Profiting When The Stock Market Falls

Why does every investor feel bad when the news announcer tells us that the S&P 500 fell 1% today?

Why do investors assume that their portfolio lost 1%? The reason is, most mutual funds and stocks do the same thing the S&P 500 does. When the market falls, so does the value of most portfolios.

Except! Protected Portfolios, and day traders with ADHD who trade binary options and profit or lose from 60 second markets movements. Read related article here.

What is a protected portfolio? Also know as a hedged portfolio? The way to protect a portfolio from a stock market crash or correction is with a put option.

A put option is used in two ways:

  1. Investors or traders will buy a put option because they think the price of a stock will go down, and they would like to profit from the fall.
  2. Put options can protect a stock investment like an insurance policy for the portfolio. It give the owner the option to sell the stock at the strike price.

The way an investor hedges an entire portfolio works like this. The S&P 500 or easier to use is ticker $SPY is trading at $178. The December 2014 put option for the $160 strike price is $6.00. This means that if the SPY falls below $160 by December 2014, the owner of the put option can sell shares of $SPY for $160, even though the price may be at $140.

Finviz

The reason no one likes this method. The cost to protect the portfolio is 3.3% and that only offers protection of a loss greater than 10%. So all the put option does for the investor is protect in the event that the markets fall 13% in 2014.

Another way to profit from the fall of the stock market is to trade options. Trading options consists of buying put options in anticipation of the market moving lower. When the market moves lower, the price of the put option usually will go up.

Read our article about trading a covered call.

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Trading Economic Events with Boundary Options

A few brokers have introduced what are called boundary options or range options. The boundary option is basically a play on volatility. Will the asset stay in the range or will it move outside of the range.

The profit on a boundary option is 70%.

Trading high impact economic events is the lifeblood and thrill of both amateur and professional traders. A trader has the ability to make more money in one hour than an entire month. The risk of trading such market moving events is not getting whipsawed in a trade that reverses. While this is usually not a great trade due to the calm nature of the Forex markets, during a major economic event this option becomes a real profit center.

The spread on boundary options are currently very narrow which is great for traders looking to profit from a move outside of the boundary. The boundary option is available on the $EUR/USD, $GBP/USD, $AUD/USD, $EUR/JPY & $CL_F (OIL). The spread is currently 6 – 12 pips which any Forex trader knows, is very small for betting on a move outside the boundary, when a high impact event like the jobs report or interest rate decision is announced.

Bookmark the economic calendar to check for the next event to trade.

These Brokers Have Boundary Options.

24Option is for international traders, see here.

Tradorax is a broker that accepts American traders, see here.

Boundary Options

Another favorite trade for boundary option traders is the weekly oil report at the Nymex. US Crude Oil Inventory is released on Wednesday. This is the announcement that tells oil traders about supply and demand in the US oil markets. Although there are geopolitical events all the time, when traders are looking to remove the noise and focus on data, this is the report they read.

Traders can use the boundary option trade to also trade the oil inventory report on Wednesday.

As always, it is important to follow proper risk management so that you do not blow out your account. This trade has a probability for certain announcement and traders need to understand that there is no such thing as a holy grail.

Trading any type of option, be it binary options, monthly options or weekly options requires research, planning and education.

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Trend Following Binary Options Strategy

The most popular trading strategy discussed when it comes to trading binary options is trend following. Traders and Brokers like to toss around the phrase “The trend is your friend” or “Never fight the trend”.

To properly apply the trend following strategy a traders must first know how to find the trend.

Below are three charts.

When looking at the first chart, you will notice that the trend is going down. When you look at the middle chart, it doesn’t really show a trend except choppy trading. The last chart shows a V shape.

Oil Trading Strategy Daily

Daily Chart
Oil Trading Strategy Hourly

Hourly Chart
Oil Trading Strategy 5 Min

5 Minute Chart

 

 

 

 

 

When you open your trading platform, depending on the broker you are trading with, it will show a different time frame than the pictures above.

Reading a chart of the wrong time frame will cause a trader to make the wrong trade.

For instance in the first chart of Oil above. We can see that in the past three months, almost every day the price of oil went lower. If we remove all the news and sentiment that we personally feel about the value of a barrel of Oil and only focus on price movement, it is very obvious that the price of oil is going lower. A true trend follower will short / buy puts on Oil in the anticipation of the trend continuing.

But when will the price move lower? Based on the first chart, the price should move lower sometime in the next month.

The biggest mistake would be to buy a put on Oil that expires in one hour or one week!

Now lets analyze the last chart. The 5 minute price of Oil.

There are a few ways to trade on a V shaped chart, but let’s stick with the trend following mindset for this trade.

As the morning started, Oil started trading lower. A day trader will look at the chart and make one of two calls.

  1. Oil is moving lower and that means at the end of the day Oil will close down on the day. That trader would buy a put with an end day expiration.
  2. Oil is currently moving lower, so the trader buys a put that expires in one hour.

Looking back at the end of the day, the profitable trade was the one that was only for a one hour time frame.

