Rebel Traders 069 : Options Trading 101

One of the reasons we feel many people don't trade options is that they don't really understand how they work... So, let's fix that!

Options trading can be amazing if you know what you are doing.

And I have to pause there, as it’s important to emphasize that last part… “If you know what you are doing.”

Here’s why... Unfortunately, most people don’t understand the best way to trade options and the specific ways you can mitigate risk. Options, when used correctly, can be a potent tool in your trading arsenal.

In fact, in over 20+ years of trading, we are primarily options traders. It allows us many advantages that are not available when trading the underlying instruments.

So, in this week’s show, we’re going to dive into exactly what options are, how they work and some of the ways we use them in our daily trading to empower what we do in the markets.

So, are you ready to rock? Let’s do it…

Time Stamped Show Notes

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Sean Donahoe: Not sure about options? Not sure where to start? Let's fix that. Let's rock.

Automated: Rebel Traders takes you inside the world of two underground master traders who take an entertaining and contrarian look at the markets to cut through the noise of Wall Street and help you navigate the trading minefield. Together, Sean Donahoe and Phil Newton are on a mission to give you the unfair advantage of a Rebel Trader. Now, here are your hosts, Sean Donahoe and Mr. Phil Newton.

Sean Donahoe: Hey, hey, hey. This is Sean Donahoe and welcome to Rebel Traders. We are rocking and rolling. We're still in California but we're heading back to HQ as of tomorrow. So, I managed to negotiate a wee little bit of a meeting room here so I can squirrel myself away to record the podcast and I'm joined as always by my partner in podcasting, the man with his finger on the pulse and there was a deliberate pause there for a little internal a joke, but we are rocking-

Phil Newton: A double-double joke there.

Sean Donahoe: Yeah, absolutely. Yes.

Phil Newton: While I'm as blue as a sailor with my colorful language, I don't think I'd like to have the comments that we had recorded for posterity.

Sean Donahoe: Absolutely and I'll leave the rest of that up to your imaginations, but we are rocking and rolling here today. We're going to be talking about basically, here at Trade Canyon, we primarily trade options. That's what we do and many of the special strategies that we've developed are based around 20+ years of trading and most of that has been options. However a lot of time, most people seem to avoid options and I feel that's mostly because they don't really understand what options are. On top of that, a lot of misinformation out there about options and how to use them and everything else which leave people in, well, let's just say, in the poop.

Sean Donahoe: So in this week's show, we're going to basically give an overview of what options are, how they work, and how to effectively trade.

Phil Newton: I like that we're self-centering ourselves this week, Sean, already.

Sean Donahoe: A little bit. A little bit. As we need to. As we need to.

Phil Newton: It reminds me of an Eddie Murphy movies before the 9:00 , "Beep, beep, beep, beep, and beep you."

Sean Donahoe: Yes. You mother -

Phil Newton: Forget you, Freddy. Forget you, too. It was always that very obvious censoring, so we'll try to do that ourselves as we can have a family friendly show.

Sean Donahoe: Indeed.

Phil Newton: Anyway, after all the introductory to options 101, I've got my glasses on my nose and what's it called, is it a miter cap? I can't remember what you call the teacher's type hats?

Sean Donahoe: I have no idea, the -

Phil Newton: The square ones.

Sean Donahoe: I have no idea.

Phil Newton: The .

Sean Donahoe: Oh yeah, the old comics of our youth, yes, the British comics -

Phil Newton: Anyway, -

Sean Donahoe: We didn't have the cool stuff like Marvel and DC over there, we just had Beano and Beezer-

Phil Newton: Beano and the Dandy, that was highlights of our childhood, and Tempe Mixers.

Sean Donahoe: Yeah, there you go.

Phil Newton: Yeah, we've also got our ... When does it stop being new, Sean? Because every week, it's now our new favorite segments, and when does it stop being new? Anyway, we've got the new, the latest edition of our new format show, Trade, Fade, or Evade. Essentially, it's a quick look, literally a quick look, at how to find, filter, and sort stocks quickly and efficiently, and make consistent decisions. That's what we're trying to illustrate in that section. We'll also have a video version of that in our Facebook group, as well. If I can pull my own finger out and get it recorded before this gets published.

Sean Donahoe: There you go, yeah. One other thing I'm going to mention, as well, we are publishing, if you're in the Facebook group, which I really highly recommend you go to,, we also publish a daily video, basically what we're looking at in the markets and all sorts of other insights that we post in there, as well. If you're not a member of that group, you really blood well should be.

Phil Newton: You literally get to look over our shoulder. You click this, press that, do this, here's the stock for today, and then we can go off and play and do other things.

Sean Donahoe: Abso-bloody-lutely, and all sorts of other cool stuff in there, as well. In this week's trade -

Phil Newton: I know you really like hunting a few unicorns.

Sean Donahoe: Well, indeed, indeed. We're going to have a little fun with that. Okay, so let's get started with the core of options 101.

Sean Donahoe: Let's start at the beginning, which is always a good place to start, rather than the end.

Phil Newton: In the beginning. It's like one of those old story time movies, sit back, relax, then we'll tell a story Jackanory.

Sean Donahoe: Absolutely. Let's start at the beginning, what the hell is an actual option? So, Phil, how would you describe this to someone who's never ... They've just come to the screen, they're looking at charts, they're like, "Okay, I want to trade that," what's the difference between a stock and an option? What exactly is it?

