How to Capitalize on Down Days
You know those days, where the market’s falling, and you know there’s opportunity there, but not sure quite what? Or, even worse you get caught up in emotion and miss opportunities that are right in front of you?
Well, I’m here to tell you that there’s absolutely opportunity during this type of market movement.
Let me show you the way…
Where Traders Go Wrong
First of all, we must discuss where traders go wrong. This is a critical piece of performing correctly on down days.
Often times, a mistake traders will make is trying to catch a falling knife. This typically occurs in which buyers are coming in, attempting to buy long calls. Or even worse, trying to buy puts as a ticker falls.
This can work at times, but requires near perfect timing of lows. In addition, from an options perspective, when the market’s falling, IV is rising — making calls or puts more expensive. So you’re essentially paying a high price for something that’s crazy volatile and you’re likely to take heat.
Why would you take heat?
This is because down days have volatility, ranges are wider than normal, and calls and puts are meant to move as leveraged products in a moving market. We of course love using them in specific situations but this isn’t one of them.
And in an already volatile situation, when a simple call or put goes against you (and quickly), normally it causes heightened emotion and unrealized loss. And, I think we can all relate to what happens when we get into a trade, and it immediately goes against us — sometimes you’re too quick to get out, taking a loss on something that does come back. That is the worst!
These are all the reasons why buying long calls as the market’s falling doesn’t tend to go in a traders favor.
The Better Way
Well, thankfully my friend Henry Gambell taught me a strategy for exactly that moment in time.
Luckily for us, as options traders, there’s a method we use to capitalize on a falling market, particularly when we can use multi-leg options strategies along with high IV, in our favor. Instead of buying options, we’re buying a multi-leg spread that’s structured so that we can take advantage of high IV, wide ranges, and volatility.
Now, that may seem like a mouthful, but really what it is… is the strategy you pull out of your toolkit on those days the market’s falling, and you’re looking for opportunity, rather than being frozen in a state of, “Oh my gosh, the market is down, what should I do?!”
That my friends, is how we use a market condition to our advantage — instead of letting it take advantage of us.
Here’s an example of exactly of what this looks like in real life:
As you may or may not know, Henry, John, and myself LOVE trading Tesla (TSLA). We trade it directionally, but we also like to trade it when it’s falling — and we have to use our technical analysis to identify an area of support.
Henry, Jack, John, and myself at our live event last fall.
I’m going to show you a breakdown of Henry’s TSLA trade, in his own words:
Example: Henry’s Unbalanced Butterfly in TSLA:
Entry point: As the market was falling, I sold 3 ratio spreads for an average credit of $2.59 each at a key area of support I identified, using technical analysis.
TSLA — Daily Chart
As you can see on the daily chart, TSLA was falling. While we love trading TSLA to the upside, there are definitely opportunities to the downside as well, especially when identifying key areas of support.
TSLA Trades —
Here’s an example of the trades placed in TSLA. As you can see, they were all placed for a credit, meaning that I’m taking advantage of the high IV, and collecting a credit myself, instead of getting taken advantage of, buying long, expensive options.
Exit point: I sold 1 spread for a credit out, and the other two were broken into verticals, also as a credit out. That means I got a credit to get in (I didn’t have to pay anything! And got an additional credit, to get out.)
Leverage: My max loss to the downside was limited. I had no risk to the upside. The trade had a 80% chance of being profitable.
Profit: $1155 ($385 per spread) 148% of initial credit – 37% on margin required
Explanation: TSLA has a bit of a cult following, and there was some interest in the stock around $420, or at least there was before TSLA had ever traded that price. Funding secured! As we started to fall back towards it, around $435, I thought shares might hold that $420 price point. During this especially volatile market the stock sold off down around $400, but using the Voodoo Lines as support and assuming $400 would hold, I gave the spread some time to play out. Once Friday’s close rolled around we had the stock trading at $427. The perfect price to exit one of the spreads in its entirety, then close out the remainder as 2 verticals capitalizing on the available premium and leaving contracts to expire that did not need to be closed.
Now, this is just one example, but luckily for us, he’s going to be going through many examples of this type of trade tonight at 7pm CT. Click on the link to sign up, and join us there!
Now, I remember when Henry first started talking about these spreads. And I thought, wow that must seem complicated… I’m used to trading simple credit and debit spreads. But I’m so glad I took the time to learn this strategy from him. Especially because he makes it so easy. Now, he’s continued to evolve that strategy, and he uses five different types of spreads in varying market environments. For me, my favorite part is that I have a strategy I can use when the market’s falling.
Yesterday, I took his lessons and put them into practice, and got into an unbalanced fly in Alibaba at the perfect spot. I sent it out to my Mastery members, and wala. Today, Alibaba is bouncing off of yesterday’s lows and I have a great trade — one I never would’ve known how to do if I didn’t take a bit of time to learn the strategy from him. Thanks Henry!
Even though Henry’s taught me so much, trading options is a lifelong journey, and I love continuing to learn more. I’ll definitely be in the background tonight. I look forward to seeing you at 7pm!