Tag: Options Trading

What Are the Best Days to Trade Stocks?

Best days to trade stocks
FrankNez options trading: Best days to trade stocks.

If you’re a new day trader and are trying to figure out what are the best days to trade stocks, then I have good news for you.

I’ve been trading options for an entire year now and have figured out which days are the safest to trade, and which days are the absolute worst.

I’m also going to go over a risk management strategy that is going to allow you to have bigger wins, and significantly smaller losses.

If you’re new to the blog, make sure you join the newsletter for more content like this.

And with that being said, let’s get started!

Best Days to Trade Stocks

Monday-Wednesday

During my journey as an options trader, I’ve learned that stocks tend to be significantly less volatile on Monday, Tuesday, and Wednesday, making them the best days to trade stocks.

These are the days where you want to take more than one trade (should your edge present itself to you) with confidence.

Sizing down during these days isn’t necessary unless your risk management strategy demands it.

You never want to overtrade as a day trader, but you should know what days have less risk than others.

How about the other days?

Here’s my personal experience.

Thursdays

Thursdays tend to have moderate risk and stocks tend to gain some volatility here, but charts are typically still very much tradable.

While day trading itself presents the trader with risk in every trade, I’m merely going over which days tend to be riskier in terms of volatility in the market.

As traders, we want to trade big price action in one direction or another and refrain from getting stuck in the chop, or from getting stopped out only to see continuation in our favored direction once we exit our position.

These anomalies usually occur due to the volatility in the market.

So, how do we avoid them?

By patiently waiting for an A+ setup or not trading at all.

Remember, cash is also a position.

Friday

Fridays tend to be the most volatile trading days of the week and could even be destructive if not assessed properly.

Most novice traders end up giving all of their weekly gains back on Friday.

In my experience, traders should not trade on Fridays unless an A+ setup presents itself.

And even then, it would be wise to downsize on this particular day.

There are far more experienced traders than I who simply take Fridays off from trading and start again on Monday.

Learning how to manage your risk on these particular days is what’s going to allow you to be consistently profitable.

Below is a risk management strategy that can help you navigate the waters throughout the week.

Day Trading Risk Management Strategy

  1. Set a fixed number of contracts to trade per new trade for Monday-Wednesday, Thursday, and Friday based on your account size.
  2. Limit your number of trades for Monday-Wednesday, Thursday, and Friday.
  3. Place a rule of when to stop trading.

1. Fixed Number of Contracts

Your fixed number of contracts is going to depend on your account size.

How do you identify how much you should risk?

Everyone’s account risk is different, but I would start trading with 10% of my account and only risk 10% of that particular trade should the market turn against my trading system.

This puts your overall account risk at 1%.

Set a rule for yourself to only trade ‘X’ number of contracts per trade for Monday through Wednesday, Thursday, and then lower your size on Friday by half.

This next part of your risk management strategy goes hand in hand with the fixed number of contracts you set for yourself.

#2. Limit Your Number of Trades Per Day

This rule is extremely important when it comes to managing your risk.

You’ll want to establish a ground rule of how many trades you’re allowing yourself to take per day.

[Ex.]

Since we know Monday-Wednesday are less volatile, we can set a max of 3 trades per day, while honoring your fixed number of contracts per trade.

Because Thursday tends to have more moderate risk, we can limit ourselves to a max of two trades on that particular day.

And with Friday’s being the most volatile day of the week, we can set a rule to only make one trade on Friday, granted that our setup presents itself to us, otherwise we don’t trade that day.

This risk management strategy allows us to refrain from overtrading on riskier days, while allowing us to potentially profit largely on less volatile days.

But the goal is to have significantly larger wins than losses, so how do we tie it up altogether?

By placing a rule of when to stop trading.

#3. Place a Rule for When to Stop Trading for The Day

Placing a rule for when to stop trading for the day is going to maximize your winning potential and minimize your losing potential.

Here’s a way you can manage your risk by knowing when to stop trading for the day:

Monday-Wednesday | 3 Trades Max

If you have two wins in a row, stop trading in order to keep that capital.

A third trade has the potential to both increase your capital, but to also eliminate your wins for the day.

If you have two losses in a row, stop trading and take the ‘L’ for the day.

While a third trade could potentially minimize your losses, the probability of accumulating even greater losses is also there.

If you have one win followed by a loss or vice versa, it’s okay to take the third trade to either end your trading day with some profitability, or minimal loss.

You may decide to not enter a third trade if after your second trade you’re still profitable or are merely facing a small loss; the choice will highly depend on whether your ‘edge’ presents itself to you or not.

Thursday | 2 Trades Max, Friday | 1 Trade Max

The same rules apply for Thursday and Friday except they are already limited to 2 trades on Thursday and 1 trade on Friday.

Since the market tends to get more volatile as the week progresses, limiting how many times you trade on Thursday and Friday will help you keep more of your gains made throughout the week.

You may decide to only trade once on Thursday and not trade on Friday.

This is good risk management as well.

By limiting the number of trades you make per day and number of contracts you take per trade on Thrusday and Friday, you eliminate big risk.

Any win you have on Thursday or Friday are merely extra gains to top off your week.