Phil Newton: Well, what is a stock, what is an option, two questions there. A stock is essentially a portion of the company. Let's just say that you've got your shop on the high streets, a fancy shoe shop goes public, because we've hit the big time.

Phil Newton: Finally, we're doing all right and we've gone public with our shoe shop. We have a hundred people who want to buy a piece, an ownership of the company, so we sell one share to each of those people. They can buy a portion of the company so they're invested and they get, potentially, a piece of the profits as a dividend. It's like a share ownership or a stock. That's what most people might be ... Traditionally associate stock trading. They can go to an exchange like the Dow Jones ... Sorry, not like the Dow Jones, like the NASDAQ, for example, or the New York Stock Exchange, I don't know why I said the Dow Jones, that's an index, but they can go to an exchange and they can buy one or many shares of their favorite company on the public exchange. Privately, you might do this privately as an investor, as well. These things are quite common is all I'm kind of suggesting.

Phil Newton: From our perspective, we want publicly traded stocks so we can just go to exchange, we're trying to profit from the fluctuation in the valuation of those individual shares.

Sean Donahoe: One thing I should mention, we're not going to get into preferred stock, common stock, and everything else.

Phil Newton: Yeah, there's different types. This is the overview, isn't it?

Sean Donahoe: Yeah.

Phil Newton: It's the 101, what is it, so that's one type of it. Sorry, Sean, I kind of railroaded over you there, steamrolled-

Sean Donahoe: No, that's absolutely fine. I was going to say-

Sean Donahoe: Most of the time, there's common stock that is issued, but there's different voting, you don't get votes in some, you do get votes with others, and everything else. We're not going to worry about that, we're just keeping it simple, I just wanted to clarify the simplicity, we're not going to-

Phil Newton: Yeah, for the poor farm boy in the room, AKA me.

Sean Donahoe: Yeah, there you go.

Phil Newton: So, that's stock. The next part then is, when you've progressed, you might start to hear about options. Well, what is an option? An option, the way I normally describe what a stock option is, is while it's not entirely accurate, but today's the first day and you've heard the term, and you ask me, "What is an option?" I would typically reply, "Do you know what a deposit is?" You might want to buy a car is the usual example that we've mentioned, but you don't have the money today, but you want to reserve that car because it's got all the features and all the upgrades, and it's got all the trim, it's in the right color, and there's only one of it, you want to reserve that car so you don't have to wait several weeks or several months for the next one to come in that's got everything you need. So you put a deposit on that car and you reserve it.

Phil Newton: Typically, you'll give the car dealer until the end of the month to let them know whether you actually want to buy the car or not.

Sean Donahoe: At that current price.

Phil Newton: At that current price, yes. So, you're reserving the car so essentially, you control the car in that context. Essentially, it's a deposit, isn't it, Sean?

Sean Donahoe: Yeah, absolutely.

Phil Newton: Most people are familiar with that concept of, "Can I leave a 10% deposit? Can I leave a deposit and I'll let you know at the end of the day, the end of the week, the end of the month, whether I want that or not?"

Sean Donahoe: At that price, yeah. It is locking in the price. Basically, the dealer can't fluctuate the price, you've got a contract in place basically that, "Hey, I am locking in that price for that small deposit," and say, just use the example of 30 days, "In 30 days, I have the option, but not the obligation, to buy that car at that price that I've locked in by putting down my deposit."

Phil Newton: Exactly, yeah. So you control the car, but you don't own the car. That's the thinking. A stock option works in the same way. At its most basic, if you buy a stock option, you're reserving a hundred shares as a standard contract, and you get to decide whether you want to take delivery of those shares at the current price and you pay a small deposit to reserve or control those shares. If you want to take delivery, you can do, or you can sell your deposit back to the markets.

Phil Newton: Going back to our car dealership example, if it turned out that Steve McQueen owned the car, then the value of the car would probably double, triple, or quadruple because hey, he's a big star, he's a big name, and it turned out that he was once the owner. That certainly makes that car attractive to collectors, so the value of the car would go up. But, you control the car at the lower price because you've agreed that with the car dealer with your deposits. So, proportionally, your deposit would also increase in value because the car's worth more, and you can buy it at the significantly lower price than the current valuation because Steve McQueen used to own it, so that deposits, you could sell that back to the market or someone else who wants the car, or you can take deliver of Steve McQueen's car at the very affordable and reasonable price of whatever you agreed with the car dealer, so those are the two choices.

Phil Newton: That's kind of like how stock options work. Again, I know that there's people rolling their eyes and saying, "That's not right, Phil," but if today's your first day, that's how I would normally explain it, just so that you get the principle, the understanding, and the idea behind what's going on. We do this in many different ways in many different industries. There is the real estate version of the same thing where you can buy a note on a house, for example. I can't quite remember what it's called in the US, but there's the equivalence in real estate where you can reserve the house, and you've got the note, and you might pay a deposit, but you essentially own the house or control the house with this small deposit. You can sell it on, you can fix it up and do whatever you want, and flip it quite quickly, and you're only out of pocket by a small fraction of the house's value, and you get to keep any profits that you might make. There's those similar things that go on in different industries around the world and they've all got their own different terms dependent on where you are in the world and what industry you're in.

Phil Newton: Does that make sense so far, Sean?

Sean Donahoe: Yeah. That really is. It's not the most accurate description, but it's a good broad scope concept and that's the whole thing.

