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- Reducing Cost Basis with Covered Strangles
Continuing the cost basis reduction series, today I’m talking about covered strangles. A covered strangle combines two of my favorite options trades into one. You sell call and you sell a put around your shares. Next week I'll take the CAH example where I sold the covered calls and show you how a covered strangle would have been even more profitable! Risk: A covered strangle doubles the premium since you are selling a call and a put! Please realize that when you increase the reward you are also increasing your risk. More premium, more risk—that's the stock market's mantra! So, before you decide if a covered strangle is a good strategy or ‘right’ for you let’s talk about the risk and discuss what I like about covered strangles. I wrote about how the covered call’s only "risk" is capping your upside. That still is true with a covered strangle. The good thing is the stock price can’t be at two different strikes at expiration so the short put you sold would be worthless so if you were called away your premium collected would be a little more with the short call. The bigger risk with a covered strangle is on the put side of the trade. Just like selling a naked but you are agreeing to purchase more shares if your short put expires in the money. We all know that a stock can go to zero, its not likely but it’s possible and so you need to account for this. Mechanics: I generally sell a 20 or 30 Delta Strangle. I use the same rules I use for covered calls and puts in terms of looking at the chart for support and resistance. This is a great way for me to not only reduce my cost basis, but also dollar cost average! If I am assigned more shares from the put I will be ‘forced’ to buy low. I will sell options in the monthly expiration closest to 30 to 45 days to expiration. Is there support and resistance at these strikes? Usually there is! Is there enough premium at these strikes? Sometimes you have to bend your roles a little bit because you may not get as much premium as you want, but remember you are getting a dividend as well! You can also think about how we trade strangles using math-based principles. Math based traders normally sell strangles in high volatility environments and collect the premium without owning shares. So this strategy is similar to that except for you still have shares. If you see a lot of volatility or you don’t mind owning more shares consider a strangle instead of just a covered call! Trade Plan: As with any options trade the premium needs to justify the risk you are taking. In terms of your trading plan you have to determine how to manage a strangle. If you can’t don’t want more shares perhaps you consider a rule to close the strangle at 200% of the premium received. Make a plan for when the stock goes up, down or sideways! If the stock goes above my covered call I roll as long as I can for credits then I let the shares go. If a stock trades sideways this is great! I keep selling strangles over and over again reducing my cost basis. OR I close the trade and take my profits to buy something tangable. If the stock drops, my rule is to keep rolling the short put as it is tested. Meaning as the price touches my stirke I keep rolling for hope. I keep collecting credits closing my current put and selling a put further out in time and away from the money if possible. Remember you get paid for time. I'll do this until I am assigned shares or the stock bounces and my GTC order hits target. This does require buying power as you are agreeing to purchase another 100 shares for each put you sell. You should create rules that make sense for your plan and your account. For example, if IVR of the stock is high, maybe you sell a strangle instead of a covered call, assuming your account can handle another 100 shares of the underlying. Everyone says they want to buy low and sell high, a strangle helps you do just that on a smaller timeframe. The put is forcing you to purchase more shares, the covered call will sell your shares higher. Advanced stategies For the more advanced and active traders you can also leg into a covered strangle. I previously discussed waiting for multiple up days or for the stock to reach resistance to sell a call. You can follow this rule, and also wait for some down days or the stock to reach support to sell a put. You do collect more premium doing this but there are some down sides as well first of all you have to actively be watching or monitoring the stock through alerts. But sometimes you don’t get the move you need to sell the option. If the stock traded sideways a 30 Delta strangle is going to give you the theta decay you wanted. You would never have a chance to leg into the strangle so you missed out on that premium. That’s just a tradeoff of waiting for more premium. Ultimately the choice is yours. You can also sell 2 puts instead of just 1, but this obviously increases your risk and obligation to buy more shares. It is something I do not do very often unless i have a strong conviction on the stock or I want more shares. Conclusion: I do like selling strangles against my shares because it doubles the premium I receive. It also increases my risk so I make sure I have a plan and understand what could happen if the stock were to drop significantly. I know how to hedge my shares using long puts if necessary. Keep in mind no strategy is ever going to work all the time you will have to manage some losers so it’s important to have a plan. I will say this strategy has been successful for me throughout the years. After all it is combining two of my most favorite options trades. The covered call and the naked put. When one of the option’s strike price is being challenged the other strike is winning. So you are reducing some of your loss. By understanding your biggest risk is to the downside, and if you are buying at a support zone a covered strangle make a lot of sense. This is an amazing way to reduce your cost basis quicker than just selling calls. After the CAH example of a covered strangle I will discuss a collar and a super collar. Both of these can reduce your cost basis, but they also are a nice way to hedge your position as well. We’ll jump into all the details next time. Happy Trading Good Kids! Disclaimer: this is NOT financial advice. I’m basically just some dude on the internet who’s been trading a while, and I use the stock market as my primary source of income. None of this is financial advice it’s purely educational!
