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Why You May Want to Avoid Buying Options This Week

If you do not understand implied volatility and you are buying put or call options or some combination, you have been warned!

The market continues to move very fast, has large swings, and one would think that makes it an excellent time to buy options for huge gains, right? Our Research Team believes that large Volatility swings will be here for a while. Once you understand the significant role Volatility plays in Option Pricing, you may want to avoid this investment construct for some time to come.

The VIX is at an extreme level and has only been over 50 only seven times in the past 25 years based on a daily closing price. It evident the last two trading sessions the investment sentiment has been bearish and option puts make money if price declines, which has been the popular trade of choice until now.

What many options traders do not understand, however, is that the price of options is configured using implied volatility.

The more volatility, the more expensive the options become to factor in the wild swings the underlying security may experience. This is reflected in the price the option trades off to factor in the fear and trepidation.

This can be seen in the substantial premium on top of the intrinsic pricing from the strike price.

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For example, bank stocks are usually considered very conservative when implied volatility is under 20. This results in options being priced accordingly.

However, in the last few trading sessions, volatility has jumped, reaching 62 at one point this week already, which is more than 3x what you would want when simply buying options. This is a VERY HIGH RISK and a difficult time to buy options. Unfortunately, this is what most options traders do, they BUY options, and while it may work in most market conditions, this is most likely NOT the time you want to do so until such time Volatility and VIX begin to subside and we do not see that in the near future.

Let me try to explain in the most basic laymen terms because I know 95% of options trades don’t really get this, and it boggles my mind. As you know, or should know, buying options is one of the riskiest and hardest ways to profit from the market, in my opinion (and statistics continue to prove this out as MOST option buyers LOSE money). I traded options years ago and do very little options trading now, though they are still a great way to make money with certain trade setups and in certain market conditions.

OPTIONS RISK #1: TIME DECAY/THETA

In short, trying to time the market with an index, stock, sector, commodity, or currency is hard enough, but when you buy options, you make things a whole lot harder for yourself. Not only do you need to time this almost perfectly so that the underlying asset has time to move, but you need to time it with precision because now the time is your enemy (Theta).

Every day the option contract you bought is going to lose value because you lose time, and there are fewer days left for your asset to move in the direction to make up for the large premium embedded in the option price. Each day this time premium begins to erode. The closer you get to the time expiration, the faster the time premium decays.

OPTIONS RISK #2: IMPLIED VOLATILITY

This is the main issue I want to share and the reason for writing this article for you.

If options are valued in relation to implied volatility (which they are), then when the volatility is above 50 (62 as of Monday, March 9) and the option is worth $1,00.

Here is the issue, even if the price of your asset stays the same, but the fear in the market fades away as it always does from this extreme level, your option value will decline dramatically. I’m just using numbers out of thin air for the example so you can grasp the issues easily.

If implied volatility drops from 62 down to 35, the option contract value will go down with the volatility as well. The $1.00 contract priced with huge volatility could now be worth $0.85 overnight.

If you traded a short-term option contract, then you will also have time decay, and your option would drop even more to say $0.82.

Remember this is the type of price action you will experience and the VIX falling (and fear subsiding) and even if your asset price just stays the same you have the potential for a significant loss and is the reason why buying options during extreme high volatility is not the trade that should be taken.

OPTIONS TRADING TIP

If implied volatility is over 25 then 
it is usually better to be a seller of options, 
if it’s under 25, then its often better to be a buyer.

So what does a trader do? 

We encourage investors to use probabilities to work in your favor!

You could put on debit spreads: This way, some of the volatility is reduced as you sell a put or call, so the volatility premium is now in your favor, and time decay is mitigated.

OR

Sell it to those people that are so sure of this big move!

We have already identified that we are in a period where the VIX in an area very rarely seen. But since the VIX can stay here for a while, a more logical option move may be to sell calls going out into the future. Due to contango, it will retrace back down as the contango effect will begin to change as trader sentiment improves, and fear is reduced.

Credit spreads have so many advantages over simply buying calls and puts

  • Defined risk – Can only lose the difference of your strikes less the premium received.
  • If the trade starts to go against, you have backup options to manage risk.
  • Roll the trade to a future date giving your trade time to work out.
  • Sell another option spread opposite of your existing trade (if a put spread on place a credit call spread, this creates an iron condor) now giving you a larger cushion for the trade to work as you received more premium.
  • Buyback the offending strike at a loss and let the profitable strike run if you feel it has legs.
  • Buy a put to defend your spread further out in time as theta decay does not get affected as quickly.
  • Use a stop loss of 2x or 3x premium received etc.
  • or take possession of the stock
  • Income – selling out of the money credit spreads can be an effective way of generating a passive revenue stream

RISK REWARD is most important, and it is critical to get into the right trade at the right time. Remember that theta-neutral trades and buying options are when implied volatility is low. Selling options, when implied volatility is high, is your best option.

