Testimonials

April 15, 2014

Ever Consider a Bear Put Spread?

The market has been on quite a run lower lately since the S&P 500 hit its all-time high earlier this month. Maybe the market will reverse and move higher at some point but traders need to be prepared like Boy Scouts just in case there is another move lower not only now, but for in the future as well. Options give traders a plethora of options so to speak for a trader with a bearish bias. Bearish directional option strategies are certainly an option but sometimes buying a put option can be a little bit more risky than maybe a trader wants because of potential price swings. A bearish option trader may want to be a little more cautious especially in this current volatile atmosphere.

An Alternative

A better alternative than the long put may be to buy a debit spread (bear put). A bear put spread involves buying a put option and selling a lower strike put option against it with the same expiration. The cost of buying the higher strike put option is somewhat offset by the premium received from the lower strike that was sold. The maximum gain on this spread is the difference in the strike prices minus the cost of the trade. The options trader will realize this maximum gain if the price of the stock is lower than the short put’s strike expiration. The most the options trader can lose is the cost of the spread. This maximum loss will occur if the stock is trading above the long put’s strike at expiration.

An Advantage

 An advantage of a bear put spread is that if the stock pulls back, the spread will lose less than just being long puts because of the spread typically has smaller delta and initial costs due to being long and short options. The trade’s delta is smaller because the positive larger delta of the long put option is somewhat offset by the smaller negative delta of the short put option. For example, what if XYZ stock is trading at $40 a share and an option trader purchases an ATM put option ($40 strike) with a delta of 0.50. For every dollar XYZ goes up or down, the put option should increase or decrease by $0.50. If a bear put debit spread was created by adding a short put with a lower strike price of 35 and delta of 0.20, the delta for the spread would now be 0.30 (.50 – .20). Now the spread would gain or lose $0.30 for every dollar the stock went up or down.

 Trade-Off

It is probably obvious to a great many of you how a smaller delta might be a disadvantage for the trade. If the trader is correct on the movement and the stock decreases in value, potentially a larger profit could be realized with just being long the put option because of the potential higher delta. But once again a trader needs to determine if a lower overall cost using the bear put and possibly a lower overall risk is worth the trade-off versus the long put.

Finally

Understanding current market conditions (especially now) and applying and managing the proper options strategy is crucial for success at all times. Deciding when to implement a bear put spread instead of buying puts for a bearish bias is just one example of this.

John Kmiecik

Senior Options Instructor

Market Taker Mentoring

March 20, 2014

Aint’ Nothin’ Like the Real Thing, Baby!

When it comes to learning to trade, there really isn’t anything like the real thing. You can read hundreds of books, watch thousands of videos, but without having someone to show you the way to actually DO IT, learning to trade can be tough.

Imagine trying to learn a complex game like chess by reading a book or watching a video. You’ll get some good pointers, but can you really learn to master the game? There is logic, psychology, player interaction, time-tested moves and other intangibles that a book or video can only teach you so much about. You can practice playing the game over and over again as well, but without someone showing you move-by-move, piece-by-piece how to play the game, you’ll never achieve mastery of the game. You need someone to show you how to play, the way to counter certain moves, the way to set up attacks three moves ahead, the way to read your opponent.

That’s the way I learned to trade: Face-to-face, and often toe-to-toe, down on the trading floor. I learned the old fashioned way: By having people around me to show me how to do it. The benefit of being able to ask the experts standing next to me on the trading floor the burning questions that I needed answered. This helped me to reach the level of competency I need to become a successful a trader. It proved to be the biggest contributor to a long and rewarding trading career.

It’s hard for people to learn to trade without access to the knowledge center that I was fortunate enough to have which was smack dab in the middle of the trading floor; and I appreciated that. I consider myself extremely fortunate to have grown up in Chicago and to have gotten a break, getting a job on the trading floor after college. I was able to springboard that opportunity into a successful trading career. I get it. And that’s why, for two days, I am going to help recreate some of

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that experience for YOU.

We are planning an intensive (but fun) two-day class in Chicago. It will be held at the Chicago Board Options Exchange (CBOE), where I first learned to trade.