And if you have any small losses, they shouldn’t affect your bigger gains from the previous days, granted that you have a proper trading system in place.

But that’s another article of its own.

The Best Indicators to Trade SPY // Lesson.

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How To Trade Options in the Market With a 9-5

Options Trading for beginners
Are you ready to trade options? Here’s what you need to know first.

There are many ways to earn money outside a 9-5 but multiplying your money at will through the market provides you with another type of freedom.

If you’re like me, you probably hold traditional long-term stocks, some crypto, but have also been interested or curious about options trading.

Options trading seemed intimidating to me a year ago.

But after many months on and off of researching it, I’ve finally decided to apply the knowledge I’ve gained.

And it’s changing everything very quickly.

franknez.com

Welcome to Franknez.com – if you haven’t joined the newsletter, be sure to do that below. I’m publishing market news and updates daily.

Let’s dive right into it!

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Why options trading?

how to trade options for beginners

Options trading allows you to make money at will, no matter if the price of a stock is on an upwards or downwards trend.

Differentiating calls vs puts is going to help you identify which strategy will best suit you as a trader.

While some traders use one or the other, many traders also use both strategies in different plays.

Trading options isn’t as risky as most people might initially think it is.

For starters, buying a call or put option means you can only lose what you invest in.

Another pro to trading options is you can earn money every day, or every week if your margin account has less than $25,000.

New options traders will find you do not need a lot of money to begin trading options.

You can fund your account with a few hundred dollars or less for starters when learning how to trade.

Reason why you shouldn’t limit yourself to a 9-5

9-5

A 9-5 might feel like you have some sense of security, but the reality is a 9-5 is never truly 100% secured.

Learning new skills will allow you to increase your income outside your 9-5 without having to take the risks of entrepreneurship.

Two of my startups failed while I was employed, the third one wasn’t scalable, and finally my first real business has been growing since 2020.

But even then, I knew that I didn’t just want to earn money per project.

I asked myself, “how can I earn money on a regular basis?”

That’s when I began to study options trading before actually committing to making my first trade.

The hardest part for me was taking action after I had digested the knowledge on how to make my first trade.

But let me tell you, once I made my first trade, I got a rush.

Because I wanted to do it for so long and I was finally doing it.

I had a strategy in mind I always thought of using and I finally began putting it to work.

I made gains on my first trade, gains on my second, and lost a little on my third.

But by my sixth trade, I was up 10.57%.

If you’re a long-term investor you’re lucky to see these gains by the end of the year.

Here’s why these gains were so important

If you’re thinking to yourself, what’s so significant about +10%?

Well, you’re missing the macro vision here.

Think about how often you get a raise at work, are you even in a position to get a raise at work?

Imagine you getting paid 10% more one day at work, that be great wouldn’t it be?

Now let’s break down how much 10% is when comparing it to a few different brackets when trading options.

10% gains on $200 is $20 more per day / additional $600 per month

10% gains on $500 is $50 more per day / additional $1,500 per month

And 10% gains on $1,000 is $100 more per day / additional $3,000 per month

Now that’s a lot better, right?

If you are able to make $1 trading options then you can make $10 trading options and $100, and so on.

And while not every trade will be a 10% gain day, some will be bigger days and some less.

This is where strategy and due diligence will play a big part in your success rate.

How to prepare for options trading

Read the differences between calls vs puts.

I break down the differences in this article and make it very easy for beginners to understand how they work.

Call options are bullish bets a stock will go up while put options are a bearish bet a stock will go down.

You will also want to familiarize yourself with the meanings of OTM (out the money), ITM (in the money), and ATM (at the money), also explained in this same article.

And lastly, you will need to use a broker that allows you to trade options.

Webull has to be the best platform to trade options as it has one of the easiest navigation layouts in the game.

NOTE: you will need to open a margin account and not a cash account to trade options with Webull.

If you’re part of the community newsletter, you received an email regarding a new 3-part video options trading series I have coming very soon.

I’ve completed Part 1 and Part 2 already and will be publishing a video on my personal day-trading strategy in August as Part 3.

I show you the basics; how to buy a ‘call’ option and ‘put’ option step-by-step during a real-life trade.

I will wrap up the third video with the trading strategies that I personally use that no one else is talking about.

Some of you caught the clip I posted on my IG story this morning on calls that printed from CEI.

This 3-part video series will be made available in our private community if you’re interested in learning more about trading options.

Here’s what happens when you trade options

Options Trader - FrankNez
  1. You gain control of your finances
  2. A confidence emerges that was previously dormant
  3. You unlock the ability to multiply your money at will

Something clicks when you realize that you can literally turn money into more money without relying on an employer.

Those of you reading this who already trade options know exactly what I mean.

By the end of my course, most of you will be able to wake up every morning and make a trade that will yield gains.

Join our private community here to be part of this experience.

The Best Indicators to Trade SPY // Lesson.

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Here’s Why Majority of Options Traders Aren’t Successful

Options Traders
Want to become a successful day trader? Here’s what you need to know.

Majority of options traders aren’t successful, many know that.