- Reducing Cost Basis with Covered Calls: A real life example
Continuing the series on reducing the cost basis with an example! Last week we discussed covered calls. If you haven't seen the previous articles we've already covered why reducing your cost basis is essential and discussed a straightforward method for determining where to buy shares. Let’s get back into the example. I owned 100 shares of CAH, remember I bought it off the red line at 69.50 a share. About a week later I collected a dividend of .50 a share. This means my effective cost basis is now $69. In the chart below you can see I sold a covered call using the logic I shared above. This is my actual trading plan. Look at the graphic below: Below is the premium I collected. The graphic below is an options chain. It looks super complicated. Don’t worry I felt like I would never understand this either. It’s really not that bad. I’ll do an article on this soon. Just focus on the red squares for now. The red square on the right is the price I’m willing to sell my shares (80) and the red square on the left is what you click to actually sell a call. I collected $115 which is the middle of those two numbers. This means I just reduced my cost basis by another 1.15 I’m agreeing to sell my shares at 81.15 (the strike of the call plus the premium collected). You are about to see what happens with a covered call goes ‘wrong’ in terms of capping my upside. But you will also see how I generate income. As you can see below CAH kept moving up, past my covered call. The purple line is the covered call I sold. Do you see how CAH went below the purple line? I had an alert to notify me, so I didn’t have to watch the chart! I figured that unless there was a trend change my shares are about to be gone before the next ex-dividend date. If you have a call in the money on the ex dividend date you will likely have your shares “called” away early. Because the person who bought that call you sold wants to collect the dividend, by converting the calls to shares! So when my covered call went out of the money I decided to roll this for a credit. I roll for credits to keep reducing the cost basis! I had the 80 May Call, I rolled it out to June, the options chain is below. So I closed the current covered call, by ‘buying it to close.’ I then sold the June Call. I closed the may call for $1.50 and I sold the June call for 3.00. So once again I reduced my cost basis by 1.50. That is 3 dividends! The options chain is below: Look at the chart below. My June call was deep in the money. Meaning the stock is trading at 85, and I sold the 80 call. I knew my shares would get called away on the ex dividend date. So what I did was roll out my covered calls one more time, I collected about 1.00 which was again another 2 dividends! So this is an example of where I capped my upside on the 100 shares. I could have sold the shares at 94, but you never really know if a stock is going to go straight up. I made $365 on the covered calls and $50 on the dividend. Next time lets look at another options strategy I love to use to reduce my cost basis: covered strangles. If you want more information you should join the GKT discord to discuss these tips in more detail and connect with like minded people who trade the stock market! Happy Trading Good Kids! Disclaimer: this is NOT financial advice. I’m basically just some dude on the internet who’s been trading a while, and I use the stock market as my primary source of income. None of this is financial advice it’s purely educational!
- Reducing Cost Basis with Covered Calls
Welcome back to the series on reducing cost basis. If you missed the first two articles, I highly recommend checking them out to get the full picture of this concept. We've already covered why reducing your cost basis is essential and discussed a straightforward method for determining where to buy shares. Today, we're diving into the world of covered calls, with a quick overview of what a covered call is, why I sell covered calls and how I decide when to sell my covered calls. A covered call is an easy and 'safe' strategy you can use to reduce your cost basis once you own 100 shares of a stock. By selling this call you are agreeing to sell your 100 shares to someone else if the stock hits that price. It's called a "covered" call because you have the shares to back up your agreement. Please note: this strategy only works if you have 100 shares. If you're just starting out with a smaller account, your goal should be to work your way up to being able to own 100 shares (ideally of a few companies for diversification). Without 100 shares of stock selling a call would mean you are selling "naked" calls, and that's a high-risk trade you should avoid! So, what's the deal with covered calls? Essentially, when you sell a call option, you're making an agreement to sell your 100 shares of stock at a price you've chosen before a specified date. In return for this agreement, you receive an upfront payment known as the premium. Think about covered calls like renting out your shares with an agreement to sell at the price you choose. If the stock doesn't hit that price in time, you keep your shares and you keep the premium they paid you, just like a landlord keeps the rent. I also think of this premium like an extra dividend. In fact, I sell calls more frequently than most of the dividends payments I receive from my stocks. Many stocks pay dividends one a quarter, I usually sell calls on a monthly basis, although depending on my overall strategy and the stock I'm trading, I might go as frequently as weekly! The reason covered calls are described as a safe options trade is the primary "risk" you take is capping your upside potential. You will see this in the next article when we jump back into the CAH trade I took. In simple terms, if the stock skyrockets, you've agreed to sell it at your chosen strike price, potentially missing out on more significant gains. But remember, locking in a profit is never a bad thing – trying to catch the very peak of a stock's rise can lead to disappointment. To maximize your premium while minimizing your risk, I pay close attention to the stock's candlesticks. If it struggles to close above its moving averages, I get more aggressive with selling calls. There are times when I will sell calls below my actual cost basis. If the stock is in a strong downtrend. However, when the stock is in a bullish trend, I wait for at least three up days and/or for the stock to approach a resistance before I sell a call. This is not time intensive, Remember you can and should set alerts to notify you when your stock is near resistance, allowing you to maintain a balanced life. The reason I often wait to sell a call is bullish moves yields more premium compared to down day. I used to sell 25 delta covered calls randomly, and this worked pretty well. But over time, I've discovered that timing my calls more strategically enhances the premiums I collect, which, in turn, accelerates my cost basis reduction by bringing in more income. Remember, the goal is not to complicate things but to make this strategy work for you in the simplest, most efficient way. It's all about maximizing those profits while minimizing your risk and workload. We will jump back into the CAH example next! If you want more information you should join the GKT discord to discuss these tips in more detail and connect with like minded people who trade the stock market! Happy Trading Good Kids! Disclaimer: this is NOT financial advice. I’m basically just some dude on the internet who’s been trading a while, and I use the stock market as my primary source of income. None of this is financial advice it’s purely educational!
