>>>>>>>>>> For More Free Videos Click Here <<<<<<<<<
You can kind of determine what the trend is, but guess what? It doesn’t matter what you determine the trend is. The only rule to prices is that prices will fluctuate.
So, we try to create trades based around certain parameters that we’re determining, that will help us to become profitable. But we do not try to predict price.
In other words, if I’m looking at this IWM chart for the Russell 2000, I might say, “Well, you know what? If you know anything about technical analysis, right around the 72 or 73 level, the potential here, to – this could be considered a resistance point.” In other words, the Russell 2000 has come up against this line once, twice, three times. This is the fourth time. It seems like it can’t break through to that point.
Resistance points usually have been prior support points. You can see that, when the IWM Russell 2000 started to decline, this price level here was a support. In other words, it held the price before, and it went back up. It held it again here, and went back up.
Then, finally, when it broke through that price, it actually came back up. All of a sudden, the support that’s here, becomes the resistance.
That is more often than not, one of the best technical analysis tools that you can do on a market, is that prior support becomes resistance. If this price should break through this resistance point, it will probably become support again.
That’s one of the things that we keep an eye on. We don’t do a lot with technical analysis, but in general, prices tend to move in channels. We’ll set up channels for stocks. They don’t have to be exact, but what we like to do, is we like to see where the high end of the price levels are headed, and where the low end of the price levels are headed.
Sometimes, they break through, and they come back up, and they hit the price levels again, and they come back up. You can look at this two ways. Number one: If we were going to do any kind of technical analysis on the Russell 2000, we could easily say that, “Hey, it’s in a down trend channel. It’s meeting some resistance at the 73 level, which means it may go back down again.”
So, we don’t try to predict price, but we do try to get a feel for where it is at the time. That gives us a sort of indication of how we should be placing our trades. If we think that there’s a little bit more risk to the downside, instead of choosing the 68 puts to sell, maybe we can go down and choose the 68 puts to sell. It gives us a little bit more room on the downside.
As you can see, there may be support brewing around the 68 level, because it hit it here, and it went back up. So, 68 might be a good place to put our puts and sell our puts at this point, because it’s formed a support point a couple of times when the market has gone down.
Now, let’s look at an analysis of what this position would actually look like. Right click there, and we’ll analyze duplicate trade. We’ll go back to the trade tab, and we’ll analyze this as well, this duplicate trade.
What we’ve done is that we’ve set up a little bit of a profit area. This green line is what will actually tell you the maximum profit that this position will be able to generate, at expiration of these options. Remember, the last trading day is the third Friday of each month. The options expire the day after that, so that’s why it’s +1 at expiration. Expiration date, in this case, for May options, is the 16th. That’s the date that they actually stop trading, but the expiration date is the 17th.
All we have to do is take a look at… It’s actually the May 17th, which is the expiration date of the option. If we were to take these trades – this type of trade is called selling a vertical spread. We’re selling a vertical spread for a credit.
Now, what kind of advantage does this give us? What kind of trade advantage does this give us? Well, the people who we are selling the contracts to, at 74, believe the price is going to be at 74 or better. The people that we’re selling to believe that the price is going to be 74 or higher, by expiration date.
The people who purchase from us the contracts at 68, on the put side, believe that the market is going to drop, and the index price will be below 68 at expiration.
We don’t care which way they go. To be honest with you, it doesn’t matter to us, who’s right and who’s wrong. The only thing we want to do is be able to profit from the sale of those contracts. You can see that setting up a trade such as this gives us a breakeven point of anywhere from 67.5 all the way to 74.5. That’s a pretty wide range. In other words, we are taking advantage of the fact of the number one rule of the markets – that prices will fluctuate.
We’re not very good at predicting future prices. You can ask anyone. I don’t care how much experience they have in the market. That doesn’t matter. Nobody can predict the future. If anyone tells you that they can predict the future, run as fast as you can, away from them. Nobody can predict the future. The only thing you can do is take a look at some general trends. You can take a look at some support and resistance points, and that’s about the best you can do.