Becoming a successful options trader is a journey in itself that requires real-world practice and experience.

The battles one fights when learning how to trade options turns into a war many aren’t willing to persevere through.

In the end, you realize the war was always you vs you.

You are always the boss battle.

This analogy depicts why only a very small percentage of options traders end up becoming successful while the majority fall.

In this article, I’m going to break down the 3 key things that make a successful trader profitable over and over again.

By the end of the article, you will have the knowledge you need to create the income and life of your dreams.

Let’s get started!

Introduction to Options Trading

If you have no clue or any idea about what options trading are, I highly recommend reading this article on what you need to know first before getting started.

The article guides beginners on what call and put options are, as well as what ITM, OTM, and ATM mean.

But if you already know the basics, let’s keep it moving forward.

Options Trading for beginners:

What Percentage of Traders Are Successful?

According to Investopedia, only approximately less than 20% of traders are successful with more than 80% of traders fail or quit.

Those who failed are those who blew their trading accounts and could no longer afford to fund them, leaving them with no choice but to quit day trading altogether.

Those who quit found day trading too challenging or never sought out solutions to the problems they were facing during the process.

Business Insider says only 6% of people who attempted to become ‘professional’ day traders actually succeed, claiming that those who fail is due to lack of passion.

That passion is what drives traders to continue to learn until they are no longer repeating the same mistakes over and over again.

But do you require passion to become a successful options trader?

The short answer is no, absolutely not.

I know options traders who earn upwards of $8K per day and trading is not their passion but rather the tool that provides them with freedom to pursue their passions.

What’s required is commitment and desire.

3 Key Elements That Creates a Successful Options Trader

Options trading: How to become a successful options trader
Options Trading: How to become a successful options trader.

The commitment I’ve put into trading options over the course of the year has allowed me to identify 3 key elements that creates successful options traders.

I’ve made a lot of money but have also taken heavy hits in the past.

Losses are part of the game, there’s no denying it.

It’s how we overcome these losses that allows us to sustain profitability.

And it’s the number of wins we have compared to these losses.

Big wins, small wins, and small losses will keep you consistently profitable, but big losses won’t.

Here are the 3 key elements every successful trader masters to create the income and life of their dreams.

#1. Finding a Trading System That Works

Every options trader takes the time to find a trading system that will make them money in the market every single time that system or setup presents itself to them.

Without a proven and ‘back-tested’ system that works, options traders will not stand a chance against the market.

Every trader has their own system, many are similar in some ways, but never exactly the same.

Some options traders enter a trade based on candlestick patterns, some based on supply and demand setups, and others on crossover indicators.

Because every person has a unique perspective, every trader will correspond to a different set of trading methods different from others.

How do you find a trading system that works?

There are two ways to find a trading strategy that will make you money.

  1. By back-testing your own unique strategy on a practice account. Find out what makes money every time and what doesn’t. Take your time before you commit to trading real money.
  2. By replicating a proven trading strategy that works from a successful options trader. Some of my readers are using my personal trading system to make money in the market. Find a trader you trust and who posts their gains for other traders to see what’s possible to achieve in the market.

A successful options trader will have their system locked down before anything.

This system will be the platform that will make you money every time it presents itself to you in the market.

#2. Trading Psychology

Trading psychology has to come next because once you find a trading system that will put you in profit every time it presents itself to you, you’ll need to understand how to execute properly and exit with profits.

Most novice options traders eventually find a trading system that works but let profits turn into losses due to a weak trading psychology.

Trading psychology often times has to do with fears in the market.

The 4 primary trading fears are:

  1. Being Wrong
  2. Losing Money
  3. Missing Out
  4. Leaving Money on The Table

These 4 primary trading fears signal painful information to our brains which often times cause traders distress in the market which leads to painful losses.

*When you are fearful, no other possibilities exist in the market. Fear blocks all available information from the market.

Here are examples of how the 4 primary trading fears cripple options traders:

Example: Afraid of being wrong: not getting out of a trade when you should; Afraid of losing money: not buying enough contracts to make a lot more money; Afraid of missing out: chasing plays; Afraid of leaving money on the table: failing to take profits.

Options traders must learn to master their emotions in order to become successful traders.

Emotions in the market will always lose, data will not.

How do you overcome the 4 Primary Trading Fears?

Afraid of Being Wrong: If you find yourself in a losing trade, you must overcome your fear of being wrong by cutting your losses. If you are afraid of being wrong, you will let your losses grow much bigger in hopes that you are right and the trade reverses in your favor. Losses are part of trading, it’s how small you are able to keep these losses that matters.

Afraid of Losing Money: Sometimes a trader might not open a trade when their setup presents itself to them simply because they are afraid of losing money. You can overcome this by downsizing the number of contracts your purchase. Conversely, some traders might only stick to the minimum number of contracts due to being afraid of losing money if they scale up just a little. Successful traders learn to trust their trading systems and manage their risk accordingly.

Being Afraid of Missing Out: FOMO, or fear of missing out, is something every trader experiences at least once. Successful traders don’t blindly jump on a trade because they missed their setup or because price is moving quickly in one direction. If their setup does not present itself to them (or they missed it), they don’t take a trade and give into FOMO. Successful options traders always follow their setup.