  • This is where we are right now.

I hope this helps shed some light on the basics of why buying options during high volatility is an uphill battle, no matter how good your timing is to predict the movement of the underlying asset you are trading.

In the near future, my team and I will make our options trades available to follow. As you know, timing the market is our specialty. Knowing what time frame an asset will rally or breakdown, and how far its first move will give us a distinct advantage to pinpoint the ideal option contracts to consider buying or selling for maximum short-term gains.

Happy Trading!

Chris Vermeulen
 www.TheTechnicalTraders.com 

Gold Sets Up For Another Massive Move Higher

Our research team believes the recent downward price activity in Gold and Silver are indicative of past price patterns we saw in Gold over the 2007 to 2012 rally.  Throughout almost every rally in precious metals (Gold), there have been a number of moderate to serious price corrections taking place within that extended rally.  The current downside move is moderately small compared to historical price rotation in Gold and potentially sets up a massive upside potential rally to levels above $2100 per ounce.

WEEKLY GOLD PRICE PATTERN FROM 2007 – 2017

This chart, below, highlights the downside price rotation that took place just before and as the US stock markets collapsed in late 2008 and 2009.  Notice how Gold collapsed nearly 28% right as extreme market weakness began to become present in the US stock market.  Then, pay attention to how Gold rallied from $730 in multiple upside price legs to a peak just below $1900 – well above 110%.  Could the same pattern already be setting up in 2020?

WEEKLY GOLD CHART TREND IS CLEARLY UP

This current Gold chart highlights what we believe is a similar price pattern where Gold collapsed as the downturn in the US stock market took place between October 2018 and December 2018.  Subsequently, Gold then rallied to levels nearing the previous peak levels (near $1380), then rallied even further to $1540.  We believe the current downside price rotation is similar to the downside price rotation that took place in August/Sept 2010 – just before Gold rallied from $1050 to $1890 (+85%).  If a similar type of rally were to take place from the current $1587 lows, the peak price of Gold may be near $2935.

GOLD/SILVER RATIO WEEKLY CHART SCREAM BARGIN

This last chart highlights the true potential for a Silver rally based on historical levels of the Gold to Silver Ratio.  There has never been a time in history since 1990) that the Gold to Silver ratio has been this high (93.9).  Historically, traditional levels are closer to 74~76.  If gold rallies above $2100 and the Gold to Silver ratio contracts to the historical 74 to 76 level, Silver will likely rally to levels above $40 to $50 per ounce.  If gold rallies to our projected peak level of $2935 and the ratio reverts, Silver could rally to levels well above $65 per ounce.

This downside move in both Gold and Silver are an incredible opportunity for skilled traders.  Don’t miss the opportunity to get into a precious metals position near these levels – before the real rally begins.

As a technical analysis and trader since 1997, I have been through a few bull/bear market cycles. I believe I have a good pulse on the market and timing key turning points for both short-term swing trading and long-term investment capital. The opportunities are massive/life-changing if handled properly.

I urge you visit my ETF Wealth Building Newsletter and if you like what I offer, join me with the 1-year subscription to lock in the lowest rate possible and ride my coattails as I navigate these financial market and build wealth while others lose nearly everything they own during the next financial crisis. Join Now and Get a Free 1oz Silver Bar!

Chris Vermeulen
www.TheTechnicalTraders.com

Platinum Breaks $1000 On Big Rally And What is Next

Certain precious metals, Gold, Silver, and Platinum, have shown moderate upside price trending over the past 20+ months while Rhodium and Palladium have skyrocketed higher.  These more precious metals, Rhodium and Palladium, have many industrial and consumer uses.  Rhodium is used in electronics and plating and Palladium is used in a variety of consumer products from Automobiles to Medical Devices.

Still, the rally in Rhodium (over 300%) and Palladium (over 70%) over the past 12 months has been more than impressive.  Whey are we not seeing a similar rally in Gold, Silver, and Platinum yet?

The reality is that we are seeing a similar price rally in Rhodium and Platinum as we saw in 2004~2008 – just prior to the Global Credit Crisis.  Take a look at the composite chart below.

There are few interesting components of these charts that show how precious metals reacted throughout the 1997~2000 rally and the 2005~2008 rally – both of these events set up a bubble burst reversion event.