Digging deeper into the chart. If we look at the large drop in prices at 1:40 PM, a trader that buys a 5 minute PUT will have lost money as the price recovered and moved up between 1:45 & 1:55.

To summarize: Trend following is the basic binary options trading strategy, yet if the trader reads the wrong chart time frame, or picks the wrong option expiration, the trade turns into a loser.

This article was first published by Binary Options and was legally licensed by OptionsWeekly.
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Betting Against Bitcoin With Options

As we all watch the rise and fall of Bitcoin, traders keep asking, How can I short bitcoin? Are there options available for bitcoin?

The answer is yes, you can short bitcoin with put options.

The type of option that is available for shorting or betting on the rise of bitcoin is called a binary option. Basically, it is an all or nothing bet, if you are correct on the direction before expiry, you profit, if not, then you lose. Mostly returns are in the 70% – 74% range depending on the length of the contract and the broker.

Boss Capital & TradeRush, both binary option brokers, offer monthly options with returns of 74%. EZTrader a CySEC regulated binary options broker, offers hourly options with 70% returns, see here. Either one of these brokers will allow you to open account with a minimum deposit of $250. The trader can choose the actual size of the option contract. For instance, the trader can select $10 for a potential return of $17 or the trader can bet $100 for a potential return of $170.

As CNN Money recently reported

If you are betting against bitcoins, what you want to do is buy a put option, which is a derivative contract that allows you to sell something at a set price. If the actual price of the thing falls below the set price, or strike price, you make money.

Prices of Bitcoin

The price of bitcoin reached previous all-time high of $1124.76 on November 29th 2013. It was at $13.36 on January 5th 2013. Because Bitcoin change hands on multiple platforms, to see the range of prices head over to Bitcoin Charts. As you can see there are over 10 different prices for bitcoin depending on the exchange.

Bitcoin Price ChartWhen trading options on bitcoin, the only price that matters is the price your option broker uses. Ask your options broker where they get their pricing from. Since Bitcoin is not recognized by typical stock brokers, you will not find Etrade or Ameritrade offering you the ability to trade options on Bitcoin.

Learn more about binary options trading on http://www.binaryex.com

View the Top Binary Option Brokers

Top Binary Option Brokers

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Massive Profit Day Trading Options on Google

Would you like to know how day traders do it? How day traders decide what stock to buy? These are the questions asked of a day trader.

I will attempt to shed some light on the subject, although, it is similar to asking a heart surgeon, how he performs open heart surgery. (day traders think highly of the profession). Stocks are grouped into three categories.

  1. Stocks that are outperforming the market.
  2. Stocks that are trading in perfect correlation to the market
  3. Stocks that are under performing the market.

Investors look at this information on a longer time frame than a day trader. A day trader will look at the stocks performance for the past hour, day or week. An investor will look at the stocks performance on the month, quarter, or year.

A large percentage of stocks trade in almost perfect correlation to the S&P 500. This means, if the S&P is up 7% on the year, most stocks will also be up 7%. Interestingly enough, this also happens on a daily basis. Unless there is new information released about an individual stock, like an earnings announcement or a new product release, the stock will usually follow the market. If the stock is outperforming or under performing the market, there should be a reason why.

Many day traders look for stocks that are up or down sharply in the pre market and trade those stocks during the day. A stock that opens for trading at 9:30 and is already up 10% will usually fluctuate a few percentage points during the course of the day.

Google is a stock that  usually trades along side the Nasdaq. When the Nasdaq goes up, so does Google, and vise versus.

Sept 1st, 2010 was a rocking day in the stock market. The S&P opened up 9 points and finished the day up 31 points!

Here is the Nasdaq 100 1 day, 5 minute chart:

Nasdaq 100 Chart Sept 1st 2010

Here is the Google 1 day, 5 minute chart:

Google Chart Sept 1st 2010

(The times on the two charts above are different because of time zones, the Nasdaq 100 is GMT -6 (Chicago) and GOOG is GMT -5 (new york))

At 10:00 am New York time, the Nasdaq jumped and so did Google (see chart below). The problem was that Google, did not move as high as the Nasdaq. With Google up 1.5% and the market up 2.5%, Google had a considerable amount of catching up to do.

Google Stock Chart
 

A day trader who is familiar with a stock like Google will say, it is only a matter to time, 5 minutes, 10 minutes or maybe an hour until Google catches up to the Nasdaq. The trader will buy Google and wait for the price to go up the same percentage as the Nasdaq is up.

A pair trade would be to buy Google and short the Nasdaq and wait for the correlation to revert back to the norm and make 0.50%.

For some reason, I decided to buy Google at 10:03 for $457 and hold onto it for 42 minutes until it reached $462 . At 10:45 when I sold GOOG, I had made my 1% return and the correlation between Google and the Nasdaq was coming together. So why didn’t I wait until 11:00 or 11:45 when $GOOG and the Nasdaq where both up 2.8%? Because sometimes you take your profits early and are happy with 1% in 42 minutes.

Learn more about the: Covered Call Strategy

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