mad day trader bill davis webinar – july 29, 2015
TRANSCRIPT
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Mad Day TraderBill Davis
Webinar – July 29, 2015
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I want to continue thediscussion on integrating
the VIX with theMarket turning points.
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As I said in yesterday’sdaily update, I mentioned
how on John’s Webinarlast week that themarket was at aninflection point.
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Today, I want to show youwhat that means and
the implications.John’s webinar was on
Wednesday July 22, 2015.Today I want to show
why I said that.
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Let’s look at some charts ofthe S & P 500 and the VIX
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Now let’s look at thesecharts with the
resistance levels.
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Let’s scope down to a10 minute chart of
the VIX …
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You still apply your basictechnical tools to the VIX.The main ones I use are
moving averages and theExtreme Bollinger Bands.
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The % move on the VIXwill NOT correlate to the same % move on
the markets!
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The only thing the VIX istelling you is if the market
will reverse and whenyou can expect a reversal.It does this by reversing
off a resistance level.
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Because we are in earningsseason and there have been
a number of outstanding moves,I would like to discuss
how to look at a company reporting.
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This was prompted by a memberasking me my thoughts on
trading AMZN BEFOREearnings came out.
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You may have seen some of the incredible moves off earnings
this quarter …GOOGL – Up $97.84
CMG – Up $52.75ILMN – Down $20.05
SNDK – Up $9.52AMZN – Up $47.24And I could go on …
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The market makers know thattraders will straddle or strangle
options BEFORE earningsso they inflate the Implied
Volatility, making the optionsmore expensive.
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If you have ever bought callsbefore earnings and watched
the stock go up, but lostmoney on your calls you
know what I mean.This is because of theinflated option prices.
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Typically, after the earningsannouncement, theImplied Volatility will
return to normal. Thisis called the Volatility Crush.
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The one thing we can do isestimate the move that
the market makers expect.
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We do this by adding up thecost of the At the Money Call
and the At the Money Put.I will use BIDU as an example.
BIDU reported Mondayafter the close.
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BIDU Close Monday 7/27/15 @ $197.68
$197.50 call closed @ $9.60$197.50 put closed @ $9.50
Total = $19.10Projected move = 9.66%
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BIDU ATM Straddle$197.50 Call - $9.60$197.50 Put - $9.50
$19.10After Earnings;
$197.50 Call - $.02$197.50 Put - $33.00
Profit = $13.90 or 73% overnight
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BIDU moved almost 75%more than what the
market makers projected,so the straddle made money.
But if BIDU moved only what the market makers
projected, this dealwould have lost money!
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Here is what I like to do.Take the projected moveand add a 50% cushion.
So, 1.50% of $19 = $28.50
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Then I price out a spread aboveand below the closing priceand add the 50% cushion.
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$197.50 + 28.50 = $226$197.50 – 28.50 = $169
Then price out spreadsusing the 150 cushion.
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Call Spread:
Sell the $225 Call @ $1.80Buy the $230 Call @ $.92
Net credit of .88 per contractor 17.6 % max value
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Put Spread:
Sell the $170 Put @ $.82Buy the $165 Put for $.50
Net Credit = $.32 or6.4% max value.
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The first question you haveto ask yourself is this.Would you have done
the put side?
The call side paid 17.6% andthe put side paid 6.4%!
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There was one technicalcondition that had me
biased to BIDU selling off.
Can you guess what that was?
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The prior day BIDUGapped Down.
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Let’s apply the same analysisto a company that reported
last night … BWLD
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BWLD Closed on 7/28 @ $171.28
$170 Call @ $9.36$170 Put @ $8.10 Total = $17.46
17.46/171.28 = 10.2% Projected
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$17.50 x 1.50 = $26
$195 C @ $1.57$200 C @ $ .99
Net Credit = $.5811.6% Return
$145 P @ $1.08$140 P @ $.60
Net Credit = $.489.6% Return
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Let’s look at BWLD Today …
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BWLD Project Move = $17.46Move today = $21.38
or 12.48%Exceeded Projection by $3.92
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$170 Call @ $9.36 $21.10$170 Put @ $8.10 .30 Total = $17.46 $21.40
Profit = $3.94 or 22.5%With a move that exceeded
the projection by 12.5%
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If you trade intra day, youwant to look at companiesthat have made big gapsoff earnings … especially
on Fridays when theleverage is the greatest!
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Stocks that make a big gapmoves off earnings are
great candidates forshorter term trading!
The more strikes itcross the better!
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Let’s use AMZN as an example.AMZN reported on Thursday
July 23rd after the closeand gapped up almost $100.
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To help time your entry,you can scope down to
a shorter timeframe.
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You can always trade usinga straddle or strangle!