Recently I was watching CNBC and I heard a comment from Art Cashin on the floor of the NYSE which rang true for every successful trader. Art said, "I'm not always right, but I'm always consistent." Picking direction day after day can be one of the hardest things to do. The truth is no one knows what the market is going to do. Technical analysis can help, but once you think the market can't go down, it goes down, once you think it can't go up, it goes up! So how do you win the battle of consistency in an inconsistent market? Let's find out . . .
Iron Condor traders will be a good group to discuss for this example. Last year carried some of the most volatile markets an Iron Condor trader will ever experience. I know several traders who started the year making great money . . . then came September. Forget about the money people lost in September, more traders were destroyed psychological than what they actually lost in the market. So what happened the next month in October? People stopped trading the strategy and missed out on perhaps some of the better gains they would have experienced trading Iron Condors. Repeat after Art Cashin, "I'm not always right, but I'm always consistent."
So how do you create a consistent plan trading Iron Condors? The thinkorswim® software makes this really easy. 30 - 45 days before expiration on a liquid product index like the SPY, QQQQ, DIA, or IWM, sell an option with a probability of expiring at or near 30%. Probability of Expiring on the thinkorswim software tells you the probability of that strike expiring 1 penny in the money on expiration. When selling Iron Condors you don't want the option to expire in the money. With a 30% probability of expiring in the money, there is a 70% probability of the option expiring out of the money which is perfect for any Iron Condor. Sell the 30% probability of expiring on both the calls and puts, buy some insurance further out of the money and you have your Iron Condor. The below figure shows you what to look for on the thinkorswim software.

These are the type of consistent rules that a trader must come up with that allows them to be consistent no matter what the market is doing. It's also important to remember risk management when trading anything. Part of creating consistency is only losing what your comfortable losing. Keep things small and simple and that will put you on the path that Art Cashin and every other successful trader strives for. Consistency.
Trade well.
thinkorswim®: The risk of loss in trading securities, options, futures and forex can be substantial. Customers must consider all relevant risk factors, including their own personal financial situation, before trading. Options involve risk and are not suitable for all investors. See the Options Disclosure Document: Characteristics and Risks of Standardized Options. A copy can be requested from Scott Garland, Compliance Officer, at 773-435-3270 or at 600 W. Chicago Ave., #100, Chicago, IL 60654-2597 or by email at sgarland@thinkorswim.com. Trading foreign exchange on margin carries a high level of risk, as well as its own unique risk factors. Please read the following risk disclosure before considering the trading of this product: Forex Risk Disclosure. thinkorswim is compensated through a portion of the forex dealing spread. Funds deposited into an account with a broker-dealer for investment in any currency, or which are the proceeds of a currency position, or any currency in an account with a broker-dealer, are not protected by the Securities Investor Protection Corporation (SIPC).
thinkorswim®, Inc. and thinkorswim Advisors, Inc. are wholly owned subsidiaries of thinkorswim Holdings Inc., which is a wholly owned subsidiary of thinkorswim Group Inc.

thinkorswim, Inc. © 2001-2009 Member SIPC FINRA NFA

We here at thinkorswim officially became part of Ameritrade this past week. We are little guppies swimming in a much bigger pond and there is a great deal of excitement for most of us with the prospect of a larger customer base to assist in investment strategies. I bring this up because I believe this is the same sentiment many traders experience when they foray into new products like options or futures from the world of stocks. There is excitement, but of course a little trepidation as well. As long as we don't lean too far over our skis initially, we will absorb some knowledge and make some strides. But it is so important to resist the urge to get ahead of ourselves.

This is our ongoing lesson to the legions of folks who are taking control of their investments; baby steps, baby steps. You can always grow trading plans down the road, but it must come in a gradual manner and not in gulps or you could choke.

So on your first venture into options, start with one contract and get some familiarity and gains. It is very easy to trade up, but much harder to reduce size because you can get slapped down. The lesson is short and sweet, but it is a simple lesson everyone must heed.

Steve Quirk

thinkorswim, Inc. and its registered employee, Steve Quirk, do not solicit or recommend any form of trading in the individual stocks (or their derivatives) mentioned above. Please do careful, independent research before investing any money as well as weigh the possible consequences on your particular financial situation before doing so. The risk of loss may be substantial.

thinkorswim, Inc. is a wholly owned subsidiary of TD AMERITRADE Holding Corporation.

Over the past few months, these articles have discussed inflation and commodity pricing increases. Rises in commodity prices and currency pairs have certainly budded; however, now we are facing a potential pullback.

The potential pullback is based on the Morgan Stanley Commodity Related Equities Index (CRX). As shown in Figure 1, the CRX has been very bullish while commodity prices have risen. Commodity price increases line the pockets of companies that benefit from mining, processing, selling or are otherwise involved in commodities and represent economic health driven by commodity prices. The CRX trended up more than 50% from March lows before breaking trend this past week. When a consistent trend breaks, a correction that equals the size of the trend channel and a conjunction with Fibonacci levels usually follows.

The break in the CRX trend could see price dip to retest the 38% Fibonacci level, near 570, or further to the 50% Fibonacci level, near 540, without ending commodities' bullish sentiment (see Figure 1). If this pullback continues and bounces off a support level, as it appears it may, then commodity-sensitive currency pairs might see a similar pullback, which may signal an opportunity to enter into the long-term trend at a lower price and with better money management.

