issued a temporary ban on selling financial stocks short. The ban runs through Oct. 2, but the SEC could, if necessary, extend it another 30 days. The SEC also eased rules to make it easier for companies to buy back their own shares.

The Federal Reserve expanded its emergency lending to allow commercial banks to finance purchases of asset-backed paper from money market funds. It also said it would buy short-term debt from Fannie Mae, Freddie Mac and the Federal Home Loan Banks.

On Tuesday, the Reserve Primary Fund, the original money fund, was forced to write off $785 million in Lehman notes, 1.2% of its portfolio. As a result, its net asset value fell to 97 cents from $1, meaning investors lost 3 cents of every dollar. It froze redemptions after investors pulled out nearly two-thirds of their money during the previous two days.

That was the first time since Orange County, Calif.’s bankruptcy in 1994 that a money-market fund had “broken a buck.” The next day, Reserve announced that two other funds had broken a buck, including a fund exclusively for offshore investors that will return only 91 cents of every dollar invested.

It got worse. Wachovia’s Evergreen Investments, Bank of America’s Columbia funds, Ameriprise Financial, Legg Mason and Frank Russell Funds said they were either shoring up staggering money funds or stood ready to do so to prevent them from breaking a buck.

On Wednesday alone, investors yanked $89.2 billion, or 2.6% of total assets, out of money funds, which the day before held $3.44 trillion. The next day, Putnam announced that it was liquidating a money fund that was under pressure from redemptions.

So, there was a lot on the minds of investors and traders during Friday's session. Add to the fact that this was a quadruple witching trading day, the short covering, and you got the sense that anything could happen.

Whew! What a week, and less than a 1% change to show for it all...

Christopher Smith
TheOptionClub.com

Big Rally On Wall Street On Hopes Of Paulson's RTC

2008-09-19T06:08:00.000-07:00

Wow. What a day we had yesterday. Talk about a wide ranging day!

This morning, the futures are up massively. Considering the sell-offs we've had this week, what the heck is going on?

It appears that the world's central banks are injecting liquidity into the markets and the U.S. Government is going to bail out...every body?

The rally was sparked by news reports that Treasury Secretary Henry Paulson might set up a facility to take on bad debts from banks, bringing relief to a sector battered by the financial crisis.

The Paulson facility reportedly would be similar to the Resolution Trust Corp., set up in the late 1980s to take over failed assets during the S&L crisis. It would let ailing banks take bad debt off the books and free up money for loans and other transactions.

Some news reports said Paulson spent part of Thursday pitching the plan to Congress.

Other reports said the plan might not mirror the RTC, or that it was just one of many possible options.

Paulson made no public comment.

Whether such an initiative could make it into law is another matter. Earlier, White House Press Secretary Dana Perino questioned the wisdom of crafting sweeping measures in the midst of the crisis. She added it might be difficult to approve a bill quickly.

Well, Pauslon is scheduled to speak within the hour. This should be a very interesting day on Wall Street.

We have what appears to be a very credible rally, but it also seems to be based on stories of what may happen. It may also be magnified by further restrictions on short selling. Be cautious.

Christopher Smith
TheOptionClub.com

Washington Mutual And The Big Independent Brokers Endangered

2008-09-18T06:03:00.000-07:00

The futures are suggesting we'll see a little relief this morning, but keep in mind that we are going to continue seeing some turbulence in this market.

Washington Mutual has now put itself up for sale, following in the wake of Lehman Brothers, Merrill Lynch, and AIG. The failing thrift has hired Goldman Sachs to help find a buyer, with interested parties potentially including Citigroup, Wells Fargo, J.P. Morgan Chase, and HSBC.

Now, Morgan Stanley and Goldman Sachs Group are the last two remaining big independent brokers but Morgan Stanley is reportedly looking for a merger. You'll remember that Bear Stearns collapsed earlier this year, Lehman Brothers recently filed for bankruptcy, and Merrill Lynch shook hands on a deal to be acquired by Bank of America. With Morgan Stanley looking for a buyer, that would leave Goldman Sachs as the last remaining large independent broker. Can they survive?

