Two Ways to Increase the Probability on Early Morning Trades

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Two Ways to Increase the Probability on Early Morning Trades

When trading futures, stocks, ETFs or watching indexes–directly or via a binary option–the early morning trades often present the best opportunity. When the market opens orders flood in, creating volatility and profit potential. While I’ve read some trading books that say to avoid trading near the open and close of a market because it is too volatile, I could not disagree more. On the contrary, myself and almost every other professional trader I know makes nearly all their money near the open and close. Patterns are pronounced at the beginning of the day, because the moves are sharp, swift and often of large magnitude. This can kill traders who don’t know what they are doing, but with a couple ways to increase the probability of picking good entry points, hopefully you’ll start to like the market open as much as I do.

Before you can increase your probability of find a good entry, you need a strategy. Here is a very simple one.

Before the market opens you’ll set up support and resistance zones. These are price areas at which the stock or future you’re watching is liking to reverse or “bounce” off of.

Given that we are trading the open, this is a day trade, and using a 1or 2 minute chart is recommended.

The first thing we look for is a gap in the price, from yesterday’s close to today’s open.

Figure 1 shows a gap in the S&P 500 Index, which is used for demonstration purposes.

Figure 1. S&P 500 Gap – 1 Minute Chart

Once there is a gap we place a support or resistance zone, which will be near the previous day’s close. Since the market rallied higher off the open in Figure 1, the price area around the previous close is called the support zone. If the market had fallen away from the previous close, then the price area around the previous close would be a resistance zone.

Figure 2 shows the support zone created by the previous close. I generally use the last several minutes of the previous session as the support/resistance zone.

Figure 2. S&P 500 Support Zone – 2 Minute Chart

The goal is to go long/buy calls when the price is near the support the zone. Similarly, go short/buy puts when the price is near the resistance zone. In the case of Figure 2, we’d be buying calls…but when? That is where the probability enhancers come in.

Enhancer # 1: Make Sure the Price Leaves the Zone Before Making a Trade

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Look back to Figure 2. In real-time the price could easily keep falling right through the support zone we’ve drawn. The support zone is a price area I usually expect the market to stall and reverse–near the previous close after a gap–but that doesn’t mean it always will.

Therefore, wait for the price to enter the support/resistance zone, or just touch it, and then begin moving away from it before taking a trade. So In figure 2, you’d commence the long/call trade once the price is moving higher out of the support zone. This shows that at least temporarily the support zone is holding and the price is likely to rise. Figure 3 shows a zoomed in version of the prior charts. It shows the entry occurs as the price moves back out of the zone, as the zone looks like it will cause a reversal. If the price falls right through the zone, no trade is taken.

Figure 3 – Entry Point

In the case of a resistance zone, you’d enter short/buy puts once the price begins to fall back away from the resistance zone.

Enhancer # 2 – The Reversal Should Occur Quickly

In Figure 3 the price enters the support zone and within a couple bars it is already moving back out. While this support zone is relatively small–only about 1 point–some days the zone will be much bigger due to volatility near the close on the previous day (remember, the zone is created based on the last few bars at the previous close). Regardless of how big or small the zone is, the price shouldn’t stay in the zone for long. We want the price to bounce off the support or decline off the resistance zone within several minutes of getting close to it.

The sharper the reversal near the zone the better. Take Figure 3 for example. At a support zone you are expecting buying interest to enter the market, so if the price moves sharply higher near a support zone it shows that indeed there is buying interest there and going long/buying calls is the right choice. Similarly, at a resistance zone you expect selling/shorting, so when the price declines sharply off the zone it shows there is selling pressure and you want to be short/buying puts.

These Enhancers Can Be Used For Other Strategies

While these enhancers have been applied to a simple trading strategy for the purposes of this article, the enhancers are useful in many other strategies as well.

As for enhancer one, I almost always wait for the price to begin moving in the direction I want before making a trade. I never assume that support/resistance zones or levels will hold; only once the price respects the level or zone do I take my trade. Wait for price to confirm your technical analysis; don’t just assume the price will do what you want, when you want.