Sean Donahoe: Now, the thing is, obviously there's different ways you can use options and obviously, let's just start with the basics. We'll start with calls and puts. Looking at those, it's basically, and this is where I think a lot of people get confused, because in both cases, you can buy an option whether it's going up or down. Now, if you expect the stocks price to go up, then most people think, "Okay, then I want to buy ..." In stock terms, you would buy a stock.

Phil Newton: I want to buy something. You're buying stock, yeah.

Sean Donahoe: I will buy a stock with the expectation of going up. Now, with options, a call option, and this is the way that we most-

Phil Newton: This is where things deviate slightly from what most people-

Sean Donahoe: Exactly.

Phil Newton: ... traditionally associate, yeah.

Sean Donahoe: I want to be very clear on this. You would buy a call option. Now, a call option, and the way to ... Like a little pneumonic here, is call up, put down. If you imagine you're using a phone, you call up, you put it down. So, call, if you buy a call option, that's because you're buying a option at a certain strike price, in other words, the price that you want to lock in for that, with an ... This contract expires in a certain amount of time and we usually look at it like 45 or -

Phil Newton: Let's just say 35 or 40 days, just so we've got some ... We normally have about 45 days, don't we?

Sean Donahoe: Yeah.

Phil Newton: So, we'll just assume we've got 30 to 45 days is our kind of default time duration.

Sean Donahoe: Yeah, that's when our little-

Phil Newton: The end of the month, essentially.

Sean Donahoe: Yes, basically. So our deposit has an expiration date, so we will buy a call option, we'll put a little money down to buy that option, that little deposit, controlling a certain number of stock, usually a hundred stock, with that little contract expiring. If we expect the stock to go down, we actually buy a put option.

Phil Newton: I just want to pause you there, Sean. I was just going to understate what you were probably about to mention, which was, you would still be a buyer-

Sean Donahoe: Yes.

Phil Newton: ... of the option, even if you expected the stock to go down. This is where it deviates from what most people might ... Everyone's heard of short-selling because of the big crash and short-sellers this, and Tesla shorts -

Sean Donahoe: And we're all bastards.

Phil Newton: ... familiar with the term, even if they don't know what they are, yeah. What that is, is people would normally borrow shares that they don't own, and sell them in the markets at the high price, and buy them back at the low price, and you would profit from the difference. That's what you would do if you expected the market to go down. As you were just explaining, Sean, you would still ... You can do that with options, but you would buy a put instead. You would still be a buyer, but you would benefit if the stock moved lower. Again, the key phrase is in both cases, you're going to be a buyer of a call and a buyer of a put, depending on which direction you expect the market to move or the stock to move in this case.

Sean Donahoe: Yeah. Absolutely. In both cases, you are putting money down on a contract, and that is the thing that I think most people just don't get. This is the biggest confusion point of it, because they're like, "Okay, well, I'm still buying." There's the thing where, and we'll get into this in a little bit, we're not going to do it right now, but you can also sell options where you can be on the other side, but we won't get into that yet.

Phil Newton: We'll come to that later, we're just chewing around the buy-side at the moment, because that's probably the easiest thing for most people to understand when you compare it to if you're going into a car dealer, for example, and reserving the car, "I'll let you know at the end of the month, here's the deposits." Most people are familiar with leaving deposits, even if they've never done it themselves, they're familiar with the idea of, you can reserve it and leave a deposit.

Sean Donahoe: Exactly. At the end of the day, this is how options work. The thing is, why do we use options in the first place? What is the advantage or the reason for using options? You could go out right now, buy the stock and everything else, or you could sell the stock if you're shorting it and everything else, or borrowing the stock and selling it, yada, yada, yada.

Phil Newton: I was just going to say, Sean, here's a good example. We've been talking about Tesla quite a lot, it's in the news quite a lot, so we tend to talk about it. Right now, that is a ... It's just under $300, it's a little above 250, so $250 per share. If you wanted to buy a hundred shares, it's 100 times $250, to get a hundred shares.

Sean Donahoe: 25K, that's a lot of money.

Phil Newton: Exactly. So, if you wanted to buy the stock outright, it would cost you 25K. I don't know about you, Sean, but that's a big investment for 100 shares.

Sean Donahoe: It's a bit blood chunk of for anyone-

Phil Newton: Exactly, yeah. Regardless of your net worth, that's a big chunk of money to put out on one idea, one trade idea.

Sean Donahoe: Put it this way, even if you've got a medium account, $100,000 account, okay?

Phil Newton: Yeah.

Sean Donahoe: That's still 25% of your capital on 100 stock.

Phil Newton: That's if you buy outright, if you've got a cash account, you're not using margin. A step down from that is margin and usually it's about 20-25%, dependent on the arrangement you've got with your broker, so you'd still have to put up 25% of the stock's value or of the notional value. In this case-

Sean Donahoe: It'd about -

Phil Newton: Cue our human calculator.

Sean Donahoe: $6,250, yeah.

Phil Newton: There we go.

Phil Newton: Yeah. So, even still, you've got a few thousand dollars tied up in that position, if you're trading with margin. Again, we're always going to be using margin in the context of it gives you a discount, so I wouldn't then buy four times as many shares because I'm getting discounts. We've spoken at length about this in the past. So, we've got a discount with a margin account, but we're not going to do anything weird or crazy. For the same hundred shares, I can use less money to control that position. A deposit is usually some 10%, so I can put 10% of the stock's value down. Again, it does vary, and again, I appreciate there's people rolling their eyes, but we're just trying to give you a benchmark for, it's about 10%, maybe a little bit less, maybe a little bit more, there's a few variables involved, but just to give you a rough idea, that's normally where we're at.