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We’ve got a GREAT curriculum planned and a really fun social event in the plans as well. Right now, this class has not been made officially public. We’re still in the final stages of planning and we’ll announce all the details next week. Right now, we’d like your input so we can finish off the amazing itinerary we have planned. Please help us create the kind of class you’d love to be a part of—your DREAM CLASS—by answering this short, four-question survey.

Dan Passarelli

CEO, Market Taker Mentoring, Inc.

Create your free online surveys with SurveyMonkey , the world’s leading questionnaire tool.

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November 26, 2013

The Fundamentals of Iron Condors

Have you ever noticed a professional athlete warming up before a game or match? What are they doing? They are stretching, running, throwing and catching just to name a few for example. What they are really doing is working on the fundamentals. To be good at anything requires learning the fundamentals and constantly working on them throughout your career no matter what your career is.

Option trading is no different. Even traders who have traded for years, who trade complex strategies return to the fundamentals to make their trading decisions. Take trading iron condors. Trading iron condors requires utilizing the fundamentals. Traders who are trading

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iron condors are trading a fairly complex, four-legged option strategy. They need to be able to visualize the strategy in order to analyze it and ultimately decide whether or not they

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should be trading iron condors or something else.

Traders trading iron condors should consider the spread from several different perspectives. Specifically, they should consider it as combinations of other spreads. When a trader is trading iron condors, the trader is in fact trading a pair of credit spreads. An iron condor is a put credit spread combined with a call credit spread. That’s one way to look at it.

Trading iron condors can also be considered from the strangle-trading perspective. An iron condor is a short strangle combined with a long strangle with wider strikes. The profit (and risk) comes from the short strangle, while the long one provides protection.

An iron condor can also be thought of as four individual option positions. Traders trading iron condors have a position in a long put, in a short put, in a short call and in a long call. Thinking of trading iron condors from this perspective, in particular, can help traders make adjustment and closing decision more effectively.

And, of course, an iron condor is, well, an iron condor! It

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is a single strategy in which the risk can be observed on a P&(L) diagram or through the greeks.

This strategy-break-down technique is not just suited for trading iron condors, but for trading all multi-legged strategies. It is an effective analysis technique similar to how car shoppers consider buying a car. They look at the front; then walk around to the side, then the back; they look under the hood and at the interior. All the while, they are considering this one purchase, but just from many different perspectives. Doing this on every potential trade can only improve your odds.

John Kmiecik

Senior Options Instructor

Market Taker Mentoring

September 25, 2013

The Stock Repair Strategy

Stock Repair Options Strategy

It’s been a tough couple of weeks for investors with this recent downturn in the market. Some investors are waiting (patiently) for some of their losers to turn around. Some traders are buying at new, cheaper prices. But as experienced investors know, the market can always go lower, sometimes fast and furiously especially with this pending debt ceiling crisis right around the corner. There is one more alternative that can make sense in some cases: the stock repair strategy.

Introduction to the Stock Repair Strategy
The stock repair strategy is a strategy involving only calls that can be implemented when an investor thinks a stock will retrace part of a recent drop in share price within a short period of time (usually two to three months).

The stock repair strategy works best after a decline of 20 to 25 percent of the value of an asset. The goal is to “double up” on potential upside gains with little or no cost if the security retraces about half of its loss by the option’s expiration.

Benefits
There are three benefits the stock repair strategy trader hopes to gain. First, little or no additional downside risk is acquired. This is not to say the trader can’t lose money. The original shares are still held. So if the stock continues lower, the trader will increase his loses. This strategy is only practical when traders feel the stock has “bottomed out”.

Second, the projected retracement is around 50 percent of the decline in stock price. A small gain may be marginally helpful. A large increase will help but have limited effect.

Third, the investor is willing to forego further upside appreciation over and above original investment. The goal here is to get back to even and be done with the trade.

Implementing the Stock Repair Strategy
Once a stock in an investor’s portfolio has lost 20 to 25 percent of the original purchase price, and the trader is anticipating a 50 percent retracement, the investor will buy one close-to-the-money call and sells two out-of-the-money calls whose strike price corresponds to the projected price point of the retracement. Both option series are in the same expiration month, which corresponds to the projected time horizon of the expected rally. The “one-by-two” call spread is ideally established “cash-neutral” meaning no debit or credit. (This is not always possible. More on this later). To better understand this strategy, let’s look at an example.

