Today we are opening the new position as follows: Trade: Sell SPY December 100 Puts Premium: $15 (0.15) Credit or better per contract Underlying Price: $119.71 Max Return: 1.52% Break-Even Price: $99.85 Time Until Expiration: 17 Days Probability of Loss: 4.26% Trade Explanation: For the Naked portfolio we are entering our 2nd trade for the December portfolio. We got a great entry [...]

Black Friday sales reports showed a considerable gain over the weekend. Naturally investors are hoping that Santa Claus will make for a very Merry Christmas and Happy New Year with a big end of year rally. So before you start listening to all the news stories that will come out around this time, let’s see if there is any truth behind it.

The failure of a Santa Claus rally though might just appear to precede a new bear market.

Here Are The Facts…

Since we try to keep the trading psychology to a minimum when dealing with seasonal trends, I want only stick to the facts and historical figures. If we go back 20 years, the S&P 500 and the Dow on average gained 1.79% and 1.69%, respectively during the month of December. Moreover, the S&P 500 has posted negative performance during the month only 4 times during the last 20 years; 6 times for the Dow.

Overall, December ranks as the 3rd BEST performing month for the stock market behind June and July. Regardless of how the market preforms as we head into December this week, I don’t think it will be enough to create anything more than a flat year for stocks. As of the close last week, stocks were down 0.47% on the year.

Do You Believe In Santa Claus?

You may not believe in Santa Claus (sorry if I’ve spoiled the hoax) but what about a Santa Claus rally? Are you more bullish or bearish heading into the month of December after a seemingly very good Black Friday sales report?

As the universe of ETFs continues to grow, seemingly daily, it seems that investors and traders are getting more and more interested in these exotic products. Since you can basically create or develop an ETF for practically anything you want, the popularity of inverse ETF has exploded as an alternative to short any market and profit in a bear market.

I have to admit, ETFs are very convenient, relatively cheap and tax friendly. And like I said before, they are much easier to understand for the traditional investor as compared to mutual funds. Some notable industry publications are convinced they will one day lead to the death of mutual funds altogether. I highly doubt that.

But, I can see why investors are in love with ETFs. Mutual funds are usually so broad based that its hard to gain exposure to certain sectors or industries. With ETFs however, you can easily invest in Financials (XLF), Emerging Markets (EEM) or the Energy Sector (XLE).

Inverse ETFs then are a simple way to create a short ETF position by buying an exchange traded fund. Since most investors don’t know how to short stocks (nor have the account to do it) you can now buy “short exposure” to ETFs that inversely track an underlying index or investment product.

Pretty cool, and smart right? Well…

Video Inverse ETF Warning

The more popular inverse ETFs promise to make you the exact opposite return of an underlying index. Seems like great way to leverage a falling market right? After all, the fund’s prospectus clearly guarantees the inverse of the daily return of the index. But the key word is daily. Watch this video to see why:

Giant Inverse ETF List

New ETFs are being developed and launched every week. Some of the bigger ETFs are absolutely going to be around for a long time, while others may close down without sufficient investor support and interest. If you are interested in trading inverse ETFs, here’s a list of the top 101. Bookmarking this page might be a good idea!