Phil Newton: So, 10% of the overall value is what you would put down to reserve the same hundred shares. Now, you don't control them as you've not bought them outright and you've not got them on margin, but you still control a hundred shares for the next 45 days with an option. What we're highlighting here is it let's capital intensive. I think that's the measure here, that's what we've highlighted. That's, for me, the biggest reason. It's great for small account. For me, anything under a quarter of a million is a small account. Whether you've got five grand in that account, whether you've got 100 grand or 150 grand in your account, it's less capital intensive and it means that you can start to benefit from trading a portfolio. If we think about it, even on a margin account, you're trading stock, you might only have two or three positions because it's very capital intensive even with margin. If you trade with options as an alternative at its most ... There's other things that we can do, but at its most basic, we can use them as an alternative to stock. We can use options with expiration dates of anywhere up to two years. If you want to trade for two days or up to two years with your time horizon, you can do anything in between.

Sean Donahoe: Absolutely.

Phil Newton: And find the right option expiration to suit your strategy. That's attractive because that means that I'm not locking up my capital for 12 months or 18 months on a trade idea, and it's fixed risk because all I've got is the deposits. If I'm wrong, my risk is fixed because I've just put a deposit down, I've not ... Let's just say that Tesla, I buy a hundred shares at $250 and then tomorrow, it turns out that Elon Musk has really been ... The SEC throws the book at him and the stock halves, now, my hundred shares, I've gone from $250 each to $100 each. My 25K has suddenly disappeared. In fact, I could end up, if I'm using margin and I do something stupid, and I buy more shares than what I'm capable of, I could end up owing the broker my first born child. I could end up owing them a lot of money if I'm not clever or smart with what I'm doing. With an option, you're only ever going to lose your deposits, so the second big reason why we do it is it's fixed risk. It doesn't matter whether the SEC stops trading on Tesla tomorrow and the stock goes to zero, the worst thing that could happen with a stock option is I lose my deposits.

Sean Donahoe: Yeah.

Phil Newton: That's really attractive because that means that I can sleep at night. That means that I'm not worried about stock gapping, because that's a big issue. It means that I don't have to try and day trade when I've not got the means or the ability to day trade because that's why people do it, because they're worried about overnight stock movements.

Sean Donahoe: Yes, exactly. The way I explain this, and I'll use Steve McQueen and the car as an example, so just to put it in broad terms. Imagine that I'm looking at this beautiful Mustang, beautiful Mustang in the showroom and they're selling it for, say, 20K, and I put down a 10% deposit, 2K, I'm locking in that price and I'm going to decide in 30 days whether I'm going to-

Phil Newton: There's a whisper that Steve McQueen might own.

Sean Donahoe: Yeah.

Phil Newton: If it turns out to be true, we're going to be -

Sean Donahoe: Yeah, because the value of that car is going to shoot up to, say, 50K, 100K, and everything else, and I can pocket the difference, that's my profit.

Phil Newton: It turns out-

Sean Donahoe: It turns out the -

Sean Donahoe: Yeah, it turns out that-

Phil Newton: It's a ringer.

Sean Donahoe: There you go. It turns out that ... I'm just trying to think of ... The engine's blown, the lower end ... Yeah, Steve McQueen never owned it.

Phil Newton: It's chop shop, it's really three different cars welded together.

Sean Donahoe: Yeah, exactly, but it's basically worth nothing. Well, the only thing I'm out is my 2K, I didn't risk 20K on that with the hope of something magical happening, I've just risked 2K and hey, it turns out it's worthless, okay, my 2K deposit's gone, but it's the risk reward of, "Hey, that could have been a 30K versus 2K?" Done. It's based on my analysis and if I'm doing my job right, before I place the trade, which is again, what we talk a lot about, our process of finding, filtering, sorting stocks, doing a lot of estimation and evaluation and analysis based on what we're seeing in the charts and everything else, what we're seeing going on. Before we even put money on the table to secure the option, we have done a lot of homework first, so that we go in pretty certain we're on the right side of it most of the time.

Sean Donahoe: That's the main thing is the most of the time. It is the majority of the time we have a positive-

Phil Newton: On average.

Sean Donahoe: On average, we are right.

Phil Newton: On average.

Sean Donahoe: If we're doing that, the majority of the time, with options, where we're predicting basically our downside and we're basically able to capture the major moves of any particular individual stock, equity, whatever we're trading, then, again, we are protecting ourselves, we're able to sleep at night, we're-

Sean Donahoe: And again, we are protecting ourselves. We are able to sleep at night. We're having the ability to have a rolling portfolio of these, so again, we're not putting lots and lots of money down on one or two giant positions hoping for a home run.

Phil Newton: Which is what we've referred to as swinging for the fence in the past. One trade, hope for the best.

Sean Donahoe: Exactly, we've got a whole load of them. Because we're trading options we can have a basketful of these positions controlling large numbers at a time.

Phil Newton: Absolutely.

Sean Donahoe: And again, capture the upside of a lot of these moves. But flipping from that...

Phil Newton: And again, it is literally the law of averages. We've got the benefit of a portfolio, of the lure of large numbers starts to work, we get to trade with frequency without tying up or locking up our capital. Another way that we've talked on this, Sean, and again, I want to say, 'cause I really like the idea, which is, it's like if we have it ... we think about them like a real business. These would be employees.

