Transcript here - SMB Training

The Vertical Spread
Advantage:
Achieve Above Average Returns, Higher Win
Rates with Minimal Cash
Jared A Levy
Senior Options Specialist, Zacks.com
Jaredlevy.com
1. SMB TRAINING is NOT a Broker Dealer. SMB TRAINING engages in trader education and training. SMB
TRAINING offers a number of products and services, both electronically
(over the internet through
Smbtraining.com) and in person. Through Smbtraining.com,
SMB TRAINING offers the “Virtual Trading
Floor”, a community through which independent
traders (subscribers), as well as T3 Trading Group, LLC
traders, observe a virtual trading floor environment (as described below) for educational purposes. SMB
TRAINING also offers web-based, interactive training courses on demand.
2. The seminars given by SMB TRAINING are for educational purposes only. This information neither
is,
nor should be construed, as an offer, or a solicitation of an offer, to buy or sell securities. You shall be fully
responsible for any investment decisions you make, and such decisions will be based solely on your evaluation
of your financial circumstances, investment objectives, risk
tolerance, and liquidity needs.
3. This material is being provided to you for educational purposes only. No information presented constitutes a
recommendation by SMB TRAINING or its affiliates to buy, sell or hold any security, financial product or
instrument discussed therein or to engage in any specific investment strategy. The content neither is, nor
should be construed as, an offer, or a solicitation of an offer, to buy, sell, or hold any securities. You are fully
responsible for any investment decisions you make. Such decisions should be based solely on your evaluation of
your financial circumstances, investment objectives, risk tolerance and liquidity needs.
4. SMB Training and SMB Capital Management, LLC are separate but affiliated companies.
5. T3 Trading Group, LLC is a Registered SEC Broker-Dealer and Member of the CBOE Stock Exchange
(CBSX www.CBOE.com). All trading conducted by contributors on Virtual Trading Floor is done through T3
Trading Group, LLC. 7. 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. 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. Futures and
forex accounts are not protected by the Securities Investor Protection Corporation (SIPC).
6. No Relevant Positions

Please note: Hypothetical computer simulated performance
results are believed to be accurately presented. However, they
are not guaranteed as to accuracy or completeness and are
subject to change without any notice. Hypothetical or
simulated performance results have certain inherent
limitations. Unlike an actual performance record, simulated
results do not represent actual trading. Since, also, the trades
have not actually been executed; the results may have been
under or over compensated for the impact, if any, of certain
market factors such as liquidity, slippage and commissions.
Simulated trading programs in general are also subject to the
fact that they are designed with the benefit of hindsight. No
representation is being made that any portfolio will, or is
likely to achieve profits or losses similar to those shown. All
investments and trades carry risks.
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Jaredlevy.com
18 years experience
1997 PHLX
2012 FOX
Propecia does work!
Member of 3 major exchanges
Traded tens of thousands of option contracts daily
Senior equities strategist for Zacks.com
o Whisper Trader, TAZR
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Formerly with PEAK6 & ONN.tv
Managing Partner of Belpointe Alternatives
Featured on CNBC (Fast Money), Fox, Fox Business, Bloomberg
TV, CNN Radio
Author of “Your Options Handbook” & “The Bloomberg Visual
Guide to Options”
“Trading appears deceptively easy. When a beginner wins,
he feels brilliant and invincible. Then he takes wild risks
and loses everything.”
Dr. Alexander Elder
Trading for a Living
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Know your strategy
Control your Risk
Keep your Discipline!
Paper Trade
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You will receive a ton of information
You will have a large checklist
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Don’t get analysis paralysis
Go with your gut, as long as it’s supported by
logical, objective data
The quick and dirty…
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Are legitimate financial products
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Are not mysterious or magic
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Perform “as advertised”
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Require work to be properly understood
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Derivatives ‘derive’ their value from properties of
the underlying
Underlyings - equities, bonds, indices, FX,
commodities
Basic principles are the same regardless of the
underlying
• Floor trading slowly fading away
• Retail trader has ready access to analytics
• Black box trading systems
o Formulas and algorithms fully automate and execute trades
• Grey box trading systems
• Combine Black Box algorithms with human interaction
• Computers & Models creating more efficient and
faster moving markets
• No real advantage to being ‘on the floor’ in some
markets
o Many professional tools are available to average investors
o Spreads in some products are very small
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Homework
Experience (pitfalls and advantages)
Statistics
Technicals
Strategy Selection
Money Management
Exit Strategies (profit and loss)
USE A DAMN CHECKLIST!!