_  Rhodium rallied extensively in 2005 through 2008 – peaking at levels near $10,000 just before the credit crisis bubble burst.

_  Palladium rallied a moderate amount in 2005 through 2007, then sold off as the bubble burst.  Then rallied to over $800 after fear set into the markets.

_  Platinum began a rally in early 2000 that propelled it to a peak in 2007 (just before the peak in the US stock market).  Since then wild price rotation and a moderate reversion to levels near $1000 have set up a massive basing pattern.

_  Gold, like Platinum, began an incredible upside price rally in early 2000 and continued to rally till the peak in 2010

_  Palladium, being an industrial use metal and being deployed in a variety of advanced technology, would tend to rally as demand for technology products and consumer products associated with Palladium components are in very high demand.  Much like what happened in 1998~2000.

_  Rhodium’s rally is very likely related to manufacturing and institutional demand across the globe.

_  Platinum and Gold may be set up for an incredible upside price rally should Rhodium and Palladium extend their rallies even further.

_  We find it incredibly fascinating that Rhodium rallied nearly 1000% from 2004 to 2009 – just before the peak in the global stock markets and the start of the Global Credit Crisis.

_  We also find it incredibly interesting that Palladium rallied over 1000% from 1995 to 1999 – just before the DOT COM bubble burst.

_  We believe the rallies in Rhodium and Palladium are early warning signs that can’t be overlooked by skilled traders/investors.

The recent upside breakout of Platinum falls into the same category as the late 1998 Platinum rally as the valuations of the DOT COM rally began to overextend.  We believe this shift into high-value risk protection began to take place as investor’s fear levels increased in the late 1990s.  As we suggested recently – a shifting of the undercurrents in the markets.

The current rally above $1000 in Platinum suggests a new upside price rally is taking place after an extensive basing pattern (2015 to now).  Should Platinum rally above $1200 per ounce, a new technical bullish trend will be confirmed.

Our proprietary Fibonacci price modeling system is suggesting price targets on the Weekly chart of $1090, $1130 and $1215.  Pay very close attention to this rally in Platinum as it could become the catalyst for a much bigger move in many of the major precious metals.  The Platinum rally in 1997 began an upward price advance of nearly 600% over the next 10 years.  A similar move today would put Platinum near $6000~$7000 – Gold would be near $3200+ should this happen.

Our belief is that the rally in Platinum will continue as valuations in the global markets push higher.  Fear is creeping back into the markets as investors are expecting some type of price reversion event.  We believe the current setup is very similar to a mix of the events we’ve highlighted in the composite metals chart, above.  A mix of what happened in 1995~1997 and a mix of what happened in 2005~2007.  Platinum and Gold are acting very similar to what happened in 1995~1997.  Palladium and Rhodium are a mix of 1995~1997 and 2005~2007.  Overall, the rallies in Rhodium and Palladium are strangely similar to “peak everything” bubbles.

Watch how this plays out over the next 12+ months.  Gold and Silver should begin to move higher as Platinum extends the rally.  Fear is starting to re-enter the markets as traders and investors extend their belief that a reversion event is setting up.

Join my Wealth Building Newsletter if you like what you read here and ride my coattails as I navigate these financial markets and build wealth while others lose nearly everything they own.

Chris Vermeulen
www.TheTechnicalTraders.com

NOTICE: Our free research does not constitute a trade recommendation or solicitation for our readers to take any action regarding this research.  It is provided for educational purposes only.  Our research team produces these research articles to share information with our followers/readers in an effort to try to keep you well informed.  Visit our web site (www.thetechnicaltraders.com) to learn how to take advantage of our members-only research and trading signals.

Nominal New Highs Reached, Skilled Traders Should Still Be Cautious

The US Stock market rallied on Friday, October 25, on TESLA earnings crushing expectations as well as news that any positive US trade deal outcomes could see almost immediate removal of future tariffs that are scheduled to be implemented near the end of October.  This was enough for the markets to rally from the start of trading and continue to push higher until near Noon in NY.  After new highs were reached, the markets contracted a bit headed into the close.

Gold shot up early this morning before the news related to the US trade deal hit.  Our opinion is that this is a natural advancement in precious metals that is not new related or muted by some external factors.  Precious metals have been setting up a sideways FLAG formation for over 2 months and we believe the apex/breakout move is near.

Oil was somewhat flat to close out the week and closed trading near $56.63.  The past three days we have seen oil rise from the $53 level to the current price levels, but we believe oil is still fundamentally oversupplied and that price will continue to weaken over time.

The real question before all of us right now is will this new nominal high represent a new breakout bullish price trend heading into a US Presidential Election cycle, or is this more price rotation within a defined price range?