Phil Newton: We've got one employee or two employees and they're opening up a shop and they're doing all the things that they do during the day. Counsel with cash registers, serve customers, blah blah blah. If one of those people phones in sick, or decides to, you know what, stop this, I'm gonna go and work for the bigger shoe shop, Phil's shoe shop's going public. I'm going and work there instead. If he decides to leave tomorrow, you're down your only employee or one of three employees that you've got and that will have a major impact on the day to day operations with the business. Because that one employee was probably quite instrumental to the outcome of the day to day.

Phil Newton: But if you've got 20 employees, and one of them phones in sick, it's not really that consequential to the end of the day, to the business. You've got 19 other employees that can pull the weight.

Sean Donahoe: Exactly. Exactly, now.

Phil Newton: And that's the benefit of a portfolio. To put under context, you've got one trade, if that doesn't work out, if the SEC stops trading on Tesla because whatever, you're almost sort of weird and crazy. Even more weird and crazy than he's already been doing. Let's just say that that happens, it's a possibility. I mean, look at Enron. Enron happens, it turns out they were cooking the books for years. But who would have thought?

Phil Newton: And that was ... alright, it's a black swan type event, it's an anomaly. But it can happen, that's what people are scared of. So if you've got that one employee, the Enron, and you're holding onto it and then suddenly, Enron happens. So like, you know, you can owe the broker. You can owe other people very large amount of money. Very very quickly.

Phil Newton: If you've got 19 other employees, or 20 other employees, other positions, and you've got a little bit of a position on each of them, and your risk is fixed on each of them, then it just gives you this measure of peace and serenity around the trading. And as you said earlier, Sean, it allows you to sleep at night. It's suddenly become stress-free. I mean, it's such a counter-intuitive way of trading when you start to look at options.

Phil Newton: Because you've now got this ... the benefit of portfolio trading. It allows you to trade more frequently with smaller position size. And use your caps, more sensibly, more effectively, to trade options. So we've got off the beaten track a bit, Sean, or more specifically, I've got off the beaten track a bit. But these are the risks, these are why we use options. And that's why I like them so much.

Phil Newton: And there's more that we can do than just using it as an alternative to buying stock as well, which we can talk about in a moment. But ultimately, this is why we love them. It allows you to be flexible and trade frequently, and you can sleep at night. And for me, with my health conditions, and for example, let's just say, you with your business interests, if you have to go to the other side of the country, you're not stressing. Oh shit, what's the market going to do tomorrow. I'm not able to look at the positions because I'm traveling or your laptop's lost or whatever.

Phil Newton: You've not got that worry, you can just check in, at the next available moment. You don't have to keep an eyeball on the markets and stress about it. Because if the worst thing did happen, what's the worst that can happen? Well, I'll lose my deposits. And if we're doing everything that we're supposed to be doing right, with our fully laid out strategy, and the market does take a swam dive tomorrow, then maybe half my positions are going to work out and the other half won't. And the other half that does work out will more than cover the half that doesn't. In a perfect world.

Sean Donahoe: A perfect example of this right now, literally as we're talking, is Sears. Sears literally announced this morning that, and it's come down the media, that they're going to be bankrupt. They've run out of money, they-

Phil Newton: Wow.

Sean Donahoe: Now this, two years ago, was-

Phil Newton: That's a national institution, isn't it? Sears?

Sean Donahoe: Absolutely, so in say ...

Phil Newton: Sears-

Sean Donahoe: Yeah, March 2017, it was a $22 stock, today, it's trading at 0.38 of a dollar.

Phil Newton: Wow.

Sean Donahoe: And that is like-

Phil Newton: I'm just looking at the headlines. Sears is set to crash to record low after bankruptcy filings.

Sean Donahoe: Yeah, so that's it. I mean, in November 2015, sorry, November of 2013, it was a $55 stock. That's only five years ago. Today, it's literally a penny stock, it's trading at 0.38 and it is tanking. It is tanking because it has filed a bankruptcy so if you had money in that ... now again, this would be way outside of what we would recommend as a stock to look at anyway because it's so damn cheap. Obviously, we wouldn't be in the penny stock range or little below. We usually about $20, you know, that's kind of ... you know $15, $20 is kind of our benchmark. It varies.

Sean Donahoe: But again, we wouldn't be looking at this, we wouldn't be anywhere near this. I would be shorting the hell out of it if I was even thinking about it. But again, this is now going to be ... they just filed bankruptcy today. And that's it. That's all over the news, Sears is basically-

Phil Newton: Seven pence. I'm just looking at the history. It's a little bit sad, this. You just randomly side-barred. You know, this is a traditionally a blue chip company. Started in, around 1892, round about 1906. They sort of ... turn of the 1900s. And it's a long, well established, blue chip traditionally, it's a good stock. And look at it. Things change.

Sean Donahoe: Yeah, if you look at options, 07, it was $150 stock, that's just 90s.

Phil Newton: Yeah, I mean, I've got the numbers I've got, revenues in 2016, $13.8 billion. So just two years, they were making $13.8 billion in revenues. Now, pretty sure that's not profit but what has to go wrong for you to be making $13.8 billion in revenues so then still file for bankruptcy. Why? You've got to wonder.

