We’d all love to be able to know whether stocks are about to go up, down, or trade sideways. But how can you really tell? That is the topic Brandon and Christine are tackling in episode 14 of the Possible Promise Podcast.
- We’re now moving to Mondays and Fridays at 1PM Eastern.
- This Friday we will have a guest on to discuss how realistic the current market environment is.
- All indices were in the positive today, thanks to optimism over the stimulus bill.
- Brandon doesn’t see how it can be so high, however, given the state of the economy and the -32.9% contraction in the GDP reported last week.%
[10:51] – Weekly Stock Picks
- SPY and XLU have been flops because of the major rally in the market over the last month.
- However, AMC has been profitable, and in fact today Brandon closed his trade at 10¢ for a 50% profit.
- The option pick is an iron condor on IWM, with $133/$131 for the puts, and $172/$174 for the calls, expiring September 18.
- The earnings play is on Square, Inc. (NYS:SQ), who has earnings after the market closes tomorrow (8/5).
[20:02] – How to Pick a Direction
- Traditional stock investing requires you to pick a direction: if you think a stock will go up, you buy it; or if you think it’ll go down, you sell it short.
- It is similar for long options, but even more so thanks to the volatility of options.
- Depending on your investing style, there are ways to form an assumption: whether by fundamentals, technical analysis, chart patterns, analyst ratings, etc.
- However you must always do your own due diligence, not just taking your opinion from Facebook or Twitter.
- Alternatively you can subscribe to a portfolio whose guidance has proven correct more often than not.
- Even then, no stock picker is ever 100% correct. People study this for decades and still cannot always be right.
- You have to get comfortable with loss and the reality of being wrong sometimes.
- There is a better way, though: if you’d rather stay neutral, you can use short strangles or iron condors.
- Short strangles are when you sell a call and a put, defining a range you believe the stock will remain within.
- You sell a call defining your upper bound, and a put defining your lower bound.
- You want to capture a 1 standard deviation move of the stock, which will allow you to be correct about 68% of the time.
- To do this, the short strikes should each be at around a 16 delta. This adds up to a total probability of profit of around 68%.
- However this is an undefined risk trade with unlimited loss potential. If the stock trades far outside your range, you could potentially lose thousands of dollars.
- As such there is a high margin requirement in your brokerage account.
- To define your risk, you can “buy the wings” to form an iron condor.
- You simply buy a call above your short call strike, and buy a put below your short put strike.
- The distance between your short and long strike on each side is the width of the wings, and that width, minus your total credit, is your maximum risk.
- This is a powerful strategy that allows you to trade any stock without forming an assumption on its direction.
- You can even skew it to one side or the other, if you are a bit bullish or a bit bearish. This strategy has a great deal of flexibility.
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