Example
An investor, buys 100 shares of XYZ stock at $80 a share. After a month of falling prices, XYZ trades down to $60 a share. The investor believes the stock will rebound, but not all the way back to his original purchase price of $80. He thinks there is a reasonable chance for the stock to retrace half of its loss (to about $70 a share) over the next two months.

The trader wants to make back his entire loss of $20. Furthermore, he wants to do it without increasing his downside risk by any more than the risk he already has (with the 100 shares already owned). The trader looks at the options with an expiration corresponding to his two-month outlook, in this case the September options

The trader buys 1 September 60 call at 6 and sells 2 September 70 calls at 3. The spread is established cash-neutral.

Bought    1 Sep 60 call at 6
Sold         2 Sep 70 call at 3 (x2)
-0-

By combining these options with the 100 shares already owned, the trader creates a new position that gives double exposure between $60 and $70 to capture gains faster if his forecast is right. FIGURE 1 shows how the position functions if held until expiration.

(See Figure 1 above)

If the stock rises to $70 a share, the trader makes $20, which happens to be what he lost when the stock fell from $80 to $60. The trader would be able to regain the entire loss in a retracement of just half of the decline. With the stock above 60 at expiration, the 60-strike call could be exercised to become a long-stock position of 100 shares. That means, the trader would be long 200 shares when the stock is between $60 and $70 at expiration. Above $70, however, the two short 70-strike calls would be assigned, resulting in the 200 shares owned being sold at $70. Therefore, further upside gains are forfeited above and beyond $20.

But what if the trader is wrong? Instead of rising, say the stock continues lower and is trading below $60 a share at expiration. In this event, all the options in the spread expire and the trader is left with the original 100 shares. The further the stock declines, the more the trader can lose. But the option trade won’t contribute to additional losses. Only the original shares are at risk.

Benefits and Limitations of the Stock Repair Strategy
The stock repair strategy is an option strategy that is very specific in what it can (and can’t) accomplish. The investor considering this option strategy must be expecting a partial retracement and be willing to endure more losses if the underlying security continues to decline. Furthermore, the investor must accept limiting profit potential above the short strike if the stock moves higher than expected.

Some stocks that have experienced recent declines may be excellent candidates for the stock repair. For others, the stock repair strategy might not be appropriate. For stocks that look like they are finished or may even head lower, the Stock Repair Strategy can’t help - just take your lumps! But for those that might slowly climb back, just partially, this can be a powerful option strategy to recoup all or some of the  losses.

John Kmiecik

Senior Options Instructor

Market Taker Mentoring

September 12, 2013

What Makes a Great Trader Part I

With summer ending and trading volume expected to rise, it might be a good time to give yourself a mental break and reflect on your trading before the fall.  Are you the great options trader you thought you would be by now or have you ever wondered what  truly makes a great options trader? I mean not a options trader that does pretty well, but one that you envy and want to be? Are great options traders just born that way? Does being smarter necessarily give you an advantage in options trading? Is studying charts until you are bleary-eyed from looking at them the secret; or is it just dumb luck on who succeeds and who fails? How does one learn to trade options?

The qualities that you will need to succeed in my opinion are a commitment to success, having a options trading plan and the most important, mastering your emotions—or the psychology of options trading. I believe that options trading is the hardest job in the world (quite possibly the best, but the hardest). That’s why it will probably take you a lot longer than you think before you really get a solid grip on it.

So let’s first talk about your commitment to success. This essentially sounds like the easiest of the three qualities to master doesn’t it? Why does anyone want to become a options trader in the first place? Probably, because they want to become wealthy and very successful. Who isn’t committed to that, right? All you need is some money, charts, and a platform and you are on your way. Almost everyone says they are committed but most people are not because when they find out options trading is work—and it is. They tend to lose their focus and their original goals when the going gets though.

