Option Trading Blog Entry: Market Commentary
I frequently get asked option trading questions like which way I think the market is headed. Especially after the event of recent days where the markets have been on a sprint to the upside but with pull backs the last couple days.
I usually respond the same way every time.
“I don’t know.”
If I could predict the market I wouldn’t be here blogging, I would be out enjoying my billions.
Believe me, I have tried to learn how to predict the markets. That’s what technical and fundamental analysis is – an attempt to understand and predict market direction. In the end, I gave up.
I cannot predict market direction. The pundits on TV and radio can’t do it, all the blogs and gurus online with their fancy explanations, charts, candles, lines, and waves can’t do it with any regularity and neither can the folks on Wall Street.
Options market prediction
So why bother?
Why not trade in a way where it doesn’t matter which way the market moves?
Makes sense to me. And that is why I love option selling. It does not matter what is going on in the market, what news comes out or doesn’t, the premium I sell loses value everyday, and I profit.
Let me give you an example. This month I have a McDonald’s (MCD) trade on. I want MCD to stay within a range. A couple days after I put the trade on, MCD moved higher and almost out of the range. So I adjusted the trade and made the range bigger.
That day a member emailed me with news that there is a rumor going around the MCD is going to raise its dividend. That might be why it went higher. And if the news about the dividend is correct, it might go higher still.
This member wanted me to know that this trade was not a good idea. He was warning me to what could happen. Thanks to this member, who had my best interests at heart, I began to worry about this position.
What if he was right and MCD shot up higher?
MCD option results
But after a while I calmed myself down and realized that it was not in my hands. If MCD went higher I would evaluate the position, adjust if possible or in the worst case scenario take a small loss. But the odds were on my side.
As it turned out, MCD has behaved fine since and the trade is right in the middle of the profit zone. Let’s hope it stays that way.
But my point is that it does not matter if the dollar is stronger or weaker. It does not matter what oil or gold do. The markets still move in ranges and if you play the ranges, 8 times out of 10 you will win. And those wins allow you to make much higher returns that you will in a savings account, a CD, a money market fund, or a mutual fund.
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I was not saying your MCD trade was not a good one ( like you said in this blog).MCD did raise dividend,first of all.Second,I just pointed out that MCD trade that you started on Sept 15,adjusted on Sept 16,then again Sept 18, was quite complicated and confusing.Probably you are professional enough to make this trade with adjustments in a few days,but most of your members may not.People want to make things simple.Imagine you are a teacher.Your pupil would like you to explain the concept in a simple way so that they can understand EASILY.Third,I put forward a competing strategy by selling MCD OCT bull put spread (sell 52.5,buy 50).My point was that simplicity,sometimes,was a beauty.
You want your members to follow you not blindly,but in a way that they really understand your work completely.
You make an excellent point. And you are right I should keep things as simple as possible, which I try to do. You were right about the dividend increase but so far the trade is still working. Yes, I adjusted it twice early in the trade and i would rather not have to adjust at all.
My point was that even with a large move, adjusting let me stay in the trade and hopefully make a profit even though the stock moved rapidly as soon as I got in the trade.
Your trade is also a good idea. With options there are many way to make money from the same stock. I could have done a Calendar Spread, or a Double Diagonal, or an Iron Condor on MCD instead of the Butterfly. Each has its own risks/rewards.