- Cost Basis Reduction- The Initial Purchase of Shares
Good Kids Trading (GKT) wants you to think about ways you can reduce your initial purchase price of your shares (the cost basis), and it doesn't always have to be from buying more shares at a lower price. The more you reduce your cost basis the less risk you have. This is a very important concept that has made me a lot of money. I'm going to share with you a trade I took in Cardinal Health (ticker is CAH). I'm telling you all my 'secrets' so you can also build a plan you like, and/or you can copy some of my ideas. Keep in mind this is NOT financial advice, this is education from someone who's been doing this a while, but I'm not a professional and I'm not a certified advisor! Why CAH you might ask? Well CAH is a dividend aristocrat. You remember those, I wrote a whole series on GKT's way of trading Dividends. If you haven't read the series you should. I broke down exactly what I look for when finding dividend stocks for my portfolio. The power of dividends, other than some income, is that every time I collect CAH's .50 dividend that effectively reduces my cost basis by .50. I admit that doesn't seem like a lot but it adds up to 2.00 in cost basis reduction a year! Remember to zoom out, don't get too focused on the daily candles! When to buy shares What if you make a simple plan to buy a stock every time they touch the red/blue line? Which are the daily 100 and 200 moving averages. Create a watchlist of 5 or 10 stocks you REALLY like, create alerts for when they hit the price levels of the moving averages, that's as simple as it gets! I wrote about the power of moving averages. Look at the chart below if you bought CAH every time it hits the red line does that look profitable to you? I zoomed out because I want you to see how well this works. Back to my example from this year. I bought CAH in March at about $69.50 a share. As we look at the chart below do you see the double bottom that formed right on the 200 daily MA? To be clear, I didn't know it was a going to be a double bottom at the time I bought it. But I knew it hit the red line and I knew it was a possible double bottom. This is why GKT believes you should combine technical analysis with math based trades, or value investing. CAH was bouncing off the daily 200 moving average, retesting and bouncing again. BULLISH! Now zoom out to the weekly. We are buying off the weekly 50. That means we're buying off support. ALWAYS remember to zoom out to the weekly chart! This is additional information to help you build conviction to take a trade (or not take the trade.) The more checkmarks you get the better! I saw good things on both the daily and the weekly chart. I was feeling good about this, doesn't mean it will work, but I feel good about taking this risk. Be willing to take appropriate risk! Appropriate risk by GKT standards is 1% (maybe 2%) of your account. I use moving averages as an easy way to help you find a good place to buy a stock, I like this buy off the red line method because I am buying when a stock has reverted to the mean and it's at support. If you decide to buy a stock I encourage you to ensure you are buying at support! I want you to create a watchlist of stocks you like, look for stocks in a bullish trend that tend to bounce off the red and blue lines! Hint look at AAPL! Share your list with me email@example.com or post it in our discord. Next time we'll walk through how I reduced the cost basis of this trade, but your assignment if you want to learn the GKT ways is: Setup your charts with the 100 and 200 moving averages, the 50,20,10 ema. If you need help ask us on discord! Build a watchlist of dividend aristocrats. Set alerts around the 100 and 200 MA on your chart (alerts mean you don't have to watch the chart). Setup some trades when your stocks hits these levels (remember you can paper trade these). You should paper trade before you trade real money. See you next time, we'll walk through this trade so you can see how I reduced my cost basis even further and you will build your plan to reduce cost basis! If you want more information you should join the GKT discord to discuss these tips in more detail and connect with like minded people who trade the stock market! Happy Trading Good Kids! Disclaimer: this is NOT financial advice. I’m basically just some dude on the internet who’s been trading a while, and I use the stock market as my primary source of income. None of this is financial advice it’s purely educational!
- Unlocking the Power of Cost Basis Reduction: A GKT Approach - Introduction
I'm starting a new series on Reducing Cost Basis because I think reducing your cost basis is a powerful concept many traders/investors miss. It's important you don't just focus on your original purchase price, but instead think: "how can I reduce my cost basis", and you don't always have to buy more shares to do this! For me cost basis reduction is always on my mind. It's why I sell premium against my shares I want to reduce the effective purchase price to as little as possible. When we think about buying stock it easy to just focus on the trade price, but in the Good Kids Trading (GKT) universe, our perspective goes beyond that initial entry point. It's all about reducing your risk, and ultimately, enhance your profitability. If you know me, I’m always focused on the simplest way to achieve my trading objectives. This series isn't about selling you a shiny or complex solution; it's about sharing simple techniques I use, so you can learn, implement, and make better decisions. Over the course of this series, I’ll show you a few simple yet powerful tactics I use to reduce cost basis. We'll discuss the importance of dividend income, particularly from dividend aristocrats – companies with a history of consistent dividend payouts. These dividends aren't just pocket change; they are tools to help shave down your cost basis over time. We'll also explore selling premium, a strategy that includes covered calls and strangles. It's about generating income while gradually decreasing the cost basis of your stock holdings. And let's not forget the concept of pyramiding – buying more shares as a stock's price dips. It's not just about getting a good deal; it's about utilizing market dynamics to your advantage. So, if you're excited to discover the "secrets" of reducing cost basis without the need for complex formulas, stick with me! My next article is a real-life example involving Cardinal Health (CAH). It's all about learning, understanding, and taking your trading to the next level. Ready to dive in? See you next time Good Kids! Disclaimer: this isn't financial advice. I’m basically just some dude on the internet who’s been trading a while, and I use the stock market as my primary source of income. None of this is financial advice it’s purely educational!