Although the pattern isn't identical to the CRX, the GBP/JPY pair has experienced a similar end to a bullish trend and may be showing signs of further potential pullback. The pair could form a head and shoulders pattern within the next four to five days, placing the pullback almost perfectly at support, near 151, within two weeks. If the pair reaches support near 151 and the CRX bounces off a support level at the same moment, this would further confirm the expectations of a continued bullish run. As shown in Figure 2, price is near 159, which is almost a perfect shoulder height if price rolls over. A break below 156 could see the pair reach the 151 level and if it does, there is a great shorting opportunity. However, if the longer trend and fundamentally based trade bounce off the bigger trend's support level, the probabilities of success may increase.

The short, or long-term bullish, position can be traded in the forex spot market or by properly combing futures, which in this instance, for the GBP/JPY pair, would be buying British pound futures (/6B) pair and selling yen futures (/6J).

Copyright 2009  Investools Inc. All rights reserved. Terms of use apply. Reproduction, adaptation, distribution, public display, exhibition for profit, or storage in any electronic storage media in whole or in part is prohibited under penalty of law. Neither Investools nor its educational subsidiaries nor any of their respective officers, personnel, representatives, agents or independent contractors are, in such capacities, licensed financial advisers, registered investment advisers or registered broker-dealers. Neither Investools nor such educational subsidiaries provide investment or financial advice or make investment recommendations, nor are they in the business of transacting trades, nor do they direct client futures accounts or give futures trading advice tailored to any particular client's situation. Nothing contained in this communication constitutes a solicitation, recommendation, promotion, endorsement or offer by Investools, or others described above, of any particular security, transaction or investment.

The security used in this example is used for illustrative purposes only. Investools is not recommending that you buy or sell this security. Past performance shown in examples may not be indicative of future performance.

Trading spot currency contracts can involve high risk and the significant loss of any funds invested. Spot currency contracts are highly leveraged. This means that significant losses can be created quickly and unexpectedly.

Options trading is generally more complex than stock trading and may not be suitable for some investors. Granting options and some other options strategies can result in the loss of more than the original amount invested. Before trading options a person should review the document Characteristics and Risks of Standardized Options, available from your broker or any exchange on which options are traded.

It seems to me that, for the short-term say 30- 60 days, the market is locked in between about 910 and 940 on the S&P 500. The bulls will use the 880 to 910 as support, and the bears will use the 940 to 960 as resistance, a nice range for us traders to make use of. Additionally the S&P 500 is sitting on its 30 day average of 92. Well if this is true things could be a bit like Palm Springs in the summer, slow and steady. In my opinion it would take something truly dramatic to blow through these levels. Maybe those "green shoots" turning into "brown weeds"? Lets look at imbedding a few strategies together with one click of the TOS platform and skew it to have a little downside protection just in case!

If you too think the above scenario is probable then you may consider using a Double calendar and then tweaking it to suit that scenario. To do this we need to "right click" on the July 91 strike, chose "Buy" go down to "Double Diagonal" over to "Double Calendar" and" left click". The system will automatically populate selling the July -91 call and Put (short straddle) and buy the Aug +91 call and put (long straddle). Ok last step, change the Aug +91 call to +94 call don't touch anything else! Like a young Dr. Frankenstein, look at what you have created "it's alive" the monster lives! The key to trading is that there are trade-offs between potential risk, the probability of profit and the potential profit. The potential risk in this trade is limited, limited to $436, that's your risk. I consider this a high probability trade because there is an approximately 66% probability SPY will close at July expiration inside its present standard deviation of roughly SPY 99- 85. This trade is profitable at July expiration between SPY 94.30-85.40 reflecting an ever so slight downward bias. Incidentally the YTD high for SPY is 96.11 and I don't believe we will test that in July and our downside breakeven price of SPY 85.40 is well below my support and at the very low end of the SPY standard deviation range for July. Presently the position represents almost 16 short deltas, that's what I would consider delta neutral and has a rich positive theta decay of $2.57, all good! Additionally if we factor in the "home run" scenario that SPY settles at 91 at July expiration and this position will produce a $320 profit! That's a 70% ROI (return on investment/risk) in a month all while having a defined risk of $436! I love trading!

thinkorswim, Inc. and its registered employee, _________, do not solicit or recommend any form of trading in the individual securities or their derivatives mentioned above. There are complexities (such as the effect of commissions for multi-legged strategies on profit potential) associated with certain options investment strategies that should be acknowledged prior to investing. Please do careful, independent research before investing any money as well as weigh the possible consequences on your particular financial situation before doing so.
The risk of loss in trading securities, options, futures and forex can be substantial. Customers must consider all relevant risk factors, including their own personal financial situation, before trading. Options involve risk and are not suitable for all investors. See the Options Disclosure Document: Characteristics and Risks of Standardized Options. A copy can be requested from Scott Garland, Compliance Officer, at 773-435-3270 or at 600 W. Chicago Ave., #100, Chicago, IL 60654-2597 or by email at sgarland@thinkorswim.com. Trading foreign exchange on margin carries a high level of risk, as well as its own unique risk factors. Please read the following risk disclosure before considering the trading of this product: Forex Risk Disclosure. thinkorswim is compensated through a portion of the forex dealing spread. Funds deposited into an account with a broker-dealer for investment in any currency, or which are the proceeds of a currency position, or any currency in an account with a broker-dealer, are not protected by the Securities Investor Protection Corporation (SIPC).

thinkorswim, Inc. is a wholly owned subsidiary of TD AMERITRADE Holding Corporation.

thinkorswim, Inc. Member SIPC FINRA NFA
2009 © TD AMERITRADE IP Company, Inc.