Sean Donahoe: I'm gonna get with one of those yachts. I'm sorry, one of those yachts has to- But there you go. Yeah, mate. But yeah, that is-

Phil Newton: Anyway, very random side bar, but yeah, it's very sad that these things ... so let's just say that you've got stock and you're waiting for it to turn around, and you're waiting and you're waiting and even just this year, you think, ah, it's, for all the reasons that we just mentioned. See, it's a good company, it's a blue chip, it's longest- it's too big to fail. Well, oh my God, we've had all these stories before in 2008, haven't we?

Sean Donahoe: Sounds familiar.

Phil Newton: That sounds familiar. But these things happen individually rather than just the big events. And I can ... why we're getting off the beaten track is, this is why we would trade options. Because if I've got stock, I might be thinking back in April, oh, the bottom's here, it's $3 a share, and it's going up. It's too big to fail, it's a long established company. All the reasons that we mentioned. And we buy at $3 or $3.50, or if we're really unlucky, we buy it at the peak of April, May ... sort of April, May, June, sort of direction, and we buy, just above $4 a share, and we ... yeah, what's the worst that can happen? I'm out $4 a share. And literally, you're out $4 a share.

Phil Newton: It's senses as we're looking at it right now. But you would be head in hands, wondering what's going on. You've bought 10,000 shares. You put your life savings in too big to fail. Reason why. But if you buy some long term call options, and you put a deposit down, and it ... and you buy them with two year time horizon. You think, yeah, I can turn them around. And I give it two years and if it's going to turn around, it'll turn around. And you just buy a small position. You put a small allocation.

Phil Newton: Use the same money, or portion of that money that you were gonna buy all those shares in Philly Boots and you swinging for the fence. But if you just put an allocation to it, it's very speculative, but it wouldn't burn the boat behind you. You would still be in business tomorrow. This would be like the employee phoning in sick that we were just talking about. And suddenly, you've got no business because that employee was running everything.

Phil Newton: They opened up, they cashed up, they made sure everything was alright. It's the brand manager has just decided to go somewhere else. And suddenly, you're out of business. That's what happened here. That's why we prefer options because when or if the worst happens, what's the worst that can happen? All I would be out is my deposit. And I'm not owing anybody anything. I've not tied up all my funds.

Phil Newton: And it doesn't matter how bad things get, the worst that can happen is I will lose my deposit. Or the price of the stock option in this case. Great example. Sorry, really really want to hammer that point home because this is the thing that people can't get their head around is, well, should I use a stop loss. No, you don't have to use a stop loss in the traditional sense as if you're buying stock.

Phil Newton: The risk is defined by the price of the option. That is always a question that comes back to me. I've actually had it twice this week already. Because people ... where do I put the stop loss on the stock option. No no, you don't need to use a stop loss with a stock option. The price of the option is the stop loss. It doesn't matter how bad things get, you'll only ever lose your deposit or the price of the option.

Phil Newton: That really needs to be ... I think I've hammered that drum, Sean. I think that drum is-

Sean Donahoe: Your bongos have been beaten on this one. There you go. So here's the other question we get. And this is something that a lot of people don't consider is, what do you actually need to trade options. Now obviously, you need a broker that handles options. But you have some monetary requirements as well. A rolling balance, obviously, of a certain amount. But I'll let Phil explain that one, because he has a much better way of explaining it than I do.

Phil Newton: I do, do I? You need money in your account.

Sean Donahoe: Yeah, you need a certain amount. It depends on your broker. They're going to require you to have a certain amount to cover it. But basically, that you are qualified to, thus, trade options, because of the risks, obviously.

Phil Newton: Yes, I'm being very flippant with this, Sean. Again, another thing that people get scared of is because there's a few extra forms to fill in essentially. You've got to check off that, yes, you're aware of the risks. Because it's a derivative and it's a leveraged product. You can use them stupidly for the reason we mentioned. We treat it like we're getting a discount. So instead of having to buy the stock outright, if we had buy a margin, we get a discount. Now what most people have done historically-

Sean Donahoe: This is ... put the warning in here-

Phil Newton: And foolishly is because they've got a discount, they then say, "Well, if I've got a discount, I'm going to buy 10 times as much." And they're gonna use the same amount that they would use to buy the stock outright but using the leverage that they've got and that's a stupid way of treating either margin or options. Anything to do with margin and leverage, it's a stupid way of doing it. Now I know the strategies and people make a success of it, but they really know what they're doing when they do that. And they're aware of the risks so that's usually why there's extra forms to fill in. Yes, I'm aware of the risks. Yes, I've got a little bit of experience, I'm familiar with these things.

Phil Newton: That normally puts people off. And all we're saying is, don't be stupid with them. Treat it like you've got a discount and you only have to put a small amount down. And we're not suggesting for any moment that you then buy 10 times or 50 times the amount that you would have done because you can. Because you've got a discount and you can buy more. Keep the discount, use the less money with the same size of position that you were originally intending on.

Phil Newton: And yeah, so there's usually a little bit ... so yeah, I think that's the public service one. But there's usually a few extra forms to fill in because that's ... depending on your broker, you might be asked to fill in a test or two. Because just think about it, they're covering their ass essentially is, they want to make sure that you know what you're doing when you push the button to put the trade on. Because you should know what you're doing when you put the trade on and push the button.

Phil Newton: It's not the broker's responsibility if your lack of knowledge means that you lose money.