I doubt that anyone saw this coming, at least not to this extent. The market's reaction has been turbulent and a lot of people are feeling the pain.

Over the last couple weeks, I've been posting links to materials that demonstrate now only how to survive these types of market, but how to actually prosper and grow your wealth when everyone else is feeling the pain.

Free Trading Report And Video Training

These training materials are all available at no cost, but will not be available in definitely. So, I encourage you to take advantage while you can and download the material now.

Christopher Smith
TheOptionClub.com

AIG Bail Out, Lehmans Remains, WaMu's Last Days, And You Prospering From It All...

2008-09-17T06:05:00.000-07:00

Everyone who can, seems to be making a deal.

Insurance Carrier AIG Rescued By The Fed

Somehow, AIG was able to negotiate a federal bail out on the heels of the government turning it's back on Lehman Brothers. Apparently, AIG is just too big to let fail.

The Fed is extending an $85 billion dollar loan to AIG, but it ain't cheap. The loan is for just two years and carries a rate of 8.5% over LIBOR, plus the U.S. Government takes a 79.9% stake in the company.

AIG's CEO, Robert Willumstad is being shown the door, and will be replaced by former Allstate CEO, Edward Liddy.

Barclays Feeds On Lehman Carrion

Like a vulture swooping in on a dying prey animal, Barclays is gorging itself on the vitals of dying Lehman Brothers. In exchange for $1.75 billion, Barclays will purchase Lehman's assets, including its North American investment banking operations as well its New York headquarters and two data centers.

Washington Mutual May Be Next

It is being reported that JPMorgan Chase is a potential buyer for the ailing thrift. WaMu has seen its stock price battered as it slumps under the weight of a deteriorating loan portfolio. It's best bet to avoid liquidation is to find a merger partner.

Turbulent Markets...And Opportunity, Ahead!

If you spend any time in the office break room, you're likely to hear co-workers lamenting these difficult economic times, languishing investment portfolios, and an uncertain future. Get your coffee and move on because you do not want to fall into that mindset.

Tough times bring opportunity for those courageous enough and savvy enough to avoid despair and panic, and take advantage of the opportunities that present themselves. There are people making money in this market right now.

Free Trading Report And Video Training Materials Available

My friend and trading mentor has compiled some fairly extensive training materials that he is making available to traders on a complimentary basis for the next few days. The report is ready for download and the videos are being released on a daily basis.

Free Market Mastery Training

These materials are intended to demonstrate how you can not only survive tough economic times, but proper during them. Take advantage of them while they are available.

Christopher Smith
TheOptionClub.com

Merrill Lynch Sold, Lehman Brothers Bankrupt, While AIG And WaMu Totter

2008-09-15T05:52:00.000-07:00

The financials are falling! The financials are falling!

We awoke this morning to the cry of Chicken Little, only this time our poultry little friend is not over reacting.

Lehman Brothers tried to avoid bankruptcy over the weekend by negotiating a buy out with Bank of America and Barclays. Henry Paulson, Secretary of the Treasury, had told the market not to expect the tax payers to bail out Lehman Brothers and there was none.

With no government guarantee to protect them against losses, Barclays and Bank of America walked away from a potential sale, prompting Lehman Brothers to file for Chapter 11 Bankruptcy protection earlier this morning.

When Bank of America walked away from Lehman Brothers, they walked over to Merrill Lynch and negotiated a price to acquire the firm.

AIG is scrambling to raise capital to avoid what would be a devastating downgrade of its credit rating. The company rejected a couple of deals that would have injected needed capital, but at the price of control shifting to those capital investors.

An AIG deal may require Fed participation and it is presently unclear whether the government is willing to take on more now that they have a $200 billion bail out to finance off the tax payers' back following the take-over of Fannie and Freddie.

Washington Mutual is now seeing as much as 45% of their Payment Option ARM loans, which were written by the thrift from 2004 to 2007, heading into default.

Today's market open is going to be rough. Minutes prior to the open the DJIA futures are down 370+ points, the S&P 500 futures off more than 45 points, and the Russell 2000 showing 23 points to the downside.