- Unlocking the Power of Moving Averages
Today I’m discussing a technical indicator that I've used for decades. If I was forced to to only pick one technical indicator, hands down, it would be moving averages. I'll break down the types of moving averages, which ones I use, and I'll show you how I use them with a real life example. There are 4 kinds of moving averages. Simple Moving Average (SMA): This is the simplest form of a moving average. It calculates the average of price data over a specific number of periods. Exponential Moving Average (EMA): Places more weight on the most recent prices, and therefore reacts more quickly to price changes than the simple moving average. Weighted Moving Average (WMA): Assigns more weight to the more recent price data, similar to the EMA, but calculated differently. Smoothed Moving Average (SMMA): Is a blend between a Simple Moving Average and an Exponential Moving Average. I use the first two with the following setups: The 100 and 200 simple moving averages The 10, 20 and 50 exponential moving averages. And here is why: The 100 and 200 simple moving averages track a stock's average price over the last 100 or 200 days. The 10, 20, and 50 EMA give more weight to recent prices so I lean towards EMAs, for the shorter timeframes as they react quicker to recent price changes. The 100 and 200 give me a better longer term perspective. Combining moving averages with candlesticks has been a powerful tool for me over the years. I often lean on moving averages to pinpoint where I might want to buy shares of a stock, sell puts, as well as where I want to exit position. Watching how a candle interacts with moving averages helps me determine where the future direction of a stock might go. When I spot a stock closing above its moving average, it indicates the stock is bullish, but if a stock rejects right off that moving average that’s normally bearish. Lets look at PG. I have circled 10 examples (this is all the same chart just separated.) In the examples above you can see how the candles interact with moving averages, and I gave you my analysis on how I use moving averages to determine future moves. It doesn't always work, but nothing does. Do not forget to zoom in and out. The examples above were from the daily chart. But, you can see moving averages lining up whether you're zooming in on a 5-minute chart or taking a bird's-eye view on monthly data. If you see similar trends on different charts? That’s like a green light for my confidence, think of it like a double or triple confirmation. I use moving averages to choose my strikes for selling puts at support, and decide where to sell covered calls or even some shares when we hit a moving average. Yep, they’re just lines, but hey, they've been good to me. If they give you an edge, that’s a win in my book! This chart below is zoomed way out, but I have a strategy called "buy Apple off of the blue line" do you see why? Every time apple hits the 100 moving average on the weekly chart I buy some. It has been a good strategy for me. You can make your strategy as simple as buying stocks you like off of a moving average. It works when the stock is in an uptrend! Or you can make it as complex as you want as well. Just make a plan and start following it! If you found this useful let me know! If you want more information you should join the GKT discord to discuss these tips in more detail and connect with like minded people who trade the stock market! Keep Calm and Let Theta Do the Work! Until next time happy trading Good Kids!
- Trade Smart: Plan for Losing Trades
Hey Good Kids! A common issue I see new traders make is not accounting for what they should do if a trade goes wrong. We all think about profits and this blurs the bigger picture of our trade plan. If you don’t have a plan for each trade, or if you are just following someone else’s trade, and it goes against you it’s easy for you to exit the trade at the worst possible time. I know this because I’ve also done it. I see people do this all the time and today I want to remind you of how important it is to avoid large losses by not having a plan when a trade goes against your initial plan! I love to sell puts. As we've seen over the past couple of weeks, the market has pulled back, causing my short puts to suffer. When you see the p/l on a short put growing - a topic I've written about previously (do check it out!) - it's all too easy to let fear and anxiety take the reins. Remember, losing trades are so normal. Emotions run high, yes, but it's essential to keep them in check by having a plan ahead of time. Emotions, in these situations, prove to be a trader's worst enemy. Following a well-thought-out plan can often prevent the pain of witnessing a max loss. As the market retraces, it's no surprise that the puts I've sold are under pressure. I always account for this, it’s not fun but not panicking is the biggest key to my success. I often choose my put levels based on my comfort with owning the corresponding stock. If holding 100 shares of a stock seems daunting, consider setting up a stop loss on your puts. Alternatively, opt for spreads over naked puts to modify the risk profile. In light of the current market scenario, I am: Considering 'rolling for hope', extending them over time for credits and thus reducing the cost basis. Determining which puts to let expire ITM, leading to an assignment of 100 shares for each put sold. Waiting until 0 DTE for specific puts before making a final decision. I cannot stress this enough: always be prepared on how you will handle a trade when it’s a loser. No single strategy or method guarantees success across all market conditions. Stocks don't go straight up. It's crucial to arm yourself with a plan for when trades don't go your way. If you found this useful let me know! I love talking to people interested in trading (a quick thanks is always nice too). If you want more information you should join the GKT discord to discuss these tips in more detail and connect with like minded people who trade the stock market! Keep Calm and Let Theta Do the Work! Until next time happy trading Good Kids!
