Dan Passarelli, CEO - Market Taker Mentoring

This week has been all about methodology and specifically following what I call the MTM Trading Plan Checklist. We're going to start talking about once you've got the trade on, how do you manage it?

So we're going to talk about exiting the trade and adjusting basically solid trade management techniques. Let's take that trade that we've been talking about for the last couple of days, this NVDA spread, and we're getting ready to exit it. We look at it and we think, well, how should I exit this trade? Just hammer it out? It's a natural bid, try and middle it? Go somewhere in between?

Do I leave it on good til cancel? Now, one technique that I like to use all the time is as soon as I put on a trade, I immediately - right after that, enter good til cancel order to profit take, as well as sometimes use a stop. Now, I don't use stops with spreads because the bid ask spreads are too wide and it can be a little bit tricky.

So what I would do typically is I would enter this as GTC order confirm and send. I'm not going to actually do that because I don't actually have it straight on. And then what I would do after that is I would go and I would set an alert. So I would just simply go over here to NVDA. If I don't have it on a watch list, I would just add it to one real quick and go create alerts.

Because if the stock falls too low, right, because this is a debit call spread, if the stock falls too low, like below support level, I'm going to want to know so that I can exit the trade and take a small loss before it comes for a big one. So this is more like the risk management part of it. Whereas this order would be a profit taking order, of course, if I were just simply buying a call and it was more of a Delta Centric type trade, well, excuse me; I guess this would be selling a call that I already have on in the hypothetical example right. There what I can do is I can put in a GTC profit taking order at, say, $9.

And at the same time, I could make this OCO right here go simply create duplicate order. And instead of a limit, I would change this to a stop. I guess I'd have to pull this up, change this to a stop, and then put this down maybe like $7 or something. Again, totally hypothetical example, and then confirm and send in. Both of these orders will be in, and if one gets filled, the other one gets canceled.

So look, there's a lot of things that you can do, but the point that I want to make here is that monitoring your position stems from the reason you put the position on in the first place. Your management plan should already be in motion as soon as you make that trade. And that's why I love to use GTC orders. We'll talk more about that in some future videos down the road. But it's important to continuously monitor your position.

Stick with the plan you have and if you have to make adjustments like maybe closing one leg and leaving the other on or taking off half the position at one profit target and the other half at a more aggressive profit target there's lots you can do as long as you have a plan. Remember I said before, even a bad plan, is better than no plan. As long as you have a plan and you stick with and follow with discipline, that is the most important thing.

Dan Passarelli, CEO - Market Taker Mentoring

Today we are moving on to the next step, which is actually getting to executing the trade. And there's two points here. We're going to come up with an execution strategy and then then actually pull the trigger and execute the trade. So let's say we go back to the trade that we talked about in yesterday's video, buying that, selling that, and we do our analysis, of course, and we decide that it's time to make the trade.

So we simply right click create duplicate order, and we look at this, and what we want to do is we want to think, okay, how do I want to enter this? First of all, I can see that the natural offer is 560. The mid price is $0.18 below that. So if we looked at the bid, this would be about $0.36 wide. So do I want to try and trade right in the middle of the market?

Typically, you're not able to do that. I probably don't want to pay the natural offer. I want to pay something in the middle. What I'll do a lot of times is I'll just put this little blue dot to put the price smack dab in the middle of the mid and the natural. So basically 25% of the full spread with below the offer is where I put the bid.

Or if I want to work it a little bit more and just be patient with it, I would go with a lower bid, but there's a lot of risk doing that. Either way, you might have different reasons for doing different things. I also want to look at my size. I want to make sure that if I'm buying ten of these, that would be about $5,500 that I'd be investing in this. Is that what I'd like to do?

Is that the most I can lose in this case? Or do I have greater risk being an entry order? I typically leave that as a day trade, but do I want to do a GTC? Every now and then, I will actually put in the GTC entry order. We typically like to send it to the best exchange and then simply confirm and send, and that's how we execute our trade.

Now, in our next video, we're going to talk about exits and some strategies for actually exiting the trade at that point. So hang tight, and I'll see you back tomorrow. 

Dan Passarelli, CEO - Market Taker Mentoring

This week we're talking all about methodology, and specifically, I introduced to you, in our last video, the MTM Trading Plan Checklist. And we talked about the three analyses that form the beginning of any trade identification.

Now I want to talk about what is next and what is after that. Now we're going to move on from the first three steps to stating the forecast, selecting the strategy, and doing your Greeks and Risk analysis.

Let's say we settle on a trade here, right? Well, before we settle on a trade, let's say we develop our forecast, we do our three analyses and we decide, "Hey, for whatever reason, (this is just a hypothetical example): I think that NVDA is going to rise from its current level of about $170 up, let's see here, maybe $15 over the next twelve days to 185. Okay, so one way that I could trade that is, I could do a debit call spread. And if there was resistance, I would be more likely to pick a debit call spread than simply buying a long call.

If implied volatility is underpriced, I'd be better buying an at money call and selling that higher strike call because I'm okay being long volatility if it's underpriced. If it's overpriced, I might instead sell a put spread. So the moral of the story is all those three steps in my trade analysis help guide which strategy I select.

All right, so I'm going to very clearly state:

• the forecast encompassing the direction of the move,
• the magnitude of the move,
• the time horizon of the move,
• and what volatility might do if that happens.