If you are committed to success then you must be committed to reaching your goals. The most important part of having goals is to write them down. If you never write them down they are simply just dreams. We don’t want to dream we are a great trader we want to realize that we are! Only about 2% of Americans write down their goals. Is it really shocking to know that most people never achieve what they want out of life? As “corny” as it may seem, when you write something down no matter what, your thoughts are transformed from the subconscious to the conscious and are now tangible. Your goals have become something you can see and say out loud. If you never write them down they never exist outside of your thoughts.

Let me leave you with this before I end this introduction on how we are going to build a great options trader out of you. I think everyone can agree whether you are a beginning options trader or a more experienced options trader that there are several key components you will need to do to become a standout. Having said this I also know that most of you will not be committed to do this at first. I know I wasn’t. I thought to myself I am too smart and I know how to options trade. I knew it would not be easy but I was unprepared for the results that followed. I’ll give you a hint, they weren’t good. After I decided to fully commit myself and write down my goals did my results finally change. Let’s face it; options trading is a realm like no other. Options trading looks easy and which in turn makes you lazy to work at it. Be committed to your success and write down your goals right from the start will only help you achieve the success you are after that much quicker.

John Kmiecik

Senior Options Instructor

Market Taker Mentoring

February 14, 2013

Baseball, Buying a Car and Iron Condors

With spring training right around the corner, traders should ask themselves this question; have you ever noticed a baseball player warming up before a game? Or watched footage of a baseball player at practice? What are they doing? Swinging a bat. Throwing and catching balls. Running bases. Working on the fundamentals. To be good at anything requires learning the fundamentals and constantly working on them throughout your career.

Option trading is no different. Even traders who have traded for years, who trade complex strategies return to the fundamentals to make their trading decisions. Take trading iron condors. Trading iron condors requires utilizing the fundamentals. Traders who are trading iron condors are trading a fairly complex, four-legged option strategy. They need to be able to visualize the strategy in order to analyze it and ultimately decide whether or not they should be trading iron condors or something else.

Traders trading iron condors should consider the spread from several different perspectives. Specifically, they should consider it as combinations of other spreads. When a trader is trading iron condors, the trader is in fact trading a pair of credit spreads. An iron condor is a put credit spread combined with a call credit spread. That’s one way to look at it.

Trading iron condors can also be considered from the strangle-trading perspective. An iron condor is a short strangle combined with a long strangle with wider strikes. The profit (and risk) comes from the short strangle, while the long one provides protection.

An iron condor can also be thought of as four individual option positions. Traders trading iron condors have a position in a long put, in a short put, in a short call and in a long call. Thinking of trading iron condors from this perspective, in particular, can help traders make adjustment and closing decision more effectively.

And, of course, an iron condor is, well, an iron condor! It is a single strategy in which the risk can be observed on a P&(L) diagram or through the greeks.

This strategy-break-down technique is not just suited for trading iron condors, but for trading all multi-legged strategies. It is an effective analysis technique akin to how car shoppers consider buying a car. They look at the front; then walk around to the side, then the back; they look under the hood and at the interior. All the while, they are considering this one purchase, but just from many different perspectives.

John Kmiecik

Senior Options Instructor

Market Taker Mentoring

December 20, 2012

Great Trader Part I

With the holidays in full swing and trading volume falling off, it might be a good time to give yourself a mental break and reflect on your trading. Are you the great options trader you thought you would be by now or have you ever wondered what  truly makes a great options trader? I mean not a options trader that does pretty well, but one that you envy and want to be? Are great options traders just born that way? Does being smarter necessarily give you an advantage in options trading? Is studying charts until you are bleary-eyed from looking at them the secret; or is it just dumb luck on who succeeds and who fails? How does one learn to trade options?

The qualities that you will need to succeed in my opinion are a commitment to success, having a options trading plan and the most important, mastering your emotions—or the psychology of options trading. I believe that options trading is the hardest job in the world (quite possibly the best, but the hardest). That’s why it will probably take you a lot longer than you think before you really get a solid grip on it.