If you consider all the shifting aspects of the US political and economic landscape as well as the current geopolitical and economic factors, we believe any real breakout move will come as we get closer to November 2020 – not now.  We believe this is still price rotation and we believe the NQ is the likely cause of this new nominal price high on Friday.  Tesla crushed earnings and that set a positive tone for Friday’s trading.

TRANSPORTATION INDEX DAILY CHART

The TRAN, Transportation Index, is still trading near current resistance and has not shown any true new price high yet.  It will be interesting to see how the markets open up early next week and what news may drive a new price trend by then.

MID-CAP SECTOR DAILY CHART

The Mid-Cap has failed to rally to recent price highs which suggest this is not a broad market rally.  We would want to see more defined price advancement across all sectors and above recent price highs to call this a broad market rally/breakout

Pay attention to the new that originates this weekend.  We don’t believe a deal will be reached with regards to trade as quickly as some others may believe and we still believe the next 12+ months of the US Presidential election cycle will be full of surprises.  We may start to get more clarity of a true price trend after the New Year (2020).  Until then, we’re staying cautious of these price rotations and picking our trades.

I urge you visit my Wealth Building Newsletter and if you like what I offer, join me with the 1-year subscription to lock in the lowest rate possible and ride my coattails as I navigate these financial markets and build wealth while others lose nearly everything they own during the next financial crisis. Join Now and Get a Free 1oz Silver Bar!

I can tell you that huge moves are about to start unfolding not only in metals, or stocks but globally and some of these supercycles are going to last years. A gentleman by the name of Brad Matheny goes into great detail with his simple to understand charts and guide about this. His financial market research is one of a kind and a real eye-opener. PDF guide: 2020 Cycles – The Greatest Opportunity Of Your Lifetime

As a technical analysis and trader since 1997, I have been through a few bull/bear market cycles. I believe I have a good pulse on the market and timing key turning points for both short-term swing trading and long-term investment capital. The opportunities are massive/life-changing if handled properly.

Chris Vermeulen
www.TheTechnicalTraders.com

Silver Will Pause Before Going Higher

Silver will likely find resistance near $15.60 and move slightly lower before another upside price leg takes place.  Both gold and silver have begun incredible price rallies over the past 10+ days and we believe this is just the start of a much bigger price trend. We believe Silver, to be one of the absolute best potential trades and investment. It will likely pause just below $15.75, near the First Resistance level, rotate a bit lower (possibly towards $15.15), then attempt another rally towards the $16.50 level.

Daily Silver Chart Analysis

The $15.60 to $15.75 resistance level can be seen on this chart by our RED highlighted price peaks. Additionally, the upper RESISTANCE ZONE between $16.15 and $16.78 is a big range that has historically been a key price channel. My cycle and trend trading indicators are suggesting this move is far from over, yet we believe this move upward will happen in advancement legs and this first leg is nearing exhaustion.  This is why we are issuing this warning to all investors right now.  We believe a downward price rotation, a stalling price pattern, will set up where a technical trader will be able to acquire silver below $15.25 again very soon.  The next leg higher may start fairly quickly as we don’t expect this rotation to extend out for many weeks.
See Our Previous Silver Breakout Prediction Call on June 7th

Monthly Silver Chart

This Monthly Silver chart with our proprietary Fibonacci price modeling system suggests upside targets of $17.00 (CYAN), $17.65 (GREEN), and $18.50 (DARK RED).  Our RESISTANCE ZONE level on the chart, above, aligns perfectly with these objectives because the price would first have to rally into the RESISTANCE ZONE and break through this level to push to any higher target levels. Therefore, we believe this upside price move won’t run into any solid resistance until reaching above the $16.30 level and possibly as high as the $16.75 to $17.00 level.  At that point, the price of Silver should find real resistance, stall, and set up for the next breakout move higher.
At this point, if you have not been following our research and analysis of the precious metals sector and already positioned your trades for this move, you should get another chance to set up some long trades as this downside price rotation takes place.  Remember, wait for silver to fall close to or below $15.25 before targeting your new trade entry.  This bottom in silver may only last for a few short trading periods, so when it happens, be ready with your orders.

