Elliott-Wave Fibonacci Spread Trading
Presented by Ryan Sanden
The inevitable disclaimer:
Nothing presented constitutes a recommendation to buy or sell any
security. While the methods described are believed to be effective in
the long run, no guarantee of efficacy is being made. Trading involves
risk. I will in no way be responsible for any decisions or trades made as a
direct or indirect result of this material. Full understanding of all trading
instruments and exchanges is the sole responsibility of the trader.
Ryan owns positions in the following related securities discussed herein: SDS
Principles of Market Trends
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• Markets move in trends.
• Movements with the trend are called “impulses”.
• Movements against the trend are called “corrections”.
• Trends eventually change.
Trend is UP
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Principles of Market Trends
• Trends depend on their time frame.
• Green = uptrend
• Red = downtrend
6 Trends
3
Principles of Market Trends
• Trends depend on their time frame.
• Green = uptrend
• Red = downtrend
48 Trends
4
Principles of Market Trends
• Trends depend on their time frame.
• Green = uptrend
• Red = downtrend
1 Trend
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Principles of Market Trends
• Trends depend on their time frame.
• Green = uptrend
• Red = downtrend
Which is correct? They all are. Which you trade is up to you.
Planning to trade one trend while acting on movements in another trend
is called a trend relativity error. It is one of the most common trading mistakes.
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Principles of Elliott Wave Theory
Nguyên tắc của lý thuyết sóng
Elliott
Markets tend
to advance in 5 waves, and retrace (correct) in 3 waves.
Thị trường có xu hướng tăng trong 5 sóng và thoái lui (đúng) trong 3
sóng.
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B
3
1
A
4
C
2
Larger-degree uptrend (higher time frame trend is up)
Xu hướng tăng mức độ lớn hơn (khung thời gian cao hơn là xu hướng tăng
)
7
Principles of Elliott Wave Theory
Markets tend to advance in 5 waves, and retrace (correct) in 3 waves.
5
B
3
1
A
4
C
2
Larger-degree uptrend (higher time frame trend is up)
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Principles of Elliott Wave Theory
Markets tend to advance in 5 waves, and retrace (correct) in 3 waves.
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C
4
A
1
3
B
5
Larger-degree downtrend (higher time frame trend is down)
Xu hướng giảm mức độ lớn hơn (khung thời gian cao hơn là xu hướng giảm)
9
Principles of Elliott Wave Theory
Markets tend to advance in 5 waves, and retrace (correct) in 3 waves.
2
C
4
A
1
3
B
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Larger-degree downtrend (higher time frame trend is down)
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These structures “repeat”.. That is, they connect together:
Các cấu trúc này “lặp lại”.. Tức là chúng kết nối với nhau
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If I take away the colors and labels.. It really looks like the stock market.
Yet, the underlying order is there if you know what to look for.
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Nếu tôi loại bỏ màu sắc và nhãn mác.. Nó thực sự trông giống như thị trường chứng khoán.
Tuy nhiên, trật tự cơ bản là có nếu bạn biết những gì để tìm kiếm
They don’t just infinitely repeat. That would be too easy. Really, they
combine to make “higher degree” waves. So, what looks like
repetition is really just larger degree waves unfolding.
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3
Chúng không chỉ lặp lại vô hạn. Đó sẽ là quá dễ
dàng. Thực sự, Chúng kết hợp để tạo ra sóng
“cấp độ cao hơn”. Vì vậy, những gì trông giống
nhưsự lặp lại thực sự chỉ là những đợt sóng lớn
hơn đang diễn ra
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An Idealized Market
Một thị trường lý tưởng hóa
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Major Degree Waves – “The Big Trend”
Sóng lớn – “Xu hướng lớn”
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Intermediate Degree Waves – “The Major Moves”
Sóng trung cấp – “Những chuyển động chính
”
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Minor Degree Waves – “The Daily Wiggles”
Sóng nhỏ – “Những khúc lắc hàng ngày”
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Nested Waves. Elliott-Wave “map” of the market.
Sóng lồng nhau. “Bản đồ” sóng Elliott-Wave của thị trường
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Nested Waves. Elliott-Wave “map” of the market.
Intermediate B of Major 2
Intermediate 1 of Major 1
Minor 4 of Intermediate 3 of Major 1
Minor A of intermediate 2 of Major 1
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S&P 500 Example:
Daily Bars.
September 2007 through January 2008
(Market Top)
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Q: That’s Wonderful. How can I use this knowledge?
A: The better we can predict where we are in the structure, the
better we can predict the next move in the market.
For example, let’s pretend that the above chart is “now”.
We can see enough to clearly identify the above wave count.
We just finished a “2” of the of the “green” waves, and now we expect
a “3” of the green waves. Therefore, we are bearish. This is true even
though the casual observer looks at the chart and sees a bottom!
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Q: How do we know when we’re wrong?
A: This is a very important question. When we don’t have a firm opinion
of the market anymore, we should exit the trade. This becomes a stop
loss. The waves offer natural stop loss points!
(stop)
?
So, we can draw the waves as best as we think. Then, if the market hits our
stop loss, then we will wait until we have a new clear picture to trade.
Sometimes we’re wrong about the wave count. That’s OK. We’re right often
enough to make this methodology worthwhile.
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Fibonacci
To make life easier, each wave has a “target” region for where it should end.
We use Fibonacci relationships to plot these on the chart in advance.
For example, Wave 2 target is 50%-78.6% of Wave 1:
2
78.6% retracement
61.8% retracement
50.0% retracement
1
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Green Wave 1 down is finished. Currently in Green Wave 2 up.
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This wave should end somewhere between $145.99 and $150.71. ($147.94 is best.)
C
A
B
Getting an “ABC” from here would be ideal…
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That would be a reversal.
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Now, we have to “project” a likely extent for Wave 3:
Wave 3 is generally 1.000 to 1.618 of Wave 1, projected from the end of Wave 2.
This is technically named an “alternate price projection”.
2
1
100%
161.8%
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Although it’s a little more tricky, we can project time the same way:
Wave 3 is generally 1.000 or so (in time) of Wave 1, projected from the end of Wave 2.
This is technically named an “alternate time projection”.
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1
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Combining these, we can get a general idea for price and time:
2
1
100%
161.8%
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Looks like we’re shooting for 123 to 133 sometime in the middle of January.
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Price and Time Targets for Various Waves
Note: There are others! I am just presenting basic ideas here.
Wave
Price
Time
Wave 1
Can’t be projected. This wave is created
by fundamentals and is how
fundamentals drive the market.
Can’t be projected. This wave is created
by fundamentals and is how
fundamentals drive the market.
Wave 2
50% to 78.6% of Wave 1
Around 61.8% of Wave 1
Wave 3
100% to 161.8% of Wave 1,
projected from end of Wave 2
Around 100% of Wave 1,
projected from end of Wave 2
Wave 4
38.2% to 61.8% of Wave 3
Around 61.8% of Wave 3
Wave 5
100% of Wave 1, projected
from end of Wave 4
Around 100% of Wave 1,
projected from end of Wave 4
Wave A
Can’t be projected. This wave is created
by fundamentals and is how
fundamentals drive the market.
Can’t be projected. This wave is created
by fundamentals and is how
fundamentals drive the market.
Wave B
50% to 78.6% of Wave A
Around 61.8% of Wave A
Wave C
61.8% to 161.8% of Wave A,
projected from end of Wave B
Around 100% of Wave A,31
projected from end of Wave B
How it played out:
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Review of Process (thus far)
• 1. Label Waves
– Determine Bullish or Bearish
– Determine Stop Loss
• 2. Perform Price and Time Projections
– Get an idea for approximately where and
when we should expect trend reversal.
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Entries
Projected
Resistance
Reversal Day
•Close below today’s open (red candle day)
•Close below yesterday’s close (down day)
•Stronger signal if it made a new high as well.
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Entries
Projected
Resistance
Stop
Risk
Sell Short on Close
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Entries
Projected
Resistance
Stop
Loss Stopped Out
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Entries
Projected
Resistance
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Entries
Reversal Day
Projected
Resistance
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Entries
Stop
Projected
Resistance
Risk
Sell Short on Close
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Entries
Stop
Risk on
Principal
Paper
Profit
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Entries
Stop
Loss :-(
Credit crisis was
actually a novice
accounting mistake.
Oops.
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Trailing Stops
N-Day high or N-Day low. N is a number.
For example:
•3-Day high
•1-Day High
•2-Day Low
3-Day High:
Highest high of last 3 days prior to and
including the extreme point, non-inclusive
of “inside days”.
Inside Day:
A day whose range is “inside” the previous
day’s range.
Extreme Point
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Trailing Stops
N-Day high or N-Day low. N is a number.
For example:
•3-Day high
•1-Day High
•2-Day Low
3-Day High:
Highest high of last 3 days prior to and
including the extreme point, non-inclusive
of “inside days”.
1
Extreme Point
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Trailing Stops
N-Day high or N-Day low. N is a number.
For example:
•3-Day high
•1-Day High
•2-Day Low
3-Day High:
Highest high of last 3 days prior to and
including the extreme point, non-inclusive
of “inside days”.
1
Extreme Point
Inside Day. Its range is “inside” the previous day’s range.
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Trailing Stops
N-Day high or N-Day low. N is a number.
3-Day High:
Highest high of last 3 days prior to and
including the extreme point, non-inclusive
of “inside days”.
For example:
•3-Day high
•1-Day High
•2-Day Low
2
1
Extreme Point
Inside Day. Its range is “inside” the previous day’s range.
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Trailing Stops
N-Day high or N-Day low. N is a number.
3-Day High:
Highest high of last 3 days prior to and
including the extreme point, non-inclusive
of “inside days”.
For example:
•3-Day high
•1-Day High
•2-Day Low
3
2
1
Extreme Point
Inside Day. Its range is “inside” the previous day’s range.
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Trailing Stops
N-Day high or N-Day low. N is a number.
For example:
•3-Day high
•1-Day High
•2-Day Low
3-Day High:
Highest high of last 3 days prior to and
including the extreme point, non-inclusive
of “inside days”.
3
3-Day High
Extreme Point
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Exits
Stop
Risk
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Exits
Stop
Risk
Nearest Minor Pivot
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Exits
Stop
Risk
Nearest Minor Pivot
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Exits
Stop
Risk
Nearest Minor Pivot exceeded
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Exits
Old Stop
Profit
New Stop
(3-day High)
Paper
Profit
Exceeded Pivot – Move to Trailing Stop
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Exits
Trailing Stop
(3-day High)
Profit
Paper
Profit
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Exits
Profit :-/
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Exits – Towards Price Target
Projected Support Levels
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Exits – Towards Price Target
Trailing Stop
(3-day High)
Projected Support Levels
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Exits – Towards Price Target
Trailing Stop
(3-day High)
Projected Support Levels
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Exits – Towards Price Target
3-Day High
2-Day High
Getting Close:
Switch to 2-day high.
Projected Support Levels
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Exits – Towards Price Target
Region Hit:
Switch to 1-day High
Projected Support Levels
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Exits – Towards Price Target
Region Hit:
Switch to 1-day High
Projected Support Levels
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Exits – Towards Price Target
If this is a major collapse,
we want to hang around for it.
Therefore, we continue with the
tight trailing stop instead of just
taking profit immediately.
Region Hit:
Switch to 1-day High
Projected Support Levels
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Exits – Towards Price Target
Reversal DayClose trade.
Go long?
Projected Support Levels
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Trend-Continuation Entries
Projected Resistance Levels
Reversal Day– But we missed it.
Should have sold short,
but I didn’t see it. Still good profit
potential left though. What now?
Projected Support Levels
Potential profit. However,
risk is too large to enter
now (stop loss too far away).
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Trend-Continuation Entries
Inside Day Trend-Continuation Entry
Stop loss goes here
Sell Short if price exceeds this
Inside day. This day’s range is “inside” the previous day’s range.
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Trend-Continuation Entries
Outside Day Trend-Continuation Entry
Stop loss goes here
Sell Short if price exceeds this
Outside day. This day’s range is “outside” the previous day’s range.
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Trend-Continuation Entries
Projected Resistance Levels
Reversal Day that we missed
Projected Support Levels
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Trend-Continuation Entries
Projected Resistance Levels
Reversal Day that we missed
Projected Support Levels
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Trend-Continuation Entries
Projected Resistance Levels
Outside Day
Reversal Day that we missed
Projected Support Levels
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Trend-Continuation Entries
Projected Resistance Levels
Stop loss will go here
Enter if we go below this
Projected Support Levels
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Trend-Continuation Entries
Projected Resistance Levels
Stop loss will go here
Enter if we go below this
Projected Support Levels
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Trend-Continuation Entries
Projected Resistance Levels
Stop loss will go here
Enter if we go below this
Projected Support Levels
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Trend-Continuation Entries
Projected Resistance Levels
Stop
Entered here
Projected Support Levels
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Trend-Continuation Entries
Projected Resistance Levels
Stop
Projected Support Levels
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Trend-Continuation Entries
Projected Resistance Levels
Stop
Projected Support Levels
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Trend-Continuation Entries
Projected Resistance Levels
Stopped Out
Figures.
Projected Support Levels
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Trend-Continuation Entries
Projected Resistance Levels
Projected Support Levels
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Trend-Continuation Entries
Projected Resistance Levels
Projected Support Levels
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Trend-Continuation Entries
Projected Resistance Levels
Inside Day
Projected Support Levels
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Trend-Continuation Entries
Projected Resistance Levels
Stop loss will go here
Enter if we go below this
Projected Support Levels
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Trend-Continuation Entries
Projected Resistance Levels
Stop loss will go here
Enter if we go below this
Projected Support Levels
89
Trend-Continuation Entries
Projected Resistance Levels
Stop loss will go here
Enter if we go below this
Another Inside Day!
Projected Support Levels
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Trend-Continuation Entries
Projected Resistance Levels
Stop loss will go here
Enter if we go below this
Projected Support Levels
91
Trend-Continuation Entries
Projected Resistance Levels
Stop loss will go here
Enter if we go below this
Entered at the open
Projected Support Levels
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Trend-Continuation Entries
Projected Resistance Levels
Stop
Projected Support Levels
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Trend-Continuation Entries
Projected Resistance Levels
Stop
Projected Support Levels
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Trend-Continuation Entries
Projected Resistance Levels
Stop
Projected Support Levels
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Trend-Continuation Entries
Projected Resistance Levels
Stop
Projected Support Levels
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Trend-Continuation Entries
Projected Resistance Levels
New Stop
3-day High
Projected Support Levels
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Trend-Continuation Entries
Projected Resistance Levels
New Stop
3-day High
Projected Support Levels
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Trend-Continuation Entries
Projected Resistance Levels
New Stop
3-day High
Projected Support Levels
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Trend-Continuation Entries
Projected Resistance Levels
New Stop
3-day High
Projected Support Levels
100
Trend-Continuation Entries
Projected Resistance Levels
New Stop
3-day High
Projected Support Levels
101
Trend-Continuation Entries
Projected Resistance Levels
Getting Close:
2-day high
Projected Support Levels
102
Trend-Continuation Entries
Projected Resistance Levels
Reversal DayExit
Projected Support Levels
103
Trend-Continuation Entries
Projected Resistance Levels
McDonalds files
Chapter 11 on
credit losses.
Projected Support Levels
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Bear Market S&P 500 Activity
• We will now go through a step-by step
walkthrough of the entire Bear Market,
from the beginning.
• It will begin very detailed, but eventually
just show the method is working.
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Note: I am deliberately counting this section differently from at the beginning
of this presentation. And it still works! This shows the versatility of these techniques.
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Note: I am deliberately counting this section differently from at the beginning
of this presentation. And it still works! This shows the versatility of these techniques.
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Choosing the Spread
Here’s our example from before. We said we are expecting approximately
$123 to $133 sometime in the middle of January.
Always target the worst-case scenario: Assume the stock goes to $133.
We therefore want a bear put spread with the short put at $133. For long put, choose
an ITM option with strike above stop loss. The more ITM, the better.
Choosing the Spread
So, we have established a bear put position:
SPY @ $144.84. (Dec 11, 2007). Stop @ $150
Long Put: Jan 2008 $160
Short Put: Jan 2008 $133
At VIX = 30, the following are the most likely prices:
Long Put: $16.37
Short Put: $1.44
Put Spread: $14.93
(Spread is better when
extrinsic value in short option
is greater than extrinsic value
in long option)
If we hit stop at expiration (worst-case scenario):
Long Put: $10.00
Short Put: $0.00
Put Spread: $10.00
If we hit profit target tomorrow (again, not as good as if it happens next month):
Long Put: $27.15
Short Put: $5.13
Put Spread: $22.02
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Choosing the Spread
If we hit profit target at expiration:
Long Put: $27.00
Short Put: $0.00
Put Spread: $27.00
So, if we are right, spread will be worth between $22.02 and $27.00, which,
considering the original spread cost was $14.93,
represents profits of 47% and 81%.
If wrong, spread will be worth $10 and will represent a loss of 33%.
If we hit stop tomorrow (not as bad):
Long Put: $12.26
Short Put: $0.70
Put Spread: $11.56
(loss of 23%)
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Risk Management
If we risk our whole account every time, eventually we’ll be wrong three times
in a row and lose 50% three times (thus losing 87.5% of the account). That’s not good.
We solve this by only risking 3% of our account on any trade.
We said the risk in the spread was 33%.
To position size, simply divide 3% by 33%:
0.03 / 0.33 = 9.1%
Therefore, we can buy 9.1% of the account on this option spread. The rest
should be held in cash. On a $100,000 account, we buy $9100 of this spread.
Since the original spread price was $14.93, we buy a 6-contract spread.
If we are right, we should get a return between 47% to 81%. We’ll say 65% for
sake of argument.
65% return on 9.1% of your account is 5.9%.
For intermediate-term investing, you will trade a spread around 10 times per year.
(Wrong 10 times: -26%).
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Special Thanks To:
Dynamic Trading, by Robert Miner
Little of anything presented today is original. I now credit my primary source
And direct you to this book for more detailed instruction if you are still interested.
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