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Economic Environment
o Where are We in the Economic Cycle?
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Earnings Trends /Corporate Fundamentals
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Technical patterns
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News /Blog Flow
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What are the Talking Heads Saying?
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What are your peers saying?
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Strong Economy: (higher risk strategies)
o Higher interest rates accompanied by lower bond prices
o Rising commodity prices
o Rising Inflation
o Stock market is harder to navigate
Slower Growth Economy: (moderate risk strategies)
o Stable or lower interest rates and solid bond prices
o Lower commodity prices
o Lower inflation
o Bottoming to rising stock prices
Weak Economy: (defensive, high probability, lower risk strategies)
o Low interest rates and strong bond market
o Lower commodity prices
o Low inflation
o Much higher stock prices
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Relationships between the indicators help predict
the future financial (and market) cycles.
They fall into three categories:
1.) Leading
2.) Coincident
3.) Lagging
Leading:
Stock prices, slope of the yield curve, and the
strength or weakness of the US Dollar.
Stock prices:
◦ Specifically look at the S&P 500. It represents
the 500 largest companies on the NYSE.
◦ The stock market closely relates to the growth
in liquidity. Increasing growth reflects
increasing liquidity, which directly benefits
stock prices.
◦ For example, the Fed lending more money to
distressed financial firms.
Slope of the yield curve:
◦ Confirms trends in the growth of money supply and
the dollar.
◦ Computed by subtracting the 13-week Treasury bills
(^IRX) from the yield on the 10-year Treasury bond.
(See the Federal Reserve website for weekly numbers:
http://www.federalreserve.gov/releases/h15/Current/)
◦ If the difference increases = yield steepens
◦ Decrease = flattens
◦ Inversion = negative difference between the two.
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When it steepens, the Fed is loosening credit and
real short-term interest rates (difference between
short-term interest rates and the inflation rate)
decline.
When it flattens, the Fed is tightening credit and
trying to catch an overheating economy while
keeping inflation under control.
When it inverts, the yield on the 13-week Treasury
Bill is the same or higher than the yield on the 10year Treasury bond. This is typical in times of
tight credit control and indicates a future
recession.
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Look at bond yield spreads!
They measure credit risk in the markets.
The spread is a measure between the BAA bond yields (lower
grade bonds) and the 10-year Treasury bond yields.
When spreads rise spreads rise to a very high level, it signals
deteriorating credit conditions.
High credit spreads make it harder for corporations to
borrow and invest. As spreads widen, the economy tends to
slow.
For investors, however, high spreads represent additional
potential returns for a given unit of risk-taking. Peak levels
of risk typically precede strong returns on risky assets - even
if the strong returns are short-lived, as was the case in 2003.
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Employment numbers, production, housing
activity, retail sales, car sales, Purchasing Manager
Index, ISM reports, Sentiment.
These are most often reported and sometimes
distorted by the media.
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To indicate if economic growth is rising or falling.
Indicate whether growth is above or below the
average.
Indicate when growth reaches a peak or trough.
Use as checkpoints while you’re in a longer
duration trade
The coincident indicators often follow 6-18 months
after a decline in leading indicators.
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Institute for Supply Management, Purchasing
Managers
The number reported reflects trends in the
manufacturing and non-manufacturing sectors.
The index oscillates around 50%.
Business activity is strong when the reading is
above 50.
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Bureau of Labor Statistics
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Reported on the First Friday of every month.
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It gives investors a report of employment figures
for the previous month.
ADP precedes that Wednesday and has historically
been more “positive”
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When car sales and goods are robust, the economy
is growing.
When they are flat the economy is running out of
energy.