As for the second enhancer, if you have a strong support or resistance zone–based on whatever strategy or analysis method you’re using–and the price reverses aggressively off that zone, the odds are good the reversal will continue at least for the short-term.

Trade with the aggressive traders when they respect a support/resistance level.

IN THE MONEY TRADES

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Wednesday, July 3, 2020

Why Premium Sellers Typically Short Delta

Yesterday I tuned into “Where do I start” @ TastyTrade.com. And during this 15 min segment Tom explained to Case why premium sellers like himself are typically delta short. In a nutshell it has to do with the fact that as a premium seller you are short volatility which rises in in a down market, so being short delta helps offset that a bit when markets move lower.

Put another way, first you have to realize that volatility and market direction typically have an inverse relationship. When the market goes up volatility typically falls and when the market goes down volatility typically rises. As a premium seller you are selling or shorting volatility, so in a vaccuum your short vol position (short option) will make money as the market rises and lose money as the market drops. However we do not live in a vacuum and there are other factors that move your position’s P&L.

Delta is the equivalent position in the underlying and gives you an estimate of how much your P&L will move up or down for each $1 move in the underlying. This is why you can be short premium and when the market goes down, assuming you are also short delta, your P&L is not down nearly as much as your short vol or vega may suggest.

If you are interested in learning more check out the where do I start video on the TastyTrade.com website. It was uploaded on 7/2/13.

Good Luck Trading!

In The Money Trades

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Tuesday, July 2, 2020

Broad Markets are Building New Range

The /ES has been setting up a new trading range since hitting a low of 1,553 in the most recent and much overdo corrective move to the downside. I know that many people point to the feds hints at pulling back at quantitative easing as the trigger. but lets also be fair that the market was just plane overbought and was due for a corrective move lower. Over the next few weeks and maybe few months as we move through summer I believe that the trading range is going to be between 1,550 to 1,645.

I have highlighted the proposed trading range in grey in the above chart screen shot. We have to realize that this market has had a massive move to the upside and is need of some digestion before further direction up or down can be decided.

Good Luck Trading!

In The Money Trades

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Wednesday, June 26, 2020

I Give A Lot Of Credit To Tom Sosnoff At Tasty Trade

I have been trading for over 7 years now and I took many wild rides both up and down in my trading in the early days. When you first get started you are in search of the holy grail of trading. which you eventually find out actually does not exist.

However there are many ways of trading that can make money. The important thing is to find YOUR style and choose the ASSETS you’re most comfortable trading. It probably makes a lot of sense to choose instruments and strategies that MATCH the size of your account.

When I started I did a lot of things the hard way. But in today’s world you have tasty trade with veteran trader Tom Sosnoff. I thank him for starting his network and for snowballing a revolution for the self directed trader/investor. I have learned a lot since first meeting Tom back in 2020 at the traders expo.

The lessons preached over and over on the show:

  1. Trade Small, Trade Often! You don’t want to trade too big relative to your account and risk blowing up. And you want to trade often so that you can allow the probabilities to work in your favor.
  2. Sell into strength. This is true when selling long positions to take profits. but it is just as true when you want to get short. It is hard to sell into strength as it is counter intuitive. But it gives you edge over selling into weakness.
  3. Buy into weakness. You can buy to close profitable short positions. But you can also get long into weakness. Again very hard to do psychologically.
  4. Be mechanical about your trading. trade based off probabilities and don’t get emotional.
  5. Its all about cost basis reduction. In one sentence this is what premium selling is all about. So sell premium to reduce cost basis, increase probability of success, and give yourself more than one way to win.

So if you have not already done so make sure you head over to TastyTrade and open up a free account and start learning so that you can start earning!

Good Luck Trading!

In The Money Trades

Tuesday, June 25, 2020

8% Corrective Move On /ES, Whats Next?

We have had a very nice corrective move on the /ES the past few sessions. And since topping out at 1,685 (the all time high), we have traded off about 130 handles or about 8%. The question is whether the move is over or will we see lower prices?

I continue to be short the /ES (net delta position) as I believe we could see a bit more downside until we see 1,530 on the /ES and then that will likely be followed by some consolidation through the rest of the summer. In the above chart you can see the profitability range I have highlighted in grey based on my aggregated position in the /ES. To date I have collected about 100 /ES points in premium over 52 contracts traded. Although I have collected 100 points my max gain is only 70 points or $3,500 on this aggregated position with 66 days left to expiration.