We could talk about how you could have made a small fortune playing these falling financials to the downside. While that is true, it feeds into the sort of greed and lack of risk management that has lead Lehman, Merrill, and perhaps AIG and WaMu to their demise.

Risk management is an absolute necessity, if you hope to survive and even prosper during what will be remembered as the worse financial crisis to hit Wall Street since the market crash of 1929.

Christopher Smith
TheOptionClub.com

Lehman Heading For Bankruptcy

2008-09-14T18:57:00.000-07:00

Bank of America and Barclays were Lehman Brother's best, and probably last hope for a deal to unload the faltering 158 year old financial firm. According to reports over the weekend, that deal is falling apart.

Understandably, Bank of America and Barclays do not want to take on the risks being carried by Lehman Brothers without some form of government guarantee. Those guarantees appear to be in short supply now that the U.S. taxpayer has already signed up to bail out Bear Stearns, Fannie Mae and Freddie Mac.

The bailout of the two GSE's alone are expected to cost more than $200 billion.

Lehman's History

Lehman Brothers got its start about 158 years ago as a cotton trading firm in Alabama, and then grew itself to a financial giant. It was the third largest U.S. brokerage, behind Goldman Sachs and Morgan Stanley. The firm's mortgage business was wildly profitable during the recent housing boom, but proved to be the firm's Achilles' heal in the ensuing credit debacle.

Bankruptcy Filing By Lehman Brothers Expected

With Barclays and Bank of America taking a walk and the apparent absence of any willingness by the government to finance a bail out, it appears increasingly likely that this firm will be forced into bankruptcy. The risk of a forced sale or bankruptcy is that Lehman's bad assets will effect the still performing assets of other firms.

More Financial Firms Likely To Fall

Other potential victims of this credit crunch? Concerns seems to be rising with regard to Washington Mutual.

Also, on Friday, insurer AIG, which may see its rating cut by Standard & Poors, said that it is reviewing its business and that "everything is on the table." The popular theory is that the insurer is looking to sell off portions of its business to raise capital and avoid what would likely be a crippling downgrade.

How To Protect Yourself From This Broadening Debacle

This credit crisis is broadening, boys and girls. If you're in this market without a sound exit strategy you may find yourself joining these troubled financial firms.

Risk management is critical to our success in these markets. Yes, we need to learn about the markets and learn about options and how to use them to effect our plans in the market. Just as important as that foundation, we must also learn how to structure our trading portfolio to avoid being over leveraged and to design our trading plans and systems to adjust or exit our positions when the trade is not working out as we had planned.

Free Trading Videos Reveal Common Mistakes Being Made By Traders

The person who taught me the importance of risk management and how to apply it in the context of a trading system is Bill Poulos, a 30+ trading veteran.

In appreciation for what he taught me and for those who could also benefit from his guidance, I put together a Squidoo lens that provides free video interviews featuring Bill speaking on the subject of risk management.

Tumultuous markets always present trading opportunities. Spotting those opportunities is only part of the solution to prospering in tough times. Another key element is avoiding the mistakes so many others make.

Bill Poulos Trading Interview Videos

Take the time now to view these five videos, now...

Christopher Smith
TheOptionClub.com

Bill Poulos Trading Interview Videos on Squidoo

2008-09-11T22:01:00.000-07:00

Yesterday, I posted a video interview of Bill Poulos who shared some insights. That video was part of a series and I've not got access to all five videos.

But, instead of posting them all here, I created a lens on Squidoo. So, check out the Bill Poulos Trading Video Interviews on my new Squidoo page.

Bill Poulos Trading Interview Videos

If you find something useful there, all I ask is that you rate the page.

Thanks, I appreciate it.

Bill Poulos Market Mastery Video

2008-09-11T11:49:00.000-07:00

Today I have the first part of a five-part interview series featuring my friend and trading mentor Bill Poulos. The video is called "Mistakes Traders Make" -- and it's simple, easy to understand, and incredibly powerful thinking.

In this first interview session, Bill was asked about the mistake that people make by trading stocks (or Forex, or anything really) when they shouldn't. Bill's answer is so...simple - So simple, you'll probably ask "Why didn't I think of that?"