Afraid of Leaving Money on The Table: When traders are afraid of leaving money on the table, they let their winners become losers. Failing to take profit (FTTP) often times occurs due to the emotion of greed, of wanting more. Successful traders overcome this emotion by always taking profits. When traders learn that there will always be money left on the table, that’s when they will begin to consistently become profitable traders.

Book recommendation

A book I highly recommend reading on the psychology of trading is ‘Trading in The Zone, by Mark Douglas’.

The first chapter alone is enough to provide you with the clarity necessary to improve your trading psychology and succeed in your trades.

Now on to the third and final key element that creates successful options traders, risk management.

#3. Risk Management

Options trading risk management
Options Trading Risk Management.

Risk management is what keeps successful options traders from blowing their accounts and losing all their money.

I was scalping $1K per day and entering trades with nearly 50% of my account (1:1 ratio) and also scalping approximately $3K-$7K paper trading – so I know my trading system works.

However, when one weak entry combined with the fear of being wrong1 led to the inability to cut my losses short, I paid the price and lost nearly half of my account due to overleveraging.

I was forced to inject my account with enough cash to maintain above the minimum margin requirement if I was to continue day trading.

This loss was such a valuable lesson because it provided me with clarity I didn’t have before.

The capital in my account wasn’t set up for large trades like the ones I was making yet.

I scaled largely because my trading system worked, and I had learned to trust it despite the number of contracts I was purchasing.

I figured out how to exit my trade with profit, but the issue was that although I welcomed risk, I wasn’t managing my risk properly in comparison to the size of my account at the time.

Risk Management Lesson

I had to identify and choose one of the following:

  1. Trade at a much smaller volume, or
  2. Continue to trade with large volume, but double down on trading psychology discipline to refrain from creating big losses

But of course, the most successful traders only risk a small percentage of their accounts and gradually scale up as their account grows.

So that’s what I decided to do.

I went from trading 60-80 contracts per trade to only 10 contracts per trade.

I then printed out a scaling system to help me identify when to scale up again based on my account size goals.

This was by far the cherry on top for my success as an options trader and has been for other successful traders too.

If you’re a beginner, start with one contract and identify how to gradually scale up later on as you gain confidence in your setup, improve your trading psychology, and understand the importance of risk management.

How to Stop Losing Money Day Trading

Options trading for beginners
Options Trading for beginners

Losing money is part of the process when learning options trading.

The most successful options traders have lost a lot of money investing the knowledge in themselves but have succeeded by not repeating their mistakes.

It’s important to understand that big wins, small wins, and small losses are normal, but big losses shouldn’t be.

Successful options traders still lose money on trades but keeping them small is the key to long term success.

You can avoid big losses by finding a trading system that works, improving your trading psychology, and writing a plan for your risk management.

If you would like me to publish more articles like this leave a comment down below or join my newsletter.

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Long-Term Investing vs Short Squeeze Plays vs Day Trading

Long-Term Investing vs Short Squeeze Plays vs Day Trading
Wealth Building: Differences between Long-Term Investing, Short Squeeze Plays, and Day Trading

Today’s article is going to be extremely educational; I’m going over the biggest differences between long-term investing, short squeeze plays, and day trading.

In this article you’re going to discover what makes each one more susceptible than the other to market manipulation and overall risk.

When you’re looking to build wealth in the market, it is important to identify the major differences between the three.

Be sure to bookmark this page so you can come back to it in the future for a mental refresh.

Let’s get started!

franknez.com

Welcome to Franknez.com – join my newsletter to receive more content just like this straight to your inbox.

I’ve helped people learn how to invest in stocks, crypto, and how to day trade options as well.

My goal is to help you take your finances to the next level. Be sure to browse the blog for market news, wealth building tips, and other valuable content.

Let’s dive right into it!

#1. Long-Term investing

Long-term investing is the #1 traditional way to build wealth over a long period of time.

Investors looking to build wealth this way tend to invest in high dividend yielding stocks such as the S&P 500.

Here, an investor’s portfolio compounds over time as dividends are rolled over or reinvested back into the asset – further purchasing more stock on its own.

During the years of retirement, investors may decide to stop reinvesting the dividend and accept the dividend as cash instead.

This is how a dividend stock portfolio may yield investors with big passive income in the form of cashflow many years later.

Many of these stocks are not heavy victims to market manipulation due to the security and minimalistic risk there is to invest in these funds.

Read: The Best Dividend Stocks to Buy for Passive Income

#2. Short Squeeze plays

Short squeeze plays have a high risk/high reward ratio that has attracted many new investors into the market.

When a stock is being heavily shorted, the short interest percentage of the stocks float tends to rise.

This means that with enough buying pressure, investors may increase the probability of squeezing short sellers from their positions.

We saw this occur when AMC ran from $2 per share to $72 per share and when GameStop skyrocketed into the hundred-dollar levels.

While both these two stocks are still heavily shorted, these are just two examples of short squeeze plays where investors could have taken advantage of an opportunity to make big bucks.

Short squeeze plays are more susceptible to market manipulation since market makers tend to have a lot of control of retail investor’s orders.