Sean Donahoe: Basically, I mean you can't put it-

Phil Newton: And that's what the extra paperwork's for. Basically, put your big boy pants on and take ownership of ... you put the trade on, it's your responsibility. And that's usually what the extra paperwork is. And from a legal point of view, depending on what you're doing, it's usually pattern day trader rule, was I think-

Sean Donahoe: That was-

Phil Newton: the other thing that you're perhaps skirting around is, if you want to be really active with your trading ... if what we're doing and we're opening and closing positions on different days, so pattern day trader rule, the quick version of it is, if you open and close-

Sean Donahoe: Intraday.

Phil Newton: Same trade. So if we're buying Sears. So if we buy 100 shares of Sears and then we close 100 shares of Sears. That would be classed as a day trade if we do that on the same day. But if we open the trade today and close it tomorrow, that is not day trading. So you can do the day trading thing three times in a five day period. And that means that you're restricted. And for what we're doing, we don't have that restriction. Because I'm never typically opening and closing the same position on the same day.

Sean Donahoe: Perfect. Yup, okay, rock and roll. So that is exactly what I was getting around-

Phil Newton: Sorry I felt like I was pushed under the bus for-

Sean Donahoe: Yes you were pushed under the bus and dragged along a few hundred feet there. But there you go.

Phil Newton: I'm glad we got the answer.

Sean Donahoe: A little bit. Now, we got the flip side and we'll talk about this finally before we go to trade of eight. But it's selling options. This is why I love this industry because you can be the casino. You can-

Phil Newton: On the other side of the trade, yeah. You can be on the other side of the trade.

Sean Donahoe: If you, for example, let's just use the thing as, we have the Mustang, okay? We believe ... we maybe know that this Mustang is a duffer or we think it's ... hey, we know that you think Steve McQueen owns it, we don't believe Steve McQueen owned it. So you're buying with the expectation it's Steve McQueen's and I'm like, I don't believe it is, mate, okay? But I'll sell you the ... yeah, I'll sell you the option I'll see you the option to buy this at this price and I don't think it's going to be anywhere near where this ... in fact, I think the value is going to go down. I know it says there's a few oil leaks or what have you but yeah, I'll sell that to you.

Sean Donahoe: You take the other side of that and it becomes ... okay, the option expires worthless as it's called. In other words, yeah, it turns out that the engine is duff and everything else. It's not even my car. I just happen to own ... but it's not my car. But I'm giving you the option, I control it.

Phil Newton: I was just going to say, another way it's often described is like insurance. So if you imagine it, an insurance agent's ... I'm worried that my house is going to burn down. I'm going to have a fire. The likelihood of it happening is slim. But for insurance purposes, better have it and not need it than to need it and not have it. So as the insurance company will sell you insurance 'cause they know, the likelihood of your house burning down in the next 12 months is highly unlikely in your area.

Phil Newton: So they'll give you the insurance. They'll sell you the insurance so that's again, the same principle as selling the option. Selling the deposit, selling you insurance. And again, it's just another illustration, same thing. Taking the other side of the position. I think my house is going to burn down and the insurance company knows that statistically, it's unlikely. So they'll sell you the insurance.

Phil Newton: Like with your example with the Steve McQueen car, the two sides to the story is, I think Steve McQueen owned this, I'm going to buy an option. And if I'm right, this is gonna be worth 10 times what it's worth right now. But you, as the current owner of the car ... it's not that you think it's a ringer, or you think it's a bad car, or there's an oil leak, you just don't think that Steve McQueen owned the car. I don't think that it's worth what you think it's worth.

Phil Newton: Thinking of that, I don't think it means what you think it means type of statements.

Sean Donahoe: Absolutely. You're back to a little Princess Bride, yes.

Phil Newton: Yeah, exactly, yes. So you think it's worth ... Steve McQueen owns it but the guy that the option writer, I don't think that that's true. It's not that you think it's worth less, or that it's a bad car or it's a bad , I just don't think it's going up, dude. At least not in the next 30 days. And for that reason, it's higher ... you've got a small fixed amount as the seller of that option, but you've got twice as many ways to get paid.

Phil Newton: So let's think about this, I think that the car is going up or the stock's going up. And I think it will do that in the next 30 days so I'll buy a call option and I will benefit if the stock goes higher.

Sean Donahoe: I'm the one-

Phil Newton: And let's just say I pay a dollar ... yeah, and I pay $100 so a dollar each, per share. And I give you $100 and if I'm right, I'll get a ... maybe I'll get $300 back for every one option. But you as the seller, Sean, you say, "You know what, I don't think it's going up in the next 30 days." So now, you've got two ways ... I've got one way to get paid. It has to go up and it's got to up by more than the price that I've paid. So it's got to go by at least $1 per share because I've paid $1 per share for the option. So it's got to go at least $1. And then after that, I'm making money if my viewpoint is right in the next 30 days or by expiration.

Phil Newton: Now, you as the seller of that option, has got two ways to get paid. And this is why it's attractive for option sellers to do this. 'Cause I'm only right if it goes up. But you're right as the option seller that, the insurance guys as it were, if it doesn't go up. So the stock can stay absolutely still, or it can go down. And so you've got two ways to get paid. And actually, there's a few extra ways 'cause it can actually go up by a small amount. 'Cause we just mentioned it, it could go up by the price of the premium.

Sean Donahoe: Say about 50 cents yeah.