I'll be posting additional videos between now and Saturday, so be sure to check back here.

Adjusting The XLF Options Trade

2008-09-01T09:07:00.000-07:00

Last month we opened a diagonal option spread on the XLF, after watching the financial stocks get hammered in the market for most of the year. It appeared that the XLF had found support at around $20 per share. A video was produced showing how the trade was set up, but since that time we have adjusted the position once and are considering a second adjustment.

This second video demonstrates how the two adjustments modify the risk and reward profile of the position, to help keep us profitable as the XLF continues to move in the market.

Keep in mind that this is not a recommendation to trade or trade advisory service, but intended as an educational opportunity to demonstrate how adjustments can be made to an options position to keep your trades profitable.

Christopher Smith
TheOptionClub.com

Ron Ianieri Option Mastery Video

2008-08-29T16:19:00.000-07:00

Did you manage to attend last night’s training? If so, you know that the web conferencing platform was a total disaster...

You know, I was considering switching TheOptionClub’s platform over to the same one Options University was using. After last night, I’ll re-think that one.

Good news...

The presentation was recorded and is now available for re-play here:

Ron Ianieri Option Mastery Video Re-Play

During this presentation, you will learn why understanding the greeks, as well as synthetic and embedded positions, is so important. Before I really understood these subjects I traded iron condors, calendar spreads, vertical spreads and the occasional long call or put.

What do I trade now?

Now I trade iron condors, calendar spreads, vertical spreads, and the occasional long call or put. Wait a minute... Those are the same strategies. So, what’s the different?

The difference is that before I learned to master the greeks, and the synthetic and embedded positions, I was losing money.

So, how can I be trading the same option strategies but making money, whereas before I was losing money? It’s simple...

Until I learned to master the greeks I was unable to properly evaluate and monitor a position. Learning to identify and use synthetic and embedded positions, combined with my newly acquired knowledge of the greeks, gave me the insight I needed to make effective adjustments.

When I started trading again, after learning these subjects, it was like the difference between a dark night and a dazzling bright morning. I saw what was happening to my positions and I knew how to manage them.

How did I learn? I learned from Ron, who taught me just like I was one of his trainee floor traders. What’s more, he’ll do the same for you, if you want.

I’ll tell you more about how and what I learned later, if you’re interested. Right now, I just want to encourage you to set aside some time this weekend to sit down with a hot cup of coffee, or tea, or whatever keeps you attentively alert, and watch the video.

Ron Ianieri Option Mastery Video

Have an awesome Labor Day and enjoy the time off!

Christopher Smith
TheOptionClub.com

Learning How To Use Options Effectively and Profitably

2008-08-26T06:39:00.000-07:00

If you've been on our message board lately, you have read a lot about whether it is better to be a buyer or a seller of options. Some say it's better to sell options. Others say it doesn't matter.

Who's right?

If you really understand options, you know the answer to that question.

You also know that we're trading options in an environment where we can, as retail traders, prosper if we take the time and make the effort to develop the necessary knowledge.

Now, if you're trading without a solid understanding of options you are trading at a disadvantage. That is a dangerous way to trade...

So, how can you master the subject of options in the shortest time possible?

To answer that question, I'd like to invite you to a webinar presentation this coming Thursday.

Option Trading Webinar Registration

The presentation will be put on by Ron Ianieri from Options University. He is going to share some effective, profitable option trading strategies and how you can master these techniques quickly and easily.

These are some of the same techniques that Ron used, and taught to other floor traders, while making his living on the Philadelphia Exchange for over 15 years. It's all about gaining an "edge" in the market to help you get and stay profitable.

Most option trading courses available in the market, regardless of their cost, teach a collection of option strategies but fail to provide students with a solid understanding of how and when to use those strategies in the market. This failure is potentially expensive and places you at a disadvantage, because you'll often find that you're fighting the market.

In other words, your analysis of the market may be "spot on," but you can still lose money simply because of your choice of strategy. Unfortunately, it happens time and again when traders do not fully understand the option strategies they're using.

