Trade The Journey

Trade The Journey

Practice

Top of the Morning! I hope everyone is doing well. This past week, a twister devastated six states, destroying cities and lives in the process. I pray for the victims. They say that these natural disasters will intensify as global warming worsens. Most countries are setting climate goals to transition to renewable energy and sustainability. Unfortunately, most of the plans are slated for 2050 and beyond.

Inflation reports met expectations and remained high, the highest rate recorded since 1982. So far, consumers have been able to absorb the higher costs. Below is a graph of the CPI with trendlines.

You can see inflation making its way into every sector. From the first day I drove on my own to now; I can’t remember gas prices being over five dollars. The U.S. tapped into its oil reserves to increase supply and lower the price of crude oil from which gasoline is produced. The Fed may have to increase the speed at which they reduce their bond and securities prices and increase the number of hikes in the coming year.

However, some pundits are saying even these actions may not be enough. Some are even saying that we may have to live with inflation for quite some time. Sooner or later, the consumer will scale back their purchases as companies reach limitations in what they can charge the consumer. Inventories are a record high, and companies need more workers to match the demand.

The Omicron variant has been deemed more transmissible but less intense than the delta variant, which is still the dominant strain. It is still unclear how countries will reply to this new variant in the future. They are still completing research on the variant.

Most of the indices made solid recoveries and regained the past couple of weeks. The Russell recovered a little last week but nothing like the other indices. This could be signaling a declining interest in taking on risks. Crypto could be another sign that risk-taking is declining, as Bitcoin dipped below the $50,000.

I still believe that this bull run has some legs and will continue for some time but not forever. “Buy the dip” are one of the many trending topics I see on my Twitter feed, and so far, the strategy has worked well. Being that markets change, your technique or approach should change as well.

The five-year yield ventured above its 20 sma. The ten-year yield recovered above its 200 but stayed below its 20 and 50 sma. The 20 sma crossed the 50 sma indicating ten-year yields may go lower. The thirty-year yield met resistance at the 20 sma after making a slight recovery during the week.

Below are some graphs on the central banks’ balance sheet, money supply, producer price index, and wage growth. These graphs will give you a sense of where we are regarding inflation.

 

Technical Picture

Russell 2000

The Russell dipped below the 200, as the 200 sma acted as resistance. After falling from its high a couple of weeks ago, it has not recovered. After the breakout, the Russell is back in the sideways trend it remained in for several months. The sideways trend is between the 2317.60 and the 2139.39 level. With all these events transpiring, its hard to see how the Russell will make any serious advancement towards its all-time high.

S&P 500

The S&P made a complete recovery. You can see the S&P making its way toward its ATH on the daily chart. On the weekly chart, you get a clearer picture of the recovery. It looks like 4720.59 will be its first test back toward its ATH.

Dow Jones

The dow made quite a recovery, gapping above the 35513.18 reference level and the 50 sma. Is the dow in a legitimate breakout or just testing above and returning to its sideways trend? This past week’s action took out two prior weeks of bearish movement on the weekly chart.

Nasdaq

 The Nasdaq gapped above the 15378.12 reference level and the 50 sma, although Friday ended with a doji on the daily chart. I’d say the bullish action on the Nasdaq was decisive, being that the bears attempted to push it down but was unable to. The weekly charts show a better picture of the Nasdaq making its recovery. The Nasdaq has some ground to make up before testing its ATH.


Practice

Before I traded options with real money, I thought it best to practice using paper money. Options are complex instruments, and they move much differently than stocks. By their nature, they are wasting assets, and different strategies can be implemented based on your preference for direction, volatility, and risk.

I picked ten stocks to trade options on, and I’ve broken even so far. My goal for these practice sessions is to watch how option greeks, volatility, and prices move. I’ve tended to place spreads, directional, ratio, and back spreads most of the time. I’ve also had moderate success in buying calls and puts.

I sell options with thirty days left in the contract’s life most of the time. I’ve brought some with a little less time but haven’t done well trading such short contracts. Short contracts give very little time to be wrong or have your forecast play out.

I tend to buy options with a little more time because it takes time to move depending on the direction. With spreads, I have more room to be wrong. Once or twice I’ve placed spread trades in which all the positions profited, but usually, that does not happen. The spread that made money in all parts involved buying an at-the-money call option and selling two out-of-the-money calls.

Over some time, I observed how the greeks moved in response to price changes and volatility. I don’t think it’s about complex mathematics as much as being willing to adjust the position or strategy as the greeks change.

Unfortunately, much of the knowledge I’ve acquired on options has come from reading and watching instructional videos, and I don’t think there’s any way around that.

Some of the paper trades are a little unrealistic because had it been real money, most of the trades would have wiped a small account. This coming week, I will record my trades in an excel spreadsheet to track my habits and tendencies.

One habit I’ve noticed is that I place bad trades upon my first entering the market to trade. It takes me a while to concentrate, so I think keeping tight stops on the first few trades will help.

All in All, I’m learning more about how to trades options day by day.


Cash flow this past week:

I saved most of the money I earned from my paycheck, which is a first. I still have some upcoming bills that are larger than usual, but I think I can handle them. I’m optimistic about the weeks ahead and think I’ll be able to pay off more of my credit.

Grade: C

Reason: Continued Improvement

Leave a Comment

Your email address will not be published. Required fields are marked *