After last week finished somewhat mixed, there was still an overall move higher. If the markets continue to chop, like they have much of this Monday, this would be a great reason to stay out away from trading anything right now.
We are currently in an are, looking at SPY, where we could either get a large mover up or a large move down. However, until the market decides which, we will likely get chop. For those of you that are newer to trading, “chop” refers to when a market or stock is range bound between two levels.
Today, we saw SPY bounce back and forth between $411-412. These provide opportunities to scalp traders, however, this style of trading doesn’t quite fit our edge. We look for trades that we can stay in for a while, assuming we catch the right side of a trend we spot forming. This allows us to slow our trading down just a bit.
The reason why chop doesn’t fit this type of system is because if you put on a trade and price begins to chop around, the premium, or value of your contract slowly degrade as Theta eats away at the price. Theta, or time decay, is the value a stock will lose as we get closer to the expiration date of those contracts. The longer price chops around, the more value you lose in your contracts.
This skews your risk/reward from being favorable enough to put on the trade to being unfavorable. Basically, this indecision creates an environment no trader really wants to trade in, so it’s best to sit out and look for any developing opportunities.
If you want to learn more about my strategy and how we find trades that consistently net us over 100%, you’ll have to join my Smart Trades options trading service today! Smart Trades is where I teach my students how I trade options on some of the largest ETFs on the exchange. As you learn, you’ll get exclusive access to all my trades with notifications any time one is put on. Now, you can learn how many use this high-income skill to achieve financial freedom. Join today!
I look forward to trading with you, but until then, as always…