So, Ron is going to help us understand WHY different option strategies work when others do not. He will share some insight into WHEN to use each strategy. Ron will also help us understand HOW to select the best strategy for the given market conditions.

If you intend to trade options, it only makes sense to fully understand how options work and how, and when, you can use them to achieve your goals. Here is an opportunity to gain some of that knowledge...

Option Trading Webinar Registration

So, Thursday night Ron is going to talk to us about how to avoid killing ourselves, and our portfolios. If you attend, you will also have access to a special report being prepared for the event.

If you've been questioning how to gain traction with your options education and trading, I encourage you to set aside the time and join me for the presentation.

Christopher Smith
TheOptionClub.com

August Options Expiration, Trading Plans & Trading Psychology

2008-08-18T13:21:00.000-07:00

August’s expiration is now behind us and we can turn our eyes toward September. Before we do, I thought it would be helpful if we turn our eyes back and review what happened between July 15th and August 15 in these rather volatile markets.

On July 15th, the DJIA hit a low of about 10,828 and rallied from that point to close friday, August 15th, at 11,660. That was an 832 point run, or a nearly 7.7% rise over a 30-day period. Impressive.

The lumbering S&P 500 marked a low of about 1,200 on July 15th, then rallied from there to close at 1,298 on Aug. 15th. A nice 8% pop!

How about the NASDAQ? Well, NDX had a low, also on July 15, of 1,761 and rallied to 1,957. That amounts to 196 points, or an 11% gain. Holy mackerel!

Get this, though. The RUT notched a low of 647 on July 15th and closed Friday at 753, for 106 points of upside gains. That’s more than 16% in 30 days!

Great news, right?

Well, before we continue our celebration I want to share with you what I’ve read in e-mails and posts from our message board. A lot of our members like to trade vertical credit spreads and/or iron condors on the indexes. I happen to be one of them...

There have been a lot of reasons to be bearish this month. I recently read in IBD, for the first time since I’ve subscribed to the paper, the word “stagflation” being used in the present tense. The dreaded condition of a stagnating economy and rising inflation, that we have not heard since the 70’s...

Jobless claims are up, consumer sentiment is low, the economic stimulus tax rebates are now memory, Georgia and Russia in open warfare, and the Chinese have more gold medals than us...signaling the decline of U.S. dominance in the world. The point is that if you were thinking about selling bearish call spreads a month ago, there was plenty of bad news out there to support your thinking.

Now, when the market began to rally the initial thought we all likely had was that this was that this was going to be another bear market rally off a relative low. To be expected, no doubt. A great opportunity to sell (more) call spreads!

Did I sell call spreads? Sure, I did.

But then the market kept on rallying. No matter, because there was little positive news out there supporting this rally so it will reverse any day now, taking pressure off my short calls. Sound familiar?

Yet, the market kept pushing higher...

If you had sold those call spreads without first establishing a defined trading plan, it is likely that you had an internal debate with yourself for much of the last 30-days. It probably went something like this...

July 23 - Wow. My short strikes are really under pressure. Should I roll? This rally can’t continue. I’ll hold on, wait for a pull-back and let theta do its job in the interim. Hmmm.

July 24 - Ah hah! We’re selling off. I knew I was right to hold on, and now we’ll head lower and I’ll keep my credit.

July 28 - Another down day. I knew that rally wasn’t going to hold. I should have sold more call spreads before it rolled over.

July 30 - Hey, yesterday took back all of those losses and today we’re up again. We’re supposed to be going lower. I hope that this market stays put because I really don’t want to have to roll my 740/750 call spread.

Aug. 4 - Oh, good. Selling off...

Aug. 6 - Oh, no. Another two up days. I’m no less than 15 points from my short strike. Maybe I should roll up, but I can’t get enough credit at the higher strike to offset the cost and I’d have to take a loss this month. Hmmm. I know this market is going to roll over and when it does I’ll have already taken the loss. Maybe I’ll just watch things because I know this market is going to start selling off.

Aug. 7 - Yes! We’re down, going down, oh yeah! Tomorrow’s Friday, it will be light, I’m sitting on this over the weekend and Monday I bet we’ll see it sell off some more.