So let’s first talk about your commitment to success. This essentially sounds like the easiest of the three qualities to master doesn’t it? Why does anyone want to become a options trader in the first place? Probably, because they want to become wealthy and very successful. Who isn’t committed to that, right? All you need is some money, charts, and a platform and you are on your way. Almost everyone says they are committed but most people are not because when they find out options trading is work—and it is. They tend to lose their focus and their original goals when the going gets though.

If you are committed to success then you must be committed to reaching your goals. The most important part of having goals is to write them down. If you never write them down they are simply just dreams. We don’t want to dream we are a great trader we want to realize that we are! Only about 2% of Americans write down their goals. Is it really shocking to know that most people never achieve what they want out of life? As “corny” as it may seem, when you write something down no matter what, your thoughts are transformed from the subconscious to the conscious and are now tangible. Your goals have become something you can see and say out loud. If you never write them down they never exist outside of your thoughts.

Let me leave you with this before I end this introduction on how we are going to build a great options trader out of you. I think everyone can agree whether you are a beginning options trader or a more experienced options trader that there are several key components you will need to do to become a standout. Having said this I also know that most of you will not be committed to do this at first. I know I wasn’t. I thought to myself I am too smart and I know how to options trade. I knew it would not be easy but I was unprepared for the results that followed. I’ll give you a hint, they weren’t good. After I decided to fully commit myself and write down my goals did my results finally change. Let’s face it; options trading is a realm like no other. Options trading looks easy and which in turn makes you lazy to work at it. Be committed to your success and write down your goals right from the start will only help you achieve the success you are after that much quicker.

Enjoy the holidays!

John Kmiecik

Senior Options Instructor

Market Taker Mentoring

October 12, 2012

Volatility Events, Predictions and a Piece of Cake

Option trading is easy. Well, let me qualify that statement just a bit. To be fair, options are more complicated than more simple, linear assets like stocks. But there are some elements to options’ pricing that actually make them a little easier to trade from a valuation standpoint. To find out more about this feel free to visit the options information section of our website.

The most important thing to consider is predictability. You probably receive many unsolicited emails telling you how so-and-so can predict the market with 100% certainty and make you a billionaire overnight. On the other side of that coin, there is not a professor alive who will tell you that it is possible to predict the direction of the stock market with any statistical significance. The truth probably lies somewhere in the middle. But one thing for sure: predicting the direction of a stock is though, and you’ll be wrong often.

But, aside from directional implications of the underlying stock, there is an important pricing factor to options that is much more predictable: volatility shifts resulting from expected volatility events. All options have an imbedded component to their pricing relating to expected-future volatility. This is called implied volatility. It can be thought of as the expected future volatility implied by the market.

Sometimes volatility is quite predictable, and therefore, fluctuations in option prices resulting from implied volatility changes can be likewise predictable. So-called volatility events include earnings, Fed announcements, CPI, PPI, Retail Sales, Payrolls, GDP and more. Volatility events are often scheduled far in advance. Just google a financial calendar and see when CPI is scheduled to be released six months from now—you’ll easily find that information. Unemployment figures are always the first Friday of the month. And so on.

When volatility events are imminent, options get more expensive. Why? Hedgers and speculators brace for a potential move by buying options, creating price-pressuring demand. Look at a chart of implied volatility for a typical stock option class and take a look at its value in the few days leading up to earnings. Typically, it will increase right before earnings. Then afterwards, it tends to fall right back to its normal range.

Scheduled volatility events help option traders analyze the ebb and flow of option premium levels with the precision of predicting the moon cycle. But all volatility events are not predictable—only those that are regularly scheduled. Sometimes, volatility events come out of nowhere. Takeovers, CFOs cooking the books, these sort of things can take a trader by surprise.

Though not all volatility events are predictable, the fact that some are provides great value to option traders. Imagine knowing that a stock would almost always rise at a certain date every quarter! This makes option trading a little easier than stock trading in my opinion. Maybe not quite a piece of cake; but still advantageous over trading stocks.