Phil Newton: Anywhere up to $1. Yeah, let's just say that you were wrong and the stock went up by 50 cents and on the day of expiration in 30 days, it had risen by 50 cents, you're technically wrong. But you still made money. Because the stock had to move $1 for the buyer of the option to break even. I think that's pretty cool. You might want to ... for all our loving and adoring listeners, you might just want to pause and maybe rewind that and just think about that for a moment. Because you can be wrong and still get paid.

Sean Donahoe: Yes.

Phil Newton: Now that does come with its risk.

Sean Donahoe: Yes, that's one highlight, yeah.

Phil Newton: If the other person is right and it does go to the moon, and it does triple and quadruple in price or whatever happens, Steve McQueen owned the car type of experience and it goes to the moon, and that scenario does unfold, then as a naked seller, meaning that you've got no protection, their profits is your loss. So if it goes up by $5 per share, you could be out of pocket by $5 per share if you hold that position until expiration. So the worst case scenario, their best case scenario is your worst case scenario.

Phil Newton: And that's the trade-off and why people do it is and again, if we go back to insurance, I think my house is going to burn down is why people buy insurance. Insurance sellers know that it's unlikely to happen so they'll sell the insurance because six, seven, eight times out of ten, it probably won't happen. So as the seller of the option, it's unlikely to happen but the buyer of the option thinks it will happen. So they think the stock is going to go to the moon, and the seller of the option knows statistically, it's unlikely to happen.

Phil Newton: Can't say for certain. But that's why they do it. And again, there's other things that we can do to protect the risk ... we've still got defined risk and limited risk that we talked about earlier. When just buying an option, there's lots of really really smart things that we can do when we start to both buy and sell. And we can do really creative things. We're not gonna talk about them today but just know that at its worst, a naked sale of an option is potentially problematic if the buyer is right and you're wrong. But you can protect against and limit your risk so it's not as bad as what we think. But just at face value, we have choices.

Sean Donahoe: It's like being naked in front of a furnace. You don't want to do that, things get burned and singed. So yeah but there are ways you can protect against it.

Phil Newton: Yeah, you can protect against it.

Sean Donahoe: Put on some asbestos underpants.

Phil Newton: What's the ... in the betting world, you would lay the bet up ... help me out here, Sean. You would lay the bet off?

Sean Donahoe: Yeah, you would lay the bet off with a spread. Yeah, I mean that's basically.

Phil Newton: Yeah, so again, it's just another kind of alternative to ... so you can still, a bit, sell the option but you can lay off the risk and cover your bets as it were. So there's things that you can do in the option world that are, again, that are familiar in the real world in other areas-

Sean Donahoe: Yeah, so I don't want to go into all the complexities of that right now. Because I think that really is-

Phil Newton: Woof, I think we skirted it, Sean. I think we stopped just right at the right one.

Sean Donahoe: Yeah, I've pulled you back from the edge there.

Phil Newton: Full stop. Right at the right moment before it went bloody weird. Yeah, move away from the edge, Phil. But I think we got it, reasons why we buy options. Reasons why we sell options. Each camp, each side of the equation, it's got its advantages and disadvantages. And we've just covered the most absolute bare bones basics of why you would do one or why you would do the other. And again, we can do both at the same time, which is where we were talking about, you can get really creative. That's for an advanced session. This is just the beginners stuff.

Phil Newton: And so that, your risk is fixed and protected if you're the seller. And again, some really creative things that you can do. We can probably talk about in the future. But for a most basic thing, it's like a deposit, and you can either be the buyer or reserve the car in our hypothetically Steve McQueen owned the car example, or you can be the seller of the deposit, or the insurance premium as we were talking about. And there's two sides to that, I think it's quite interesting and depending on how risk averse you are, you can do one or the other. Or you can do a bit of both, which we do a bit of both.

Sean Donahoe: Okay, so let's jump over to trade for , let's go unicorn hunting. So okay, let's start I guess with a couple of fan favorites, or at least my favorite targets. Let's start with Snap. We gotta look at basically IPOs that were from 2017, there it's over a year now, where are they, would we trade them today? 'Cause usually what we do is, we wait for data. We don't want to trade immediately. We look at stuff and say, okay, I'm gonna be ... we need to have a track history that we can look at after the hype has settled down from all the market makers trying to get you to buy. So we're looking now over 12 months.

Phil Newton: I'm sorry- that's the first thing we do is, we look at an-

Phil Newton: 'Cause the first thing we do is we look at which way the stock's going. That's why we need 12 months of data as an absolute minimum or about -

Sean Donahoe: Okay, so let's look for the daily's at Snap. What would you do, trade, fade or evade? I'm gonna say evade, just because every bloody time -

Phil Newton: Every time, yeah. Every time. You know it was ... even when we had enough data to make semi-sensible decisions on this it was still evade. It's up $10, it's marching down below $7 and it's actually where I thought it was last week when we talk about this. Don't think it's quite funny. But, yeah, it's just evade. It's not worth enough for me, and if I was gonna do something it would sell a rally in a very obvious and clear downtrend. This is probably gonna be another one that files for bankruptcy while we're talking about SEERS.

Sean Donahoe: Well there was actually an article, we put it in the Rumble Trader's group yesterday about Snap running out of money as well. So, again I don't think that's gonna help the stock today. But yeah, keep an eye on that one. But, yeah, nothing I would do, I would evade that.

Sean Donahoe: Okay, APRN. Little APRN . A P R N.

Phil Newton: A P R, A P R N. Again, usually as always I've to not look, