IWO Trading Floor

Become a Great Options Trader

Proactive Spreads, February 20th 2017 – GS, BABA

By

We’re going to open today’s newsletter with a custom indicator I’ve built.

It’s pretty simple– it just looks at the number of days since the last 1% selloff.

In this current market, it’s been 89 days since we’ve had a 1% selloff. Pretty crazy, right?

In the last 15 years or so, the only other time that this happened was back in 2006, and that peaked out at 92.

See where I’m going with this? We’re due for a shakeout… it’s been a while.

Now that doesn’t mean I’m expecting locusts and frogs to descend upon the NYSE and tank the market 20%… just that we haven’t seen “normal” sellers show up for a while.

Many of our strategies at Proactive Spreads are reversion-based, meaning that you need to have some kind of “stretch” on a stiatistical basis to generate a new trading signal. We try to anticipate these levels and plan our trade before it happens so we can be prepared if and when the selling comes in.

But recently it feels like we are squeezing water out of a stone. The lack of volatility means we don’t get the best risk/reward with our setups.

Volatility will pick up again, and probably soon. We’ll probably see people get scared about the Fed meeting in March and use that as an excuse to sell. Once vol picks up, the setups will become a lot more clear. Until then we’re keeping trade frequency low as we don’t want to get stuck to aggressively long into a shakeout.

Trade #1: GS

This stock has failed breakout written all over it. Make a new marginal high, suck in eager momentum buyers only to fail and lose the line at 245. If that happens we should expect a quick move back to 230 to fill that gap as it’s the lower end of the range. Into that level I want to get long.

Trade Setup

Expected Price: 230

Sell to Open GS Apr 205/200 Put Spread

Tier 1: Open at 0.50, Close at 0.10

Tier 2: Open at 0.80, Close at 0.50

Tier 3: Open at 1.10, Close at 0.80

Trade #2: BABA

This setup is going to be a little more nuanced.

There is a clear range setup here between 105 and 100.

What we want to see are two things:

  1. A breakdown underneath 100
  2. Within 3 days of that breakdown, a close back above 100

We’re looking for a failed breakdown setup, also known as a 2b reversal. If that happens, there are high odds it will retest the uppder end of that range and most likely run to the September highs.

Trade Setup

Expected Price: 100

Sell to Open BABA Apr 90/85 Put Spread

Tier 1: Open at 0.45, Close at 0.05

Tier 2: Open at 0.85, Close at 0.55

Tier 3: Open at 1.25, Close at 0.95

 

Disclaimer

U.S. GOVERNMENT REQUIRED DISCLAIMER – COMMODITY FUTURES TRADING COMMISSION. FUTURES AND OPTIONS TRADING HAS LARGE POTENTIAL REWARDS, BUT ALSO LARGE POTENTIAL RISK. YOU MUST BE AWARE OF THE RISKS AND BE WILLING TO ACCEPT THEM IN ORDER TO INVEST IN THE FUTURES AND OPTIONS MARKETS. DON’T TRADE WITH MONEY YOU CAN’T AFFORD TO LOSE. THIS WEBSITE IS NEITHER A SOLICITATION NOR AN OFFER TO BUY/SELL FUTURES OR OPTIONS. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE DISCUSSED ON THIS WEBSITE. THE PAST PERFORMANCE OF ANY TRADING SYSTEM OR METHODOLOGY IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS. CFTC RULE 4.41 – HYPOTHETICAL OR SIMULATED PERFORMANCE RESULTS HAVE CERTAIN LIMITATIONS. UNLIKE AN ACTUAL PERFORMANCE RECORD, SIMULATED RESULTS DO NOT REPRESENT ACTUAL TRADING. ALSO, SINCE THE TRADES HAVE NOT BEEN EXECUTED, THE RESULTS MAY HAVE UNDER-OR-OVER COMPENSATED FOR THE IMPACT, IF ANY, OF CERTAIN MARKET FACTORS, SUCH AS LACK OF LIQUIDITY, SIMULATED TRADING PROGRAMS IN GENERAL ARE ALSO SUBJECT TO THE FACT THAT THEY ARE DESIGNED WITH THE BENEFIT OF HINDSIGHT. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFIT OR LOSSES SIMILAR TO THOSE SHOWN