1. BGZ – Direxion Daily Large Cap Bear 3X Shares ETF
2.  BIS – UltraShort NASDAQ Biotechnology ETF
3.  BRIS – Direxion Daily BRIC Bear 3x Shares ETF
4.  BXDB – Barclays Short B Leveraged Inverse S&P 500 Total Return ETN
5.  COWS – Direxion Daily Agribusiness Bear 3x Shares ETF
6.  DDG – Short Oil & Gas ProShares ETF
7.  DGLD – 3x Inverse Gold ETN
8.  DLBS – iPath US Treasury Long Bond Bear ETN
9.  DMM – MacroShares Housing Down ETF
10.  DNO – United States Short Oil ETF
11.  DOG – Short Dow30 ProShares ETF
12.  DOY – MacroShares $100 Oil Down ETF
13.  DPK – Direxion Daily Devloped Markets Bear 3X Shares ETF
14.  DSLV – 3x Inverse Silver ETN
15.  DSTJ – JP Morgan 2X Short US Long Treasury Futures ETN
16.  DSXJ – JP Morgan 2X Short US 10 Year Treasury Futures ETN
17.  DUG – UltraShort Oil & Gas ProShares ETF
18.  DUST – Direxion Daily Gold Miners Bear 3x Shares ETF
19.  DXD – UltraShort Dow 30 ProShares ETF
20.  EDZ – Direxion Daily Emerging Markets Bear 3X Shares ETF
21.  EEV – UltraShort MSCI Emerging Markets ProShares ETF
22.  EFU – UltraShort MSCI EAFE ProShares ETF
23.  EFZ – Short MSCI EAFE ProShares ETF
24.  ERY – Direxion Daily Energy Bear 3X Shares ETF
25.  EUM – Short MSCI Emerging Markets ProShares ETF
26.  EUO – ProShares UltraShort Euro ETF
27.  EWV – UltraShort MSCI Japan ProShares ETF
28.  PSQ – Short QQQ ProShares ETF
29.  PST – ProShares UltraShort 7-10 Year Treasury ETF
30.  QID – UltraShort QQQ ProShares ETF
31.  QLD – Ultra QQQ ProShares ETF
32.  REK – ProShares Short Real Estate ETF
33.  RETS – Direxion Daily Retail Bear 3X Shares ETF
34.  REW – UltraShort Technology ProShares ETF
35.  RSW – Rydex Inverse 2x S&P 500 ETF
36.  RUSS – Direxion Daily Russia Bear 3x Shares ETF
37.  RWM – Short Russell2000 ProShares ETF
38.  RXD – UltraShort Health Care ProShares ETF
39.  SAGG – Daily Total Bond Market Bear 1x Shares ETF
40.  SBB – ProShares Short S&P SmallCap600 ETF
41.  SBM – ProShares Short Basic Materials ETF
42.  SCC – ProShares UltraShort Consumer Services ETF
43.  SCO – ProShares UltraShort DJ-AIG Crude Oil ETF
44.  SDD – ProShares UltraShort SmallCap600 ETF
45.  SDK – ProShares UltraShort MidCap Growth ETF
46.  SDOW – UltraPro Short Dow 30 ETF
47.  SDP – ProShares UltraShort Utilities ETF
48.  SDS – ProShares UltraShort S&P500 ETF
49.  SEF – Short Financials ProShares ETF
50.  SFK – ProShares UltraShort Russell1000 Growth ETF
51.  SH – ProShares Short S&P500 ETF
52.  SICK – Direxion Daily Healthcare Bear 3X Shares ETF
53.  SIJ – ProShares UltraShort Industrials ETF
54.  SJB – ProShares Short High Yield ETF
55.  SJH – ProShares UltraShort Russell 2000 Value ETF
56.  SJL – ProShares UltraShort MidCap Value ETF
57.  SKF – ProShares UltraShort Financials ETF
58.  SKK – ProShares UltraShort Russell2000 Growth ETF
59.  SMDD – UltraPro Short Mid-Cap 400
60.  SMN – ProShares UltraShort Basic Materials ETF
61.  SOXS – Direxion Daily Semiconductor Bear 3x Shares ETF
62.  SPXU – ProShares Ultra Pro Short S&P 500 ETF
63.  SQQQ – UltraPro Short QQQ ETF
64.  SRS – ProShares UltraShort Real Estate ETF
65.  SRTY – UltraPro Short Russell 2000 ETF
66.  SSG – ProShares UltraShort SemiConductor ETF
67.  SVXY – ProShares Short VIX Short-Term Futures ETF
68.  SZK – ProShares UltraShort Consumer Goods ETF
69.  TBF – ProShares Short 20+ Year Treasury ETF
70.  TBT – ProShares UltraShort 20+ Year Treasury ETF
71.  TBX – Short 7-10 Year Treasury ETF
72.  TBZ – UltraShort 3-7 Year Treasury ETF
73.  TLL – ProShares UltraShort Telecommunications ETF
74.  TMV – Direxion Daily 30-year Treasury Bear 3x Shares ETF
75.  TOTS – Direxion Daily Total Market Bear 1X Shares ETF
76.  TPS – ProShares UltraShort TIPS ETF
77.  TWM – ProShares UltraShort Russell2000 ETF
78.  TYBS – Daily 20 Year Plus Treasury Bear 1x Shares ETF
79.  TYNS – Daily 7-10 Year Treasury Bear 1x Shares ETF
80.  TYO – Direxion Daily 10-year Treasury Bear 3x Shares ETF
81.  TYP – Direxion Daily Technology Bear 3x Shares ETF
82.  TZA – Direxion Daily SmallCap Bear 3x Shares ETF
83.  TWQ – ProShares UltraShort Russell 3000 Index ETF
84.  UDN – PowerShares US Dollar Bearish ETF
85.  YCS – ProShares UltraShort Yen ETF
86.  YXI – Proshares Short FTSE / Xinhua China 25 ETF
87.  ZSL – ProShares UltraShort Silver ETF
88.  FAZ – Direxion Daily Financial Bear 3X Shares ETF
89.  FXP – UltraShort FTSE/Xinhua China25 Proshares ETF
90.  GASX – Direxion Daily Natural Gas Related Bear 3X Shares ETF
91.  GLL – UltraShort Gold ProShares ETF
92.  INDZ – Direxion Daily India Bear 3x Shares ETF
93.  IPAL – 2x Inverse Palladium ETN
94.  IPLT – 2x Inverse Platinum ETN
95.  KRS – Short KBW Regional Banking ETF
96.  KOLD – UltraShort DJ-UBS Natural Gas ETF
97.  LHB – Direxion Daily Latin America 3x Bear Shares ETF
98.  MATS – Direxion Daily Basic Materials Bear 3X Shares ETF
99.  MWN – Direxion Daily Mid Cap Bear 3X Shares ETF
100.  MYY – Short MidCap400 ProShares ETF
101.  MZZ – UltraShort MidCap400 ProShares ETF