John Kmiecik

Senior Options Instructor

Market Taker Mentoring

August 11, 2011

Great Trader Part II

Last time we talked about an options trader having a commitment to excellence. This time we’ll go over why an options trader needs a trading plan and how to go about writing one. This is the part nobody wants to do. Most options traders think that their trading plan is in their head. “I know what I need to do when I need to do it” most beginning and some veteran options traders will exclaim. If it was just that easy, everyone would be a great options trader. Unfortunately it’s not. That is specifically why you need a written options trading plan. Just because you know what to do doesn’t mean you will do it.

Before you even begin to write your options trading plan, you must take an inventory of yourself. What are your strengths and weaknesses? You must take the time to truly examine yourself and be honest about whom you are. Your options trading plan must match your personality.

The first thing you need to do to start your options trading plan is to write down your goals like we talked about last time. Once you do this, it brings everything into perspective. The same reason you need to write down your goals is the same reason you need to write down your options trading plan-so your thoughts are transformed from the subconscious to the conscious. It doesn’t matter if you write the plan on a nice piece of paper or a cocktail napkin. It just needs to be written down in your own words.

The next section of your options trading plan will be money management. This is one of the most crucial and often overlooked components of successful options trading. How much are you going to risk per trade? What are your weekly or monthly profit targets? What are the maximum losses you are comfortable with on a daily, weekly or monthly basis? All of these questions need to be answered right in this section.

Strategies will be the next component of your options trading plan. This will be the meat and potatoes of the plan so to speak. A thing to consider is to start with relatively a few simple strategies (long calls and puts) and master them before you write in more complex option strategies into your plan. You need to describe in as much detail as possible the strategy you intend to use. You will probably be making constant changes to this part until you get exactly what you want.

The last section will be the follow up and review. This is when an option trader needs to print out the charts and the option chains and review them. Did I follow my written options trading plan like I said I would? This needs to be done when the market is closed so all your attention can be on the review. You must keep a trading journal and must always acknowledge your winners and more importantly learn from your losing trades.

This is just a general outline of an options trading plan to get you started. We will go into more detail in each area in upcoming features.

John Kmiecik

August 4, 2011

Great Trader Part I

Have you ever wondered what makes a great options trader? I mean not a options trader that does pretty well, but one that you envy and want to be? Are great options traders just born that way? Does being smarter necessarily give you an advantage in options trading? Is studying charts until you are bleary-eyed from looking at them the secret; or is it just dumb luck on who succeeds and who fails?

The qualities that you will need to succeed in my opinion are a commitment to success, having a options trading plan and the most important, mastering your emotions—or the psychology of options trading. I believe that options trading is the hardest job in the world (quite possibly the best, but the hardest). That’s why it will probably take you a lot longer than you think before you really get a solid grip on it.

So let’s first talk about your commitment to success. This essentially sounds like the easiest of the three qualities to master doesn’t it? Why does anyone want to become a options trader in the first place? Probably, because they want to become wealthy and very successful. Who isn’t committed to that, right? All you need is some money, charts, and a platform and you are on your way. Almost everyone says they are committed but most people are not because when they find out options trading is work—and it is. They tend to lose their focus and their original goals when the going gets though.

If you are committed to success then you must be committed to reaching your goals. The most important part of having goals is to write them down. If you never write them down they are simply just dreams. We don’t want to dream we are a great trader we want to realize that we are! Only about 2% of Americans write down their goals. Is it really shocking to know that most people never achieve what they want out of life? As “corny” as it may seem, when you write something down no matter what, your thoughts are transformed from the subconscious to the conscious and are now tangible. Your goals have become something you can see and say out loud. If you never write them down they never exist outside of your thoughts.

Let me leave you with this before I end this introduction on how we are going to build a great options trader out of you. I think everyone can agree whether you are a beginning options trader or a more experienced options trader that there are several key components you will need to do to become a standout. Having said this I also know that most of you will not be committed to do this at first. I know I wasn’t. I thought to myself I am too smart and I know how to options trade. I knew it wouldn’t be easy but I was unprepared for the results that followed. I’ll give you a hint, they weren’t good. After I decided to fully commit myself and write down my goals did my results finally change. Let’s face it; options trading is a realm like no other. Options trading looks easy and which in turn makes you lazy to work at it. Be committed to your success and write down your goals right from the start will only help you achieve the success you are after that much quicker.

John Kmiecik

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