CONCLUDING THOUGHTS:

The next upside leg in Silver should rally for a total of about +6% to +10% targeting the $16.25 to $17.00 price level – the RESISTANCE ZONE.  After that price level is reached and price consolidates to likely form another momentum base, another upside price leg should push the price of Silver towards our Monthly Fibonacci price targets – somewhere towards $18.00 to $18.50 before stalling again. ! I can tell you that huge moves are about to start unfolding not only in metals, or stocks but globally and some of these super cycles are going to last years. A gentleman by the name of Brad Matheny goes into great detail with his simple to understand charts and guide about this. His financial market research is one of a kind and a real eye-opener. PDF guide: 2020 Cycles – The Greatest Opportunity Of Your Lifetime As a technical analysis and trader since 1997, I have been through a few bull/bear market cycles. I believe I have a good pulse on the market and timing key turning points for both short-term swing trading and long-term investment capital. The opportunities are massive/life-changing if handled properly. I urge you visit my Wealth Building Newsletter and if you like what I offer, join me with the 1 or 2-year subscription to lock in the lowest rate possible and ride my coattails as I navigate these financial market and build wealth while others lose nearly everything they own during the next set of crisis’. Chris Vermeulen www.TheTechnicalTraders.com

King Dollar Rides Higher Creating Pressures On Foreign Economies

One of the biggest movers of the day on Friday was the US dollar.  The US stock market appeared very weak prior to the opening bell and precious metals, especially gold, appeared to be rocketing higher.  Almost right from the open, the markets washed out the fear and changed direction. The US dollar did the same thing. This renewed strength in the US dollar continues to baffle foreign investors and foreign governments as they continue to try to support their economies and currencies against a stronger and more agile US economy and currency. Even as the US dollar strength is frustrating many investors, it is also attempting to keep a lid on traditional safe havens such as precious metals. This further complicates many foreign nations because their gold reserves are not appreciating at the same rate that their currencies are devaluing. Couple that with capital outflows, consumer protectionism, waning economic outputs, and the need to protect local currencies to avoid populist panic, and King Dollar seems to be riding high. A friend of ours and foreign currency trader suggested we read the article below today. Does China have enough US dollars to survive the US trade war? We’ve authored many articles about the US dollar over the past few months.  We believe the strength in the US dollar will continue and that a support level above $92 is likely to continue to support the price for some time. That being said, the current price rotation near $96.50 provides a recent low price rotation level that could turn into future support after recent highs near $98.40 are broken. Many times you’ve probably read our comments about a “capital shift” and how this shifting capital across the planet will be driving future investment in the US and other foreign markets.  At this point in time, it’s almost like a dog chasing its tail.  The more support the US dollar receives, the more pressure there is for foreign markets to support their currencies and economies. The weaker foreign economies become and foreign currencies devalue, the more demand for US dollars increases to help offset local weakness. It starting to become a vicious cycle.
We believe the defined price channel between the two magenta colored lines will continue to dominate US dollar price activity until price breaks through either the upper or lower range of this price channel. The current support near $96.50, will likely turn into a new price floor once price breaks above $99.
There are a number of factors that could ease the upward pricing pressure in the US dollar.  First, increased economic output and activity in foreign markets illustrating economic growth and prosperity would likely ease the capital shift into the US stock market and US dollar. Once foreign markets begin to act as though real opportunity exists over an extended period of time, then the dominance of the US dollar may begin to weaken. Additionally, suitable trade deals, such as we witnessed between the US and Mexico recently, will help to alleviate currency pricing pressures on foreign currencies. This strength in foreign currencies presents an opportunity for global investors to take advantage of pricing gains. Stronger foreign currency valuations and economic output will help to ease the US dollar dominance eventually.  Until that happens, as traders we need to be aware of the pricing issues related to the capital shift that is taking place, the pricing pressures on precious metals, and the likelihood that foreign investors will continue to pile into US equities while King Dollar is dominating.
Pay very close attention to foreign market weakness and news of banking issues or government bailouts of foreign banks. Much like the US credit crisis in 2008/2009, bank failures and extended credit risk exposure can lead to waterfall events.  This would be our biggest fear for the global economy if foreign governments and banking institutions are not properly prepared for extended devaluation periods. If things really started to crumble overseas we could see gold and the dollar move up together, it has happened before in times of crisis. We’ll keep you informed as we see things transpire. In the meantime, King Dollar rides high end of the sunset and foreign governments/nations will continue to attempt to support their economies and currencies. Eventually, the fear factor will push precious metals broadly higher. We have a good pulse on the major markets and can profit during times when most others can’t which is why you should join my Wealth Trading Newsletter for index, metals, and energy trade alerts. I can tell you that huge moves are about to start unfolding not only in metals, or stocks but globally and some of these super cycles are going to last years. These super cycles starting to take place will go into 2020 and beyond which we lay out in our new PDF guide: 2020 Cycles – The Greatest Opportunity Of Your Lifetime Happy Fathers Day Guys! Chris Vermeulen Founder of Technical Traders Ltd.