- How Alerts Boost My Profits While Cutting Screen Time
Hey, everyone! After creating and maintaining my watchlists, lets talk about the power of alerts. Just like my watchlists, my alerts also follow my trading plan. Whether you're using TradingView or a different broker, you can easily set up these alerts. But remember, if you’re on TradingView, your subscription level might limit how many alerts you can have. I keep my alerts simple, and I make sure I don't setup too many. If you have alerts for everything you will start ignoring your alerts making them pointless. Only setup an alert if you want to take action or your really need to know. My most basic alert is looking for buy and sell levels. Remember when we talked about setting support and resistance on the charts of our watchlists? Well, for my favorite stocks, I like to also set alerts around those levels. This way, I get a heads-up to maybe sell some puts or buy more shares. For the most part, my price alerts tend to be on the support side. But I do setup alerts at resistance for stocks where I sell covered calls, or stocks, like CSCO and INTC, that I like to short. By keeping my alerts simple and relevant they make sure I don’t miss anything. It might sound basic, but trust me, these alerts save me from missing good trades. I don’t have to be glued to my screen, I can just get on with my day and let the alerts tell me when I should pop back in because I know the alerts I have are meaningful. Slightly more complex, but I also use TradingView to set up alerts on technical indicators for things like the DMI and MacD. This means I get a heads-up when something interesting is happening with these indicators. Yes these alerts trigger more often, I have them setup to notify me in less intrusive ways. These go to a special folder that I just review once or twice a day. As I go through the list of alerts if I spot a good setup, I turn to my color-coded watchlists to help me keep track. So I’m taking a large list of stocks, waiting for an alert on the technical indicator I like to trade, then narrowing down the best trades using a dynamic watchlist. You see how it all ties together? My trading plan, watchlists, and alerts all work together in a system. This system takes large amounts of stocks and keeps narrowing down the information until I'm looking basically at what I believe is the most relevant trades. This is how I keep my trading time down while still making sure I'm on top of everything. This is just my way of doing things. I hope it gives you some ideas, but don't forget to make it your own. If you found this useful let me know! I love talking to people interested in trading (a quick thanks is always nice too). If you want more information you should join the GKT discord to discuss these tips in more detail and connect with like minded people who trade the stock market! Keep Calm and Let Theta Do the Work! Until next time happy trading Good Kids!
- Mastering Watchlists: Your Essential Guide to Efficient and Effective Stock Trading
I’m continuing the series on the top 6 ways I minimize my trading time. In the previous post, I discussed my watch list organization. Think of your watchlists as a tool to help you stay focused your watchlists should be created in conjunction with your trading plan. They should help you sort through the mountain of stocks to trade within minutes and minimize your trading time. So be sure to build watchlists for the strategies in your trading plan! Side note: If you don’t have a trading plan, you need to create one. If you want to be consistently profitable and successful you need your own trading plan. If you are just starting out use someone else’s plan! It’s not plagiarism it’s avoiding having to reinvent the wheel. You should create your watchlists based on your 'favorite' stocks (discussed last week) and your favorite strategies. When I talk to traders many of them don’t spend time building watchlists in a meaningful way and even fewer maintain them. This is a call to action for you to take advantage of this valuable tool. A well maintained watchlists builds the foundation for freeing up your time to take the best trades using strategies from your trading plan. I learn though examples, so I’m going to share my process. Keep in mind everyone is different. My risk tolerance, my account size, my methods are probably not the same as yours, so make your on process, but you can still apply these principals. Watchlists by strategy Daily Index: The first thing I do is review my daily watchlist that I check every day before the market opens, just to gauge the mood of the market, looking at the major indexes. I discussed this last week. Selling puts: is my favorite strategy for so many reasons (I’ll dedicate an entire article to this soon!) So as soon as the market opens, I sort my main watchlists by percent change, I’m looking at over 200 of my favorite companies having a big down day (put premium is higher on down days). Dividend Stocks: You already know I have my favorite dividend stocks on a list, so I will sort this by % down looking to buy shares or sell puts at support depending on the next ex dividend date and premium of the puts. I also check the calendar that I discuss at the bottom of this article under Built-In watchlists. Pillars: I keep a list of stocks I believe will appreciate over time, quality companies that are more investments than trades. (I'll def trade these as well, but this list is mainly longer term). This isn't something I look at multiple times a day, but I do review this watchlist just looking for opportunities. This watchlist is more so, to make sure I have all my alerts setup (which we'll discuss next week). Sideways stocks: Theta decay is my best friend, it might sound weird but I actually keep up with stocks that are consolidating for long periods of time. This list is subjective and as I review other stocks I will often add them to this list. These are just some examples, you should have a watchlist or a stock screener (either through your broker, or using a site such as finviz) to sort through the mountain of stocks out there! Maintaining your watchlists Don't make the mistake of building a list and not maintaining it! Taking a couple of minutes to update your list will save you time in the future. Take a couple of minutes for the following maintenance tasks: Adding and removing stocks from watchlists: The more you trade, the more comfortable you get with your strategies you'll discover companies that become your favorites to trade as well. Conversely, you'll also identify those that seem to lose for you. After a few losses on the same underlying stock, I remove it from my list. After all, there are so many other stocks out there! Keep adding and removing companies that fit the watchlist on a continuous basis. Add Support and resistance: Start adding support and resistance to the charts in trading view. I like to color code my lines. Make your own system, but when I see a thin purple line I know there is weekly support or resistance (blue lines are normally on the daily chart), and if you add a line today, it will be there for months and years to come! As you can see on my apple chart, yes it takes a few minutes, but I promise this saves you so much time in the future! Remember buy at support sell at resistance is a money making strategy. Here's an example from Apple: Color coded watchlists Trading view has color watchlists: I strongly recommend you create your own system using the colors. I use these dynamic lists mainly for the short term or positions I’m currently in. This is obvious, but I want to