Then once I have that holistic forecast, I select the best strategy that fits that. And the first strategy that I come up with may or may not be the best one. I always like to look at least three different ways to trade something. But let's just do this example that I was talking about buying the 170 calls, selling the 185 calls. I just bring that over to risk profile. This is called modeling a trade. I look and I say, hey, okay, so if this stock, let's put it on today's days and see, hey, as time passes, first of all, the blue line is at expiration, the purple line is today, and I can move that day ahead. And as you can see, every time I move the day ahead, that line changes just a little bit, slowly fades into the blue line.

I can change volatility. I can say, okay, if the stock gets down below this support level here, where will I take my loss? I want to start doing all this strategy to select the trade that in this situation has the best chance of winning, has the lowest risk and has the highest reward and it's never the same trade.

That's why I go through this process of doing the analysis, stating a holistic forecast, selecting the ideal strategy by using this risk analysis. Now, in addition to that, by the way, we can also pull up the price slices and if we do that, we'll just get rid of any offset here. If we do that, this gives us our Greeks for the trade.

Here, I'll get rid of this one. We'll just look at the at the money. So my Delta is 285, my Gamma is four. My Theta loses about $96 a day as we move towards the short strike. I know that my Theta would actually end up being positive and I can prove that by just saying, hey, what happens if the stock is at 183 and I just lock this, I changed this to 183 and see, my Theta is positive when we're close to the short strike.

I can do lots of little tricks and things like that to model this and really get a feel for how this position functions as time passes, as volatility changes and at different prices in the underlying and I can look at what my PNL is, how my Vegas affects the position and everything.

So this is a really essential part of the trade process. Maybe the most important part is picking the best way to trade that strategy. In tomorrow's video, we're going to talk about the next steps in the MTM Trading Plan Checklist.

Dan Passarelli, CEO - Market Taker Mentoring

 

When I train people on how to trade options, one of the most important things that I try and impart on folks is to have a methodology to simply have a system. And I tell people even a bad system is better than no system at all.

One of the things that I do to help folks get down their own system is to introduce them to the MTM trading plan checklist. Now this is the MTM trading plan checklist.

As you can see, there are several steps. I'm going to be talking about the MTM trading plan checklist all week and I'm going to break it into five different parts for each of the five days of the week. And right now I'm just going to talk about the analyses. Looking at the technical set up, identifying volatility events and the volatility analysis. I call them the Trifecta of analysis. They're really very simple.

First we go through and we do our technical analysis. That checklist can work for any type of trade there is. Straddles, directional calls, breakout trades, times spreads, earnings trades. It's general enough that it can be adapted to any type of trade and any type of trading style.

So we always want to do an analysis. For example, we could see that a stock crossed above the 20 day moving average and we think that it might be a momentum play or you might use a longer term moving average as a support or resistance area. Speaking in general terms, this is the first thing we want to do. Then we also want to do our fundamental analysis or identifying volatility events, which is simply going and finding when earnings is. It's really, mostly, that simple.

I will also go and I will look at news on a particular stock. Think or swim here has a pretty solid series of stories to get the live news on any particular stock and I'll just go through and make sure I haven't missed anything, see if there are any whale trades.

And again, know when earnings are and know when things like Fed announcements are. Next thing we have to do a volatility analysis. And I've done some videos on this in the past. I don't want to spend too much time on it, but I like to use the one, two, three volatility analysis.

• Step one is today's implied volatility above or below today's historical.
• Step two is today's implied volatility in the top half or bottom half of the six month range.
• And step three, what's likely to happen with volatility, implied volatility and historical volatility going forward.

 

So once I have those three analyses done, then I can move on to the next step in the MTM Trading Plan Checklist, which we'll talk about tomorrow.

 

Dan Passarelli, CEO - Market Taker Mentoring

We had some green in the market today, which of course is always nice! Especially following the last week and a half or so of trading and the news that came out. Which was, of course, the Fed announcement this past Wednesday. Looking forward, a lot of people that I've talked to have kind of forgotten this or it slipped away from them if they knew it or some just didn't know it. But we have a three day weekend this weekend and I think that can benefit the market a little bit.

Back in the day they used to have what they would call bank holidays, which is when bad financial stuff was happening. They would just close banks and close the market for a little bit to let people take a breather and not panic and let some of the emotion dissipate so that level heads could prevail.

So, an extra day off this weekend probably is not a bad thing for the markets. It could probably give people a little bit of time to digest some of the news and make a little bit more intelligent decisions and maybe we'll see a little bit less volatility as a result of that.

Dan Passarelli, CEO - Market Taker Mentoring

 

You know how sometimes somebody tells you they're going to do something and you know they're going to do it but then when they finally do it, you're like, how could they have done that? That's kind of what is going on with the market today.

The Federal Reserve and economists and financial thought leaders have been telling us that we're going to have to raise interest rates and get more aggressive. In the final days leading up to the Fed announcement, it was widely expected that it would be raised 75 points and it was. We saw a little bit of follow through to the upside yesterday.

But that was all erased today because the reason why the Fed raises interest rates is to cool the economy. It's the cooling economy that cools inflation. There's just a lot more worry about that, so there could be a little bit more downside still yet to come.

So me, personally, I'm watching. I'm looking for a lot of different opportunities still finding some of those underpriced straddles and picking some spots I'm not ready to get in and start buying here yet.

But one thing I was talking about with one of our one on one coaching students just yesterday is that at some point we're going to hit the bottom. They call that the capitulation point or some people will call that the stomach turning point. When that happens, that's when you're like: I can't take any more - maybe now I should buy puts. That's usually the worst time to do it.

That's when I like to do things like start selling puts, taking advantage of massively high volatility and scaling into the market into more long, longterm holding positions.