They may drive share prices down by overleveraging their already bias positions, which means a lot of momentum is required for a short squeeze play to be successful.

Short squeeze plays are a form of swing trades that may last weeks to months of holding a stock before trading it for profit.

This type of investment strategy may be viewed as mid-term investing to cash in big on a rather unique opportunity.

#3. Day Trading

Day trading uses leverage as a multiplier to trade stocks in a short-term timeframe.

What makes this investment strategy attractive to most investors are the possibilities to earn massive gains in such a short period of time.

Traders are earning money whether the market is up or down through ‘put and call options contracts’.

Unlike long-term investing or short squeeze plays that have a buy and hold approach, day trading is a skill that requires focus, discipline, and a deep understanding about the psychology of trading.

Day traders can earn hundreds to thousands and even tens of thousands of dollars on a daily basis (you can view my gains here).

While day trading is mainly a form of income, traders may still allocate earnings towards long-term investments to further build their wealth.

Here’s how you make money trading the S&P 500.
Read: How to Trade Options in The Market with a 9-5

Which investment strategy is best for you?

As investors, we need to identify the best way to take advantage of the tool that is the stock market.

Long-term investors should focus on increasing their income to flood their portfolios with compounding effects.

Short squeeze traders should draw out a macro vision board to determine which path to take after short squeeze profits are secured.

Day traders would be wise to invest a portion of their income towards dividend paying assets or physical assets (such as property or a business) that will produce cashflow.

Building wealth is about having your money work for you so that you can have the time freedom to do what you love most.

If you enjoyed this article, please share it on your favorite social media platform!

I’m curious to know your thoughts, leave a comment down below.

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Read: How to Invest in the Stock Market for Beginners

3 Indicators That Will Improve Your Scalping

Scalping Trading
Day Trading Tips: How to improve your scalping | Scalping Trading

Published by FrankNez Team.

Scalping is a trading style that involves taking positions and existing within a few minutes.

It’s quite common with day traders as it affords them many opportunities to profit within a short period.

Most markets are volatile, with crypto being the king.

It is not unusual to see double-digit movements within the market in a day, and this volatility is a blessing in disguise.

The trader that is able to capitalize on the volatility gets rewarded handsomely.

One way to exploit this volatility is by scalping.

All you need to do is study the market, take a position, and exit once your take profit target is hit.

Since trading profitability lies in being able to predict which direction the market will take, price action is king.

However, combined with indicators, your chances of success are improved tremendously.

Below let us explore 3 trading indicators that can boost your scalping when combined with price action.

Moving Average (MA)

how to use moving average when scalping stocks
How to use Moving Average when scalping stocks

Statisticians use moving averages to analyze data points by creating a series of averages of different subsets of the full data set.

In trading, MA is used to smooth out the price data of an asset by creating a constantly updated average price.

Thanks to MA, the impacts of random, short-term fluctuations on the price of an asset over a specified time frame are mitigated.

When scalping, you can use MA to identify an asset’s trend direction or determine its support and resistance levels.

However, note that MA is a lagging indicator as it uses past data, and the larger the timeframe, the greater the lag.

Also, it’s customizable for 9, 15, 20, 30, 50, 100, and 200 days.

And the shorter the time span you use to create the average, the more sensitive it is to price changes.

When scalping, you can use the 9 and 20 MA to enter and exit the market for quick profits.

In an uptrend, wait for the price to pull back to the 9 MA.

If the next candle is green, you can enter and set your stop loss below the 20 MA.

If you do not intend to exit immediately, use a trailing stop loss to lock your profits as the price increases.

Related: How to Trade Options in The Market with a 9-5

Moving Average Convergence Divergence (MACD)

How to use MACD when scalping
How to use MACD when scalping

If you are new to trading, you might wonder what is MACD?

It stands for moving average convergence divergence.

This indicator is used to measure both trend momentum and direction.

It consists of two lines, one blue (signal line) and the other orange (MACD line).

Crossovers of these lines present the most opportunities for scalpers since if the signal line crosses the MACD line to the upside, it means upside price action can be expected.

On the other hand, if the MACD crosses over the signal line, then downward price action can be expected.

Relative Strength Index (RSI)

Scalping Options Trading
Scalping indicators | Day Trading Tips | Options Trading Tips

The RSI or relative strength index is an algorithmic trading tool that measures a currency’s price action momentum change.

The indicator will take price action data and convey the information through a simple line graph.

This indicator displays the relationship between current price action and buying/selling conditions.

It ranges from 0-100, with most traders using parameters 30 – 70.

The logic of the indicator is simple: if the asset price is trending between 0-30, it is said to be oversold, thus considered cheap, while if the price is trending above 70, it is said to be overbought, thus expensive.

If you are scalping an uptrend, you want to buy “cheap” on the RSI and sell at the overbought level.

The opposite applies in a downtrend.

Additionally, watching out for divergences between price and RSI can indicate an imminent change in trend.

Another thing you need to remember is scalping requires use of platforms with high liquidity.

Therefore consider using the likes of PrimeXBT for fast trade execution.