Whipsaw trading can really put a damper on your portfolio, so let’s take a step back right now and do a quick mini-lesson on technical analysis and MACD Divergence. After looking at charts for the past 5 days sitting on mostly all cash heading into expiration, I’ve noticed that the technical are flashing some important warning signs. Mainly I’m seeing a whole bunch of divergence.

And rather than bore you with chart after chart in a full length post, I decided to do another video. You can always catch HD updates on our YouTube channel.

Trading into the short Thanksgiving week should be fairly light in volume but that doesn’t mean that there won’t be more trading opportunities. Add your comments below and let me know your thoughts on the charts I went over and how you see the market shaking out through November.

Whipsaw trading can really put a damper on your portfolio, so let’s take a step back right now and do a quick mini-lesson on technical analysis and MACD Divergence. After looking at charts for the past 5 days sitting on mostly all cash heading into expiration, I’ve noticed that the technical are flashing some important warning signs. Mainly I’m seeing a whole bunch of divergence.

And rather than bore you with chart after chart in a full length post, I decided to do another video. You can always catch HD updates on our YouTube channel.

Trading into the short Thanksgiving week should be fairly light in volume but that doesn’t mean that there won’t be more trading opportunities. Add your comments below and let me know your thoughts on the charts I went over and how you see the market shaking out through November.

Especially when dealing with money, traders can sometimes develop self-destructive habits. As stocks jump up and down in price throughout the day, they can take hold of your mind and begin to play you like a fiddle if you are not careful. That’s why it’s so important to learn how your emotions will react to various market conditions.

Is It Possible You Secretly Want To Make Bad Trades?

Of course it is! Trading sounds so glamorous when you start. You’ll talk about how you day traded this stock or bought an option that went up 100% at the neighborhood BBQ. Then, without the right system in place, your subconscious mind will start to take over before you know it.

Slowly the thrill will wear off if you are not careful and you’ll actually start enjoying talking about how “hard” or “difficult” it came be. You will imagine losing money versus making money. You’ll start to make excuses for your failures; regular job getting in the way, too tired, not enough money, etc.

When you reach this point your mind is now thriving off the failures and you need to have an intervention!

The Solution: Keep A Journal

I know it sounds cheesy and honestly it might be a little stupid at first, but it’s well worth the effort and slight embarrassment to outsiders. If you are going to start trading like a professional, you need to develop professional habits. The most important skill is of course control over your trading psychology.

See yourself as a successful and professional trader at the start of each day. Take 5 minutes to visualize the charts, you positions, entires and exits. You are alert but calm.

I have a journal that I keep at all times. I don’t write in it each day (or even every other day). But when a trade or chart strikes me I’ll put down my notes and emotional thoughts. Then I’ll go back and re-read my notes from weeks and months ago and realize that my emotions really have everything to do with how profitable I am.

Low Risk – High Payoff Technique

The advantage of visualization and journaling your thoughts is priceless. It costs you practically nothing to start and yet the payoff can be great (thousands of dollars in profits potentially). As a trader we are always looking for the best risk/reward trades right? Why not make this a top priority this week? What do you have to lose?

Each month Option Alpha has seen it’s readership and members grow – which is great. As always, I’ve never done any advertising or marketing for this blog. I’d rather have it grow via word of month and social media which to me is “real” growth and not “paid” growth.

So thank you all and keep spreading the word!

As the website continues to grow, I’ll get more and more emails each week about a higher frequency of trading. It’s really starting to alarm me to be very honest. What is the big freaking deal with trading so much? More monitors, screens and trades doesn’t make you necessarily “smarter” or better at trading.

What are your thoughts on trading frequency? Do you think trading more often is a good or bad thing? Add your comments to this post and share your opinion.

More and more beginners think that trading more is cool or popular. Maybe they even think that trading more gives them more opportunities to learn more about the market but this couldn’t be further from the truth. The more you trade the worse you get – period.