Aug. 8 - Yikes. This can’t be right. Just 6 points away from my short strike? Okay. Um. Roll? Geez, why can’t this market just sell off for a couple days and give me a break here. This spread is far to expensive to buy back right now. It’s Friday. The weekend is two days, which means I just have a few days to survive next week until expiration. Theta is going to really be sucking on this spread. Oh, man. Maybe I should just buy it back. I’ll think about this over the weekend...

Aug. 11th - Oh, crap! Two big up days. I’m in real trouble, now. My spread is now in-the-money, where I never expected to be. I should have adjusted when I had the chance. What do I do now? Well, this market has to pull-back now. Maybe that was a climax run and it will all roll over tomorrow...

Aug. 12th - We’re down, just a bit, but at least we’re down. Still a little in-the-money, but with a little more selling tomorrow this whole trade might turn around for me.

Aug. 13th - Started lower this morning, but closed a bit higher. Just two days until expiration. This is a big mess. How’d I ever let my spread go in-the-money. Why didn’t I roll when I had the opportunity. Maybe if I post on the OptionClub message board, one of those guys could help me out...

“Dear Discussion Board, I sold an August 740/750 call spread on the RUT and it’s now at 747. What should I do?”

...I hope someone can help.

Aug. 14th - not much help on the discussion board...they just keep replying to tell me I should have had a plan...follow the plan...too bad, so sad... I need the market to reverse. Today’s the last day I can trade. Should I sell the spread and just take the loss? Maybe we’ll sell off in the afternoon. Let’s see... Oh, no! The RUT’s now above the strike of my long contract...my spread’s totally in-the-money! I can’t get out. I can’t afford a max loss. Maybe there’ll be some selling at tomorrow’s open. Yeah, I bet a lot of traders will want to take the profits before the weekend, so tomorrow’s open will be lower and the RUT will settle lower. Maybe it’ll even gap down a bit, maybe there’ll be some really bad new before the market’s open. It could happen. Man, I hope something happens...

Aug. 15th - Oh, no. The RUT’s settlement value is in...765! Disaster...

This chronology was a little work of fiction on my part, but for some, perhaps even you, it sounds uncomfortably familiar.

What went wrong?

The problem that occurred had nothing to do with the market, or even the selection of the 740/750 strikes for the vertical spread. It had a lot to do with that internal conversation our fictional trader had with them self, rationalizing their way out of taking a loss when the market rally materialized, instead hoping for a reversal to save their trade.

There are very few people who can make well reasoned decisions under pressure. That is why athletes, the military, law enforcement, etc., all train and respond according to predetermined plans of action. If X happens, then I do Y...

It also had a lot to do with a fundamental failure to understand what was happening with that vertical option spread. Once the credit spread was sold, theta was the primary driver behind our profitability. That positive theta needs to be balanced against negative gamma, though.

Holding the position into the days leading up to expiration, with the market closing in on our short strike, left our trader in a very vulnerable position. They were no longer in control of their risk, but relying on hope and prayer that the market would "give them a break."

This is where options tend to get a bad name. Someone puts on a large short position and gets bush whacked by the market. Let's blame the options. They're too risky.

Options are not risky, though!

It's no different than blaming the hammer for clobbering your thumb. So, hammers are dangerous? They are if you use them carelessly. Otherwise, they are very useful tools.

So are options. In fact, options were created to reduce risk in an investment portfolio. The problem we faced above was that our trader was so focused on earning an easy profit, they forgot about the risk and then failed to take steps to manage it once the trade started going against them.

Tools, hammers and options included, can be dangerous when you do not know how to use them properly. Understanding how options work, understanding option "greeks", understanding things like synthetic and embedded positions, becoming adept at position adjustments, etc. These are all part of trading options and if you're a little uncertain about one or more of these subjects, then it would really pay to spend some time studying those areas where you have questions.

You might consider taking a few moments right now to watch a video that demonstrates how options can be used safely, intelligently, and effectively for investing and trading.

Tale Of Two Traders Video

Trade well,

Christopher Smith
TheOptionClub.com