Also, as mentioned earlier, remember, price action is king.

First of all, determine the direction the asset is headed, then use the above indicators to strengthen your bias.

This increases your confidence in taking a given position and tremendously improves your trading success.

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5 Common Options Trading Mistakes

5 common options trading mistakes
Options Trading: Here are 5 common options trading mistakes

Published by FrankNez Team.

Options are everything in life, and some traders embrace this concept.

Although trading options can help you make a lot of money, they can also turn out badly when not used correctly.

“If stocks move up, down, or sideways, traders may benefit. They can do so with a very minimal monetary input by employing options methods to limit losses, safeguard profits, and control significant pieces of shares. The drawback is that while trading options, you can potentially lose a lot of money in a matter of minutes,” connotes option trader and startup business loan provider Shane Perry of Max Funding.

It is thus essential to act with extreme caution.

Even the most experienced traders may make the wrong decision and lose money.

So, to help you avoid potentially expensive pitfalls, here are the five common option trading mistakes that you should avoid.

Mistake # 1: Trading Without Sufficient Knowledge

The first and most common options trading misstep is attempting to trade options without first gaining a thorough grasp of how things work.

Diving into anything that is perceived to be difficult to crack without first understanding the principles, features, and risks involved is something you should not do in options trading.

The market is littered with tales of novice traders joining the options market with high hopes only to leave empty-handed.

Mistake #2: Unplanned Trading

Many people who are new to trading fall into the trap of trading without a plan.

They undertake a stock investment without considering when to exit.

Many may believe that planning your trade is a complex undertaking; however, this is not the case.

An entry point, exit point, profit target price, the maximum loss you can accept, tactics you’ll use, and the highest alterations to your position should all be included in your trading plan.

Mistake #3: Not Making Use Of Probability

When considering whether or not to conduct a trade, consider the probability of your plan.

It would put what is mathematically likely to take into perspective, but it is also necessary to determine if your risk/reward ratio is reasonable.

It’s vital to remember that probabilities have no bias in any way.

Mistake # 4: Capital Misallocation

When trading options, generating profits of 100%, 200%, or even more in a brief span of time, is possible.

You may obtain these gains on very slight changes in the underlying.

However, depending on your purchasing options, you may lose all of your money in a single deal.

Given the threat of a complete loss on a transaction and the high potential of doubling, tripling, or even quadrupling your money, the amount you invest in options should be much smaller than your stocks.

This allows you to make the same earnings as a stock trader while putting much less capital at risk.

Mistake # 5: Poor Choice of Options

options trading mistakes
5 Common options trading mistakes

When trading options, there are several paths to take.

The advantage is the flexibility and freedom to match the time with the indicator(s) you’re employing; the disadvantage is that it may be scary and overwhelming for beginner options traders.

One consideration should always be your risk tolerance when purchasing options since specific options may yield better results than others.

Still, they also carry a higher potential to lose your entire investment.

Ready To Trade Options Smarter?

When done correctly, options trading may be an excellent method for portfolio diversification, risk mitigation, and profit generation.

Naturally, no transaction is risk-free, and if you’re not attentive, options may lead to significant losses.

You’ll have a greater chance of spotting and preventing these typical mistakes if you familiarize yourself with them.

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Related: How to Trade Options in The Market With a 9-5

Calls VS Puts: The Biggest Differences in Options Trading

Calls VS Puts
A simple guide to Calls VS Puts – Puts vs Calls – Calls vs Puts explained

This article is going to help new investors identify the difference between calls vs puts.

I’m going to provide you with a very simple overview and breakdown of what these two trading strategies mean in the world of options trading.

And if you’re not familiar with what options trading is, I will further explain that down below.

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What is a call option?

What is a call option?
What is a call option? – Calls vs puts explained

A call option is a bullish strategy that allows a trader to profit from a trade on the upside.

The trader essentially bets that the price of a stock is going to go up by buying call options.

How does a call option work?

When you open the options chain, you will have many contracts to choose from, ITM, ATM, or OTM, which I’ll use as a quick example for now.

If you are betting on the price of a stock to go up, you might buy a contract with a strike price of a few dollars above the underlying securities’ current price, depending on your risk.

If the stock does indeed move up in price, you will begin to see gains on your contract.

You may then sell your contract and profit from your play when you are ready.

What is a put option?

what is a put option?
What is a put option? – calls vs puts options – puts vs calls stocks

A put option is a bearish strategy that allows a trader to profit off a trade on the downside.

Unlike calls, traders buying put options are betting the price of a security will drop.

How does a put option work?

I’ll use another OTM example for now and explain the other scenarios below.

You will have many options in the options chain to choose from.

Here you will be able to select a contract to buy based on the ‘strike’ price you’ve selected.

The strike price you’ve selected is where you believe the price of a security will go down to.

If a price of a stock is at $20 and you buy a contract for a strike price of $17, you’re betting that the price of the stock will fall in the future.

If the stock falls to $19 then $18, you will begin to see gains on your bet.

The closer the price of the underlying security gets to $17, the more gains you will see.

You can then close your position at any moment before the contract’s expiration date and take profits.

Both these examples are examples of an OTM contract which I’ll explain more below.

Here are other examples of how calls vs puts work.

What is ATM and ITM?

ATM vs ITM
Options trading: ATM vs ITM

ATM stands for “at the money”.

At the money (ATM) is the current price a stock/security is trading at.

When your strike price is near the current share price this is considered to be “at the money” (ATM) for both calls and put options.

ITM puts

ITM stands for “in the money” and will be a little different for puts vs calls.

When a strike price is in the money for put options, it means the price is above the “at the money” (ATM) price.

Example: You’re betting the price of a stock will go down, so you buy a put options contract “ITM” for $11 while the stock is currently trading at $10 (ATM).

You contract has a higher probability to earn gains since the current share price (ATM) is already below your strike price (ITM).

The further the price of a stock goes down from your strike price, the more money you make.

ITM calls

When a strike price is in the money for call options, it means the price is below the ATM price.

Example: You’re betting the price of a stock will go higher so you buy a call option contact “ITM” at $9 while the stock is trading at $10 (ATM).

Your call option contract has a better probability of making money from the start since the current share price is already above your strike price.

If the price of that stock continues to surge, then you will continue to make gains.

“In the money” (ITM) contracts are a little more expensive to buy since your probability to make money is higher.

“At the money” (ATM) contracts which are closer to the “current” share price had a medium risk factor and are cheaper than ITM contracts.

So then what are OTM contracts?

OTM “out the money” explained

OTM Explained
Calls vs puts explained – OTM – Calls vs Puts options

OTM, or “out the money” is the strike price above the ATM for calls, and the strike price below the ATM for puts.

Call option example: If you buy a call options contract OTM at $12 and the price of the stock is currently at $10 “at the money” (ATM), you are betting the price of a stock will rise above $10 per share.

Put option example: If you buy a put options contact “out the money” (OTM) at $8 and the price is currently at $10 “at the money” (ATM), you are betting the price of a stock will go below $10.

Remember, the closer a stock’s price gets to your strike price, the more gains you will reap.

So, the further out the money your strike price is, the higher the reward may be.

Should you buy ATM, ITM, or OTM?

Every trader will use the strategy that best tailors to their risk.

  • Out The Money (OTM) = High Risk / High Reward
  • At The Money (ATM) = Medium Risk / Medium Reward
  • In The Money (ITM) = Low Risk / Low Reward

Traders will need to study the performance of an underlying asset to get a feel and understanding of where the price may go.

Once you have determined whether you will be buying puts vs calls or vice versa, then you may begin to look at the contracts available.

Options contracts explained

Every 1 contract equates to 100 shares of a particular stock.

OTM contracts are usually less expensive.

With these contracts you can buy 100 shares of a stock for only cents.

ITM contracts are more expensive because they are the safest choice.

ATM contracts are in between ITM and OTM in pricing.

The options chain will allow you to choose when contracts based on short-term or long-term expiration dates.

You can go short or long on both a call and put options contract.

These expiration dates may vary from only a few days to weeks, to months, and even years.

Whether you should trade short-term or longer-term expiration options contracts is a strategy that will be highly based on your trading goals.

Where can you trade options?

options trading with webull
Options trading with Webull – calls vs puts options – calls vs puts explained

The most popular platform to trade options is Webull.

Webull is where I personally began learning reading charts and familiarizing myself with the options chain and data.

Here traders will be able to purchase calls vs puts or vice versa.

Some traders use both strategies to make money during a bull and bear market.

Other platforms where you can trade options include:

  • TD Ameritrade
  • ETrade
  • Robinhood
  • Fidelity

If you’re already invested in stocks, you might already be using one of these platforms.

The difference between trading stocks and trading options is that you will need to open a margin account for options.

A cash account will not allow you to buy calls vs puts.

You can earn 5 free stocks from Webull when you sign up using my affiliate link.

If you choose not to keep these 5 stocks, you can sell them and fund your margin account to trade options.

Puts VS Calls: Why trade options?

puts vs calls: why trade options
Puts vs Calls stocks – calls vs puts options – calls vs puts explained

Buying puts or buying calls allow traders to bulk up on stock and use leverage to make money in the stock market.

There are 4 different ways you can trade options.

  1. Buy Calls
  2. Sell Calls
  3. Buy Puts
  4. Sell Puts

All four essentially allow you to use leverage and make money whichever side of the play you want to begin trading options.

However, selling calls and selling puts from the get-go will require further in-depth explanation, which I will do in another article.

For today’s breakdown, I’ve explained buying both calls and puts.

There are a variety of things that attract investors to trading options.

  1. Short-term gains
  2. Big returns
  3. Losses are limited to what you put in your contract
  4. Quick accumulation of cash / shares

If you’re here today, it’s because you’ve probably seen people in your space talk about how much money they’ve made playing options.

And while options can yield a full-time income stream, new traders should also be aware of the risks.

Is trading options risky?

Is trading options risky?
Calls vs puts options – puts vs calls stocks –

Trading options has its risks as bets aren’t 100% guaranteed to play in your favor.

However, there are a few things you can do to increase your chances at becoming profitable.

  1. Familiarize yourself with technical analysis / chart patterns
  2. Only buy what you can afford to lose

While traders can certainly trade based on market sentiment, it would be wise to gain some understanding of how prices move through technical analysis.

TA can help traders determine the trajectory of a stock’s price moves in the coming minutes, hours, days, and even weeks.

It’s best to armor yourself up and learn as much as you can to properly set yourself up for success.

If you’d like me to do a write-up on bullish and bearish patterns leave me a comment below.

When it comes to choosing between calls vs puts, it really comes down to adapting to the changes in the market to help you increase your income potential.

If you have any questions, be sure to leave a comment below.

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Was AMC’s MOASS Just Threatened by New ‘Put Theory’?

AMC Put Options
AMC Put Options – AMC ‘Put Theory’

AMC’s MOASS was just threatened by a put theory that came about from YouTubers in the ‘ape’ community.

Many community members feel betrayed, others are choosing to follow the new narrative.

Despite which road you decide to take, we’re going to break it down together below.

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Puts on AMC stock

Most of you have heard about the put theory where YouTubers in the ‘ape’ community say buying puts on AMC is the way to make money and drive the price of the stock up.

And while buying puts or options trading is a way to make money in the market, what’s the exact logic behind it in this scenario?

But most importantly, will buying puts on AMC stock trigger MOASS?

There are two things to consider when putting out information like this out to a massive community.

  1. Trading options is risky, and profits are not guaranteed
  2. This is just theory

What is the put theory?

The theory says that as market makers are pushing the price of a stock down, you push the price of the stock down too with put contracts while you hold your AMC stock.

This essentially would enable the market maker to lean towards the upside since majority of orders are puts rather than calls.

At the same moment, options traders may potentially make money when they exit the put, a process known as ‘hedging’.

Although, it is important to note that a successful play is not guaranteed.

The theory then transitions to buying the stock or buying call options as the market maker moves the price of the stock up, further fueling buying pressure.

According to the put theory, because algos tend to favor low prices (which puts are at the moment), eventually those same algorithms will move towards buying the less expensive call options, driving the price of a stock up.

This is all theory of course.

Trading options

While I agree that as individuals, we can always learn something new, you cannot demand it from a community who may potentially lack the resources to do so (time, monetary means, etc.).

Trading options requires patience, time, money, and learning something completely new, which I’m 100% for.

But most people might not be open to the idea of taking up a new hobby or hustle.

And if you are, kudos to you.

But is buying puts on AMC going to help squeeze shorts from their positions or will it only provide market makers with more liquidity?

Remember, this is just a theory after all.

YouTubers say that with so many puts in play, market makers will eventually begin to move the price up, where retail investors can then begin to play call options.

While it’s a great strategy to make money in the market, is there a lack of integrity when asking a community to keep buying and holding a stock while others profit from the foundation of those who are not trading?

Options trading is risky but may provide great reward if a play is strategized properly.

But should it be done on AMC?

Would buying puts on AMC prolong a short squeeze?

It’s an interesting theory, isn’t it?

But if options traders begin to fuel AMC with puts during a bear market, doesn’t that just drop the price for retail?

Yes.

And while some retail investors might feel like this theory may be taking advantage of them, in the sense that options traders get to make money while retail momentum collapses, I don’t personally think there were any nefarious intentions behind this.

Some sentiment in the community is looming that:

  1. YouTubers either sold their positions and are now looking for ways to make money trading AMC.
  2. There’s a lack of integrity and transparency from creators.

And not every YouTuber in the community is on board with this idea either.

But I’d love to know what you think.

Is trading options bad?

Options Trading
Options Trading

Absolutely not.

Trading options is a skill you can develop to hedge in the market and make money on the downside and upside.

It allows traders to buy shares cheaper and earn a premium.

Technical analysis usually provides traders with hindsight and allows them to make educated predictions as to where the price of a stock is going.

A trading decision is then made based on this research and analysis.

The risks are you can lose money on every trade, which could develop into a form of gambling without proper due diligence and research in options trading.

What can we take from the information that YouTubers in the community are suggesting retail take?

There’s always something to learn.

While I don’t agree with buying puts on AMC specifically will accelerate a short squeeze event, trading options could prove to be a valuable skill you can put to use in other assets.

Is an AMC short squeeze still possible?

YouTubers are saying to make cash with both calls and puts in AMC Entertainment stock.

So where does that leave a short squeeze?

Is a short squeeze still possible?

AMC’s current short interest is at 20.94%.

This means there’s a high percentage of shorts that have not closed their positions yet.

AMC surged to $72 per share from a 20% short interest drop to 14%.

AMC has the proper setup for a short squeeze, you can read more about the data supporting this setup here.

Can the put theory really trigger MOASS?

Like shorting a stock, the put theory is essentially a ‘bearish’ strategy that stunts the growth of a stock in the short term.

There are no guarantees algorithms will favor calls over puts as puts pile up into the market.

One would also need to convince many call option traders to buy puts or get the ‘ape’ community learning the process to do so.

It’s an unlikely scenario that has the potential to create bigger losses for the inexperienced options trader.

I’d love to hear your take on it.

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