Good Luck Trading!

In The Money Trades

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Thursday, June 13, 2020

I AM ALIVE.

It has been a couple of weeks since my last post. If you look through the feed you will likely notice that my last post was on May 23rd. I really can’t believe that it has been almost three weeks. Never fear I am alive and well and have continued to trade the markets. But over the last few weeks I have been pretty busy with work in both my day job and in my side pursuits. More recently I have been teaching myself programming skills. Before we break off into market analysis I will leave you with this quote I live by from Jim Rohn: “A formal education will make you a living, but self education will make you a fortune”.

My last post was the first of what would be the first corrective move to the downside after hitting all time highs at around 1,685 on the /ES.

And 3 weeks later.

Looking at the chart above you can see that the markets pulled back about 90 points and have found support around 1,597 on the /ES. During this time we finally got a pull back and a awesome move lower in JNJ:

Remember JNJ had an incredible run of 19 strait weeks to the upside without a single down move. Although the above chart is not a weekly chart, you can see that JNJ topped out a penny shy of $90 and hit a low at around $82.50 11 days later. Only to remind us that there is cycality in the market. meaning that the market goes up AND it also goes down.

As public as I have made it, it is no secret that I have been net short the market place. But over the recent pull back I have been selling puts in NLY which finally showed some life today. I am short 20 put contracts that have an equivalent delta of about 30 SPY. If you look back in the archive you will see numerous posts about my fascination of NLY for its juicy dividend. I made really good money until exiting the trade in March and have been since been patient to build up a healthy position again. My effective long price puts me long the stock around $13.30/share. The current yield at this price is around 13.5%. There is ton’s of chatter about rising interest rates and reform to fannie mae and freddie mac. I don’t care!

I have continued to play in and out of VXX as a compliment to my short position in the /ES. I have mostly been short puts to get long volatility since my position in /ES is short premium which by its very nature is short premium. So although intrinsically I am up a little money. the expansion in volatility that has happened over the past few weeks doesn’t show me up as much as I would be at expiration. But that is fine with me, I am currently getting paid $33/day in theta in my aggregated position. My profit range on this position is 1,537 to 1,645. I think the recent high at 1,685 has given us something to trade against to the upside.

Getting back to VXX. with a pop volatility I covered the latest short puts I had and turned around and sold out the Aug ’13 $21/strangle for $5.15.

Good Luck Trading!

In The Money Trades

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If you like the hard work we put into our blog posts and videos, PLEASE help us out by sharing them. Click the share links below and share them on FB, twitter, etc. It really helps us get more exposure and grow IN THE MONEY TRADES!

How to Calculate Probability

Updated: December 10, 2020 | References

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When you calculate probability, you’re attempting to figure out the likelihood of a specific event happening, given a certain number of attempts. [1] X Research source Probability is the likelihood of one or more events happening divided by the number of possible outcomes. Calculating the probability of multiple events is a matter of breaking the problem down into separate probabilities and the multiplying the separate likelihoods by one another.

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Example: It would be impossible to calculate the probability of an event phrased as: “Both a 5 and a 6 will come up on a single roll of a die.”

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\u00a9 2020 wikiHow, Inc. All rights reserved. wikiHow, Inc. is the copyright holder of this image under U.S. and international copyright laws. This image is not licensed under the Creative Commons license applied to text content and some other images posted to the wikiHow website. This image may not be used by other entities without the express written consent of wikiHow, Inc.
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Note: If you had, for example, forgotten about the number 4 on the dice, adding up the probabilities would only reach 5/6 or 83%, indicating a problem.

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\u00a9 2020 wikiHow, Inc. All rights reserved. wikiHow, Inc. is the copyright holder of this image under U.S. and international copyright laws. This image is not licensed under the Creative Commons license applied to text content and some other images posted to the wikiHow website. This image may not be used by other entities without the express written consent of wikiHow, Inc.
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Note: The probability of the 5s being rolled are called independent events, because what you roll the first time does not affect what happens the second time.

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