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John writes:
“I notice that when you enter a trade you don't get filled at the market. Do you use the margin spread to calculate a value higher than the market for the Sell to Open and a lower value for the Buy to Open? How do you determine these values?”
When placing an order, it can be beneficial to negotiate for a higher credit based on the bid, ask and spread amount. As an example, let's say we want to put on an Iron Condor for Caterpillar (CAT). If we look at the chart below, we can see the "NBBO (National Best Bid and Offer) Quote of $0.45 (Bid) by $0.54 (Ask)" with the difference between the two possible net credits---the bid/ask spread---being $0.54 - $0.45 = $0.09.
What most retail traders don't know is that this spread amount (the $0.09) is actually negotiable with the market makers---as a rule of thumb, about 30-40%. Generally, you can just divide the difference by a third ($0.09 / 3 = $0.03) and then add that amount back on to the bid price ($0.45 + $0.03 = $0.48). You can then set a limit price on the order form for $0.48. It may not seem like much but it makes a big difference over time as far as your return on investment.
Thanks for your question, John!
Trader’s Tip:
Historically,
• October marks the end of the most bearish 6 month period for the Dow and S&P 500. It also marks the end of the most bearish 4 months for the NASDAQ.
• On 10/10/2008, the Dow lost 18.2%---1874 points---ending the week as the most bearish for the Dow in the history of Wall Street.
• October is known as the “bear killer”.
• Tuesday, October 5th is a bearish trading day.
Key Dates:
• October 14th--options expiration for some indices.
• October 15th--options expiration for all equity and all other index options.
• November 18th--options expiration for some indices.
• November 19th--options expiration for all equity and all other index options.
Market Outlook
Last week the markets traded mostly flat after digesting the largest rise any September has seen since 1939. Even though consumer confidence dropped to its lowest level since February, traders are just more focused on encouraging signs in the corporate world including an increase in deal-making. Unfortunately, there's a big difference of opinion between Main Street and Wall Street on how the economy is doing. The focus, right now, is more on executives than consumers.
On Wednesday, European and U.S. markets fell as labor protests across the EU fueled worries about countries' ability to reduce their heavy debt. Demonstrations in Brussels, as well as Spain, Ireland and Portugal were observed as labor unions protested against problems and debt caused by the banks. The unrest has raised concerns that countries, such as Spain which may be downgraded again soon, will have difficulty repairing their public finances. Germany has pushed for tougher regulations while France is against near-automatic sanctions saying politicians and not unelected officials in Brussels should determine government policy.
However even wide-spread European unrest couldn't undermine the euro and boost the dollar--the dollar has fallen to a nine month low as the specter of more 'quantitative easing' (money printing) by the Fed drives the dollar lower and commodities higher.
Back on Wall Street, investors took profits after a month-long rally with the expectation of higher volatility going forward as the most bullish quarter in a year nears its end. The VIX futures show that the options market has been very skeptical about this rally. The CBOE Volatility index, a gauge of investors' fear and greed, rose 2.9% to 23.25 while VIX futures were predicting levels of 24 - 28 for the remainder of the year and above 30 for 2011.
For spread traders, these levels are ideal---they provide us with just enough volatility to collect a decent premium yet not too volatile to whipsaw the markets---which leads us to the real question....
What are the Secrets of the Week?
The markets are at a place now where investors are trying to figure out what the right level should be---- especially with earnings season starting this week--Alcoa the first Dow component to report, announces this Thursday.
Options traders also appear to be bracing for higher volatility in the near-term. Both the VIX and the VXN have closed higher for the last four sessions out of five. Concerned about upcoming economic reports and 3rd quarter earnings have most investors nervous. And with September turning out so well, many investors don't have a clear plan as they are locked between fears of a pullback and an ongoing uptrend.
Luckily, we do.
Our two candidates for this week offer a 7-9+% Return on Investment with a 91% to 94% probability of win. And our third play offers a similar return and probability---Plus with less than two weeks to the finish line, time decay (Theta) is accelerating in our favor. With so little time before expiration, let’s get going...
You can get in on this week's trades along with two new high-probability trades per week by clicking here now. http://www.cashflowheaven.com/ws
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