remind you that you can not have the same underlying on two different colors! So that's why I try to use these for short term. Again this is my system and just to give you some ideas, you should make your own system! Red= Positions I’m in that are losing and I need to monitor (I also use alerts, more on this next week) Blue= I use this for stocks that have a MacD/Dmi Cross (from my alert list) Green= Stocks I’m looking to get into bullish Orange= Upcoming Ex-dividends Purple= Stocks I'm looking to get into bearish Pink List= Stocks that trade sideways. For example if I’m going through my dividend watchlist and I see a stock that might be a good buy, I’d tag that stock to the green list. (so its on my dividend list and it’s also on the green list). Then I can just sort through the green list when I’m ready to add more bullish delta to my account! So you can see I create my own watchlists based on criteria such as dividends, profitable companies, companies trading sideways, etc. Then as I run through them I color code the ones I’m super interested in the short term. This lets me keep a broad list of stocks that work through multiple stock rotations, but I can run through the color list through the week to save time! Built-in watchlists: Do not underestimate the value of default watchlists from your broker, tradingview, or stock screeners like finviz. You do not have to reinvent the wheel, if the broker or website has the information out there and it’s ‘free’, use it! Here are a few of my favorites: Tastytrade: Dividend Aristocrats: I search by IVR- as discussed in the dividend series the premium on these isn’t as much as a growth stock, but looking for higher than normal premium in a company that pays a dividend is a favorite. Liquid Symbols: If I’m low on trades, I don’t see anything great on my watchlists or alerts I’ll use this list (again sorted by IVR) to look for trades. Think or Swim: This process is definitely not as optimized as I should be. (we all need work, right?) I used to use dividend websites to find upcoming ex-dividend dates (this is the date you need to own shares to get paid the dividend) but the sites normally try to sell you a subscription or their data isn’t that great. Each Sunday I go to Marketwatch, only check the dividend box and see which stocks are going ex dividend the upcoming week. (pro tip go ahead and click on Monday of the following week in case there is a Monday ex dividend date). Trading View Hotlist: Trading View’s hotlist is a ‘fun’ list showing which stocks getting traded the most. Even if I don’t make a trade it’s good to know what is moving and see if there is a trade out there. The key for me is finding a system that I understand, maintaining the lists, adding support and resistance to the charts, and removing stocks that lose repeatedly. If I find a new stock I’ll add them as soon as I see it. It’s about remaining active and not taking the power of a well maintained watchlist seriously. Setting Alerts and getting notifications are also a key to minimizing my trading time. I’ll discuss my system next week to help give you some ideas on how you should incorporate them into your trading plan! If you found this useful let me know! I love talking to people interested in trading (a quick thanks is always nice too). If you want more information you should join the GKT discord to discuss these tips in more detail and connect with like minded people who trade the stock market! Keep Calm and Let Theta Do the Work! Until next time
- Trade Smart: The Power of Effective Watchlists
Last week I shared 6 tips on how I minimize my screen time, using watchlists are one of the top ways I minimize my trading time. Like most things in trading the specifics boil down to a personal preference. What I do might not work for you, but in the GKT spirit I’m always an open book. Maybe you can learn from me, maybe you even have suggestions for me. Most of my watchlists are self-created using trading view. (that's an affiliate link if you decide to subscribe I'd appreciate you using that.) There are a couple exceptions that I'll share below. This is not a sales pitch for trading view, but I really like the product, I use it daily, and I pay full price. Separate Watchlists You can choose to have a single watchlist with lots of companies, or you can make as many lists as you like. I divide my watchlists based on the follow factors: Time Horizon and Account Type (like IRA, short term account, longer term account) Company Fundamentals Specific Trading Strategy This means some of my watchlists have duplicate underlings on multiple watchlists (for instance Apple appears on more than one list). This strategy works best for me because my watchlists are shorter and I find I can stay focused on my strategy and make the best trades. Examples of my Watchlists In the article I discussed a 'Quick Morning Review' this is done via a watchlist. I scroll through the following list every single morning 30 mins before market opens. Do you notice every stock on this list is purple? Trading view has built in color coded lists (below) and I encourage you to use them. I use each of these for different purposes (Purple is my daily list, blue is my possible swing trades, red is positions i need to monitor for protection, etc). Build your own system but use these! ETF’s: This includes the following, I like to watch this to keep up with market rotations that I talked about back in the dividend blog post. XLC (Communication Services Select Sector SPDR Fund) XLY (Consumer Discretionary Select Sector SPDR Fund) XLP (Consumer Staples Select Sector SPDR Fund) XLE (Energy Select Sector SPDR Fund) XLF (Financial Select Sector SPDR Fund) XLV (Health Care Select Sector SPDR Fund) XLI (Industrial Select Sector SPDR Fund) XLB (Materials Select Sector SPDR Fund) XLRE (Real Estate Select Sector SPDR Fund) XLK (Technology Select Sector SPDR Fund) XLU (Utilities Select Sector SPDR Fund) Dividend Companies: Mainly Dividend aristocrats but also some of my other favorite dividend stocks as well. I wrote a complete series on how I use dividend stocks as a staple of my trading. Check out the series! Long Term Quality Companies: There are companies I believe in long term and don’t mind holding for more than 5 years. Stocks I normally pyramid into. I have stocks like GOOGL, AAPL, COST, WMT, JNJ, SO, PEP, WM. (its highly subjective to you). Money making companies:- This list is strictly based on fundamentals then pared down to companies I like to trade. High Liquidity: This is my math based favorite of companies that have high liquidity. I think I got this list from Tasty Trade its hundreds of underlings. Sideways Companies: I like to trade companies that trade sideways or are range bound, so when I see a stock not moving too much it goes on this list. Futures: Currencies, Commodities, and Forex- again this list was from tasty trades cheat sheet, but you can find it other places as well! In addition to the watchlists I create, I do also use watchlists within TastyTrade and the hotlist within trading view! These are lists with underlyings I didn't create, but when I don't see trades I like, these lists help me look outside the box. Next time I’ll talk more about how I sort my watchlists, how I maintain the watchlists and how I trade based of my watchlists. If you found this useful let me know! I love talking to people interested in trading (a quick thanks is always nice too). If you want more information you should join the GKT discord to discuss these tips in more detail and connect with like minded people who trade the stock market! Happy Trading Good Kids!
- 6 Tips To Maximize Profits with Minimal Screen Time: My GKT Formula to Trade Smart
With these 6 tips I've built a life where I trade for roughly half an hour daily. And yes, my account is decent sized. And yes, trading is my primary income source. It's been a journey of learning, growing, and adapting, but with the right tools and mindset, you to can pave your path to building passive income through trading. 1. Build Watchlists (and keep them updated): I keep watch lists of my 'top' companies. I have watchlists for multiple sectors, companies that make money, and the most liquid stocks in the market. It's VERY important to draw weekly support and resistance lines for quick reference on the stocks you trade the most! 2. Set Alerts: Instead of watching for a pull back or relying on technical indicators, like the MacD Cross, I use tradingview and or my broker's alerts to notify me. These notification are highly customizable and go directly to my phone, so I'm always in the loop even if I'm not near the screen. 3. Quick Morning Review: Every morning I take a brief look at pre-market data for SPY and QQQ. No one knows where the market is going to go, but looking every morning gives me an understanding of where the moving averages lie, and keeping up with the market every day (even if it's just for 2 minutes) is crucial for building market awareness, spotting support and resistance points, and staying informed. 4. Plan Ahead: I familiarize myself with the key events for the upcoming week. This includes earnings reports, federal reserve meetings, or significant economic data. Being proactive keeps you prepared. Even though we don't know exactly what will happen, knowing that a binary event is coming up is key to my trading. We discuss this in our discord! 5. Trade the plan: I stick to my plan, I go through my watchlists and look for trades using a plan I've build and believe in. I change my plan as the market conditions change, but knowing the plan, believing in the plan, and executing my plan is like second nature to me. It's become mechanical so there is no emotional trading! 6. Immediate GTC Orders: Once my trade fills, I instantly set a Good Till Cancelled (GTC) order for my profit target. This ensures I capitalize on price movements, while I'm not watching in real-time. I have GTC orders sometimes fill the same day while I'm doing other things not even looking at the market. These tips are how I make money in the market. I have a lot of experience, and I've optimized my trading routine to fit into just about 30 minutes a day. I've been doing this a while so it might take you longer at first, but this is exactly the things I do to minimize my screen time and make money in the market! If I can do this you can too. If you found this useful let me know! I love talking to people interested in trading (a quick thanks is always nice too). If you want more information you should join the GKT discord to discuss these tips in more detail and connect with like minded people who trade the stock market! Happy Trading Good Kids!
- Delta and Theta Concepts for the New Options Trader
Welcome to Good Kids Trading! At GKT, and particularly in our FREE Discord channel, http://www.goodkidstrading.com/join, we talk a lot about Delta and Theta. “I’m just going to let Theta decay work.” “I need more positive Deltas so I added this position.” “You want positive Theta.” “This strangle has gone out of my comfortable range, I’m rolling one side to neutralize Delta.” Delta and Theta are both Greek letters and are just two of the main “Greeks” that option traders care about. In this article we will discuss these two Greeks but on a level that is needed for the new options trader to get a fundamental understanding. Don’t worry, no fancy math here, just the fundamental concepts. For those who want the quickest possible explanation, here it is: Delta is Direction Theta is Time If you already understand what I mean by that, check out these articles that are a little more advanced... One Trader's Method to Handle Assignment Build Income through Dividend Stocks Don't Over-Manage Trades What is Options Delta? Delta is direction. Before we even mention an options contract, let’s talk about simple shares of a stock. When we own 1 share of a stock, if the stock’s price changes up or down by $1, then we will have made or lost $1. If it went stock goes up or down by $5, $10, or $19.21, then our profit or loss will be exactly the same as the price move. Simple enough right? Taking the same concept, imagine if we only buy 30 shares of stock and the stock price goes up $5. We would be up $150. If we bought 100 shares of stock and it goes down $5, we would be losing $500. None of this should be a new concept if you have ever bought stock before. Moving to options, each option contract has a Delta that gets calculated by some math formula beyond the scope of this article. Each options contract has a different Delta. By default, calls have positive Delta and puts have negative Delta. The easiest way to think about Delta is that the number of the Delta is roughly equivalent to that same number of shares. Looking at the 430 SPY call option as an example, it carries 0.71 Delta, which is roughly equivalent to buying 71 shares of SPY. Remember 1 option contract covers 100 shares of stock, so 0.71 Delta multiplied by 100 shares is 71. The SPY 440 call has 0.50 Delta so roughly equivalent to buying 50 shares of SPY. Fun fact: The at the money (ATM) options almost always have 0.50 Delta. Having more Delta is the same concept as buying or selling more shares. Buying 10 shares of a stock would cost less than buying 40 shares, and Delta follows the same trend as you can see from the screenshot above. But this still doesn’t explain why Delta is direction, so let’s get to that right now. Positive Delta options gain value as the price goes up. Positive Delta is like buying shares. Negative Delta options LOSE value as the price goes up. Negative Delta is like shorting shares. When you have negative Delta, you want the price to go down. Regardless of whether your option strategy has one leg, or it combines several legs with different numbers of contracts, your broker will calculate the total Delta for the position. If it is positive, then you set up a bullish trade. If the Delta is negative, then that is a bearish trade. How bullish or bearish is determined by the size of the Delta. Hopefully now you understand why Delta is direction. At GKT we set up bullish, bearish, and neutral trades. Our really bullish trades have large amounts of positive Delta, really bearish trades have large amounts of negative Delta, and neutral trades are close to 0 Delta. The closer to zero the delta is, the more we want the stock to not have any large moves in either direction. With directionality comes risk. If you are extremely bullish and your options strategy has +80 Delta, this is equivalent to buying 80 shares. If you get the bullish move you want, you will win big. If the stock goes down, you should expect to see a large losing trade on your hands. Tailor your Delta to match how much or little of a directional move you expect the stock to make. What is Options Theta? Theta is time. Each option contract comes with an expiration date. The number of days to expiration (DTE) reflects how much time is left on the contract. Notice how when there are 90 DTE the curve is fairly flat. This shows how little of the option's premium is lost over time. Compare that to 21 DTE and 0DTE where the curve rapidly approaches vertical. This shows that a lot of option premium is lost over a very short period of time. To illustrate this concept, imagine you are some guy named Eric and you wanted to write a blog article. The Head Honcho, let’s call him Justin, says, “Can you get a draft to me in the 60 days?” “No problem!” Eric says. Well wouldn’t you know it, Eric is a procrastinator. 60 days is forever and a half away to him. Time passes, and 21 days until the article is due. Justin asks, “Hey bro, you know me, no pressure but if you can’t work on this, I’ll roll the idea to someone else.” “No, I’ll get it taken care of,” affirms Eric. After all, 3 weeks is almost forever away, Eric's got plenty of time. Now it is the week of the article’s deadline and all of the sudden Eric begins feeling the pressure and maybe makes an outline or jots a few thoughts down. Then the day or two before it is due, Eric finally gets going and works away in a frenzied state. In fact, he made final edits and sent the article right at 3:59pm EST, just in the nick of time. The emotional turmoil Eric experienced is similar to how Theta works. Like Delta, Theta has a very complex math formula that is beyond our purposes here. Unlike Delta, Theta is always listed as negative for both the calls and the puts. Theta is always negative because options chains assume you are buying the option. Unfortunately for all of us, time will do nothing but tick away. With each passing moment, the expiration date draws closer and there is less time contributing to the option’s value. Theta is a procrastinator like Eric. Have you ever been caught in traffic when you are running late for an appointment? The value of that time is exponentially more valuable when you have 5 minutes to spare compared to when you have 5 hours. ***Insert typical free Theta decay curve*** Time doesn’t carry much value when the deadline remains far away but as the expiration date closes in, that time becomes extremely precious and even more valuable. At GKT we love having positive Theta. When your trade has positive Theta, this means you make money as time passes. Depending on the type of trade you make, your main goal may even be to profit from the passage of time. The only way to get positive Theta is to sell an option. When you sell an option, you are selling that time value to someone else. As time passes, which it always will, the time value will go down. The larger the Theta, the larger the influence time has on the option’s price. As powerful as Theta may seem, it is but one component of an option’s price. How to Use Theta and Delta Delta is direction and Theta is time. Take a look at this example. This is definitely NOT an options strategy. I literally clicked 4 different times on the screen to come up with this trade for the purposes of this example In the green box, I have boxed in both Delta and Theta. Looking only at these two numbers, answer these questions for me. 1. What direction would I need SPY to move for this trade to be profitable? 2. If SPY’s price doesn’t change but time continues to tick by, would I expect to make money or lose money? 3. What if time passes and SPY increases in price by a large amount, will I be profitable? Keep in mind this is all theoretical but this mental exercise can and should be done on every options trade you make. Now that you’ve had a second let’s go over the answers. 1. What direction would I need SPY to move for this trade to be profitable? This trade has negative Delta. In this trade, I have -118 Delta which is very close to saying I have shorted 118 shares of SPY. Negative Delta trades, and shorting shares, both are profitable when the price goes DOWN. 2. If SPY’s price doesn’t change but time continues to tick by, would I expect to make money or lose money? This trade has positive 28 Theta. Positive Theta means that, all else being equal, my trade should become more profitable as time passes. 3. What if time passes and SPY increases in price by a large amount, will I be profitable? This is a "put it all together" type of question and one where the answer becomes more intuitive the more you trade options. As important as Theta is, if you have a directional trade and the price in the opposite direction, Theta will help reduce the loss but that may be about it. In this trade we have -118 Delta which is an extremely bearish trade. Because we are extremely bearish, if SPY increases in price, we will be directionally incorrect in a big way. 28 Theta isn’t a small amount of Theta but it almost certainly won’t counteract being wrong on the price movement. Next Steps... If you have any questions about the concepts in this article, our Discord is full of options traders who are happy to share their thoughts and provide explanation behind the trades. If you are really serious about learning and mastering options, joining in on those real time discussions is the best way to accelerate your learning. http://www.goodkidstrading.com/join