Look for trends greater than 3 months
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When housing starts
are increasing, the
economy is strong.
The home is not only
the larges personal
asset, but inflation
protection
Home prices falling
has far reaching
ramifications
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Real short-term interest rates, inflation at the
consumer and producer levels, and the growth in
commodities.
When these start to move, major change has
already happened
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Measures the difference between short-term
interest rates and the inflation rate.
High real short-term interest rates are associated
with periods of declining inflation rates, higher
bond prices, and lower precious metal stocks.
Low real interest rates create a volatile stock
market.
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Inflation (deflation) at the consumer level
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Look at trends
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Often misleading and hard to read
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Break the reports apart to find where prices really
are moving
The economy is expanding at an above average rate.
Employees demand a rise in income.
Consumers borrow more money. More borrowed
money raises interest rates.
Moderately higher interest rates cause the consumer
to re-think buying more.
Producers then cut back on their production, and the
economy slows to a more manageable growth rate.
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Do you account for macro risk?
Are you able to quantify it?
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Some are more easily identified than others.
For example, if short-term interest rates drop,
commodities drop, then the money supply may
grow for a few months before stock prices grow.
Another scenario is a weak economy with stable or
lower rates with firm bond prices. Commodities
are heading lower, and inflationary fears start to
subside.
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These are the typical turning points in the business
and financial cycles.
The leading, coincident and lagging indicators all
play off each other in different ways.
Each scenario forecasts the next; this helps you get
an idea of what’s to come and adjust your risk
accordingly
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The leading indicators have risen sharply but are growing
more slowly. The coincident indicators rise sharply, and the
lagging indicators spike.
Stock prices are in a bull market.
The Dollar is strong but trading in a range.
The yield curve has been steepening for a while and is
flattening out.
Industrial production is expanding with the ISM well above
50%.
Employment and retail are rising.
Inflation is creeping up along with the strong economy,
forcing commodities to strengthen.
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The leading indicators decline, the coincident
indicators rise rapidly then slow, and the lagging
indicators rise.
Consumers are borrowing less and trim their
purchases.
Rising inflation reflects rising costs for business.
Bond yields are moving higher because of rising
inflation.
The Dollar is weakening dramatically.
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The leading indicators continue to decline, the
coincident indicators are still heading lower, and
the lagging indicators have stopped rising.
The economy has weakened enough due to slower
growth in demand.
Interest rates are low.
Commodities are lower due to less demand on the
consumer and manufacturer levels.
The yield curve flattens.
The Dollar remains weak.
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The leading indicators bottomed, the coincident
indicators decline and the lagging indicators
decline.
Costs are declining and margins are improving.
More money is borrowed.
Due to remaining low interest rates, the yield curve
steepens.
Stock prices gain renewed strength.
Foreign investors recognize new prospects and bid
up the dollar. (Bond auction results?)
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The leading indicators continue to rise, the
coincident indicators stop dropping and rise slowly
and the lagging indicators are still in a downtrend.
Commodity prices are still moving lower.
Lower interest rates and inflation prompt
consumers to borrow and purchase goods.
The economy stops slowing.
Rinse & Repeat
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Depends on the level of risk.
When risk rises, the chances of making a profitable
return drops.
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IS RISK HIGH OR LOW?
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What is your trade horizon?
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This is the critical planning stage. Poor planning
can hurt.
Step 2 : Finding Your Target
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Scanning
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Ranking System
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Fundamental Triggers
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News Triggers
o Finviz.com
o Zacks.com
o Zacks.com
o CANSLIM
o Trademonster.com
o Finviz.com
o Yahoo finance
o Marketwatch.com
o Wsj.com
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Corporate Triggers
o Earnings.com
o Sec.gov
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Technical Triggers
o Tc2000.com
o Finviz.com
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Volatility Triggers
o Optionshouse.com
o Trademonster.com
o Livevol.com
Type
“movers and shakers”
Into search box
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More Advanced Concepts
o Standard Deviation as a form of a stocks typical
movement
o Target “normal” range of stock
o Sell call outside that range