For our Premium Membership we typically send out 3-6 alerts each month and try to keep fairly consistent. Instead of focusing on trading more positions, we do a lot of analysis followed by more analysis and then make a solid trade. Too many traders email me and talk about making 5-10 trades a day! That type of frequency is just not profitable long term. Just look at the number of day traders that either lose all their money or quit within 6 months of starting – the numbers are staggering!

Stop making more trades and start making better trades. Analyze more frequently and learn to control risk. Go back and learn from past trades you made that didn’t go well (I rarely see people do this one). If you focus on trading less and more consistent the profits will take care of themselves – our performance is living proof that 3-6 trades per month can be very successful.

With the recent market volatility I wanted to cover a new topic and strategy. It’s another tool to put in your box and a great way to take advantage of volatility skew in options pricing. As we all know implied volatility levels should really drive your trading strategy, and having a way to profit from different volatility environments is very important.

The strategy I’m going to cover here is called the put ratio spread. And of course, the opposite of everything can be applied using call ratio spreads (just flip the P/L diagram).

How Do You Recognize Volatility Skew?

Earlier this month, I had noticed that with the market moving higher and VIX staying above 30 there was a good amount of negative volatility skew for index options. In particular I saw that the IWM OTM put options traded at higher implied volatility levels as opposed to the ATM put options. It’s actually even more spread as you get further OTM.

If you subscribe to the notion that overall volatility has a historical average and that higher volatility levels will come down on average, then using a ratio spread will help you profit from this type of market.

Now, Use A Ratio Spread To Profit From Skew…

Here’s what you do. Start buying options with lower implied volatility while selling options with higher implied volatility. If you then offset the sales of options by 2:1 to the purchases you will exploit the negative skew in the IWM put options.

As a quick example, you could BUY 1 70 Strike Put and then SELL 2 65 Strike Puts = for a net credit of $15. Your profit/loss diagram would like something like this using thinkorswim’s Analyze tab.

Based on the profit/loss diagram you can see it’s basically a mildly bearish strategy on the IWM. If you set it up correctly you can even still make money ($15 with our example) if the market rises into expiration. The risk to the downside is worth considering if the market sells off hard but using technical analysis will help with better entries near market bottoms. The ideal scenario is to have the stock close right at the short strikes price in which cause you would pull in a $500 profit!

Keep This Strategy Handy

Overall the ratio spread is a little different as compared to a traditional credit spread. With a credit spread you are short and long an equal number of contracts so the volatility risk and skew is minimal and more of a directional play on the stock. The ratio spread is a great tool to keep in your arsenal of strategies and well worth trying this week in your paper trading account!

Ribbon studies and multiple moving averages are becoming more and more popular among trend traders. The basic idea behind the technical indicator is that you are using roughly 12-16 different moving averages on the same exact chart (instead of using just 1 or 2 on your chart).

How Do You Build This Indicator?

Typically ribbon studies consists of approximately eight short-term and eight long-term exponential moving averages. The short-term moving average lengths can vary of course and are more dependent on what time frame you are trading.

The chart that I have here is set up with 16 moving averages varying from a 50 day to a 200 day and everything in between. I think this gives me a more accurate look at the overall trend when using long term moving averages. But some will argue that you should start with the 30 day moving average, I disagree.

Trend analysis enables more effective selection of appropriate trading strategies such as breakout, trend continuation etc. Can be applied to long side and short side trading.

Convergence and Divergence Signals

There are generally 3 different signals that you can analyze with ribbons and multiple moving averages:

1) When your ribbons start to become more parallel and and evenly spaced, you can assume that the current trend is strong and in “agreement” with the other signals since they are moving together as a collective.

2) When the ribbons start widening out and separating, this signals that we are starting to reach market extremes and could be the end of trend. Short term MA’s are reaching extremes and the law of probabilities suggest these levels won’t last much longer.

3) And finally, when the ribbons start to converge on each other, a trend change has already begun to occur. An early indicator after seeing extreme levels is that the shorter term MA’s will converge first while the longer term MA’s will slowly converge.

Spacing Is More Important Than Crossovers

Most people incorrectly assume that the only important factor when using ribbon studies and multiple moving averages is the “crossover” or the “twist” in the charts. The point at which the shorter term MA’s start to move above or below the longer term MA’s – and while this is important it’s not the best use of this indicator.

The actual spacing of the ribbons and MA’s really show the underlying strength of the trend. Use the 3 difference spacing points I outlined above and you’ll be well on your way to better trend analysis.

Have You Had Success With Ribbons?

Like I said before, this technical indicator is becoming more and more popular. But I would like to know what kind of success or failure you’ve had with these ribbons for identifying trends? Add your comments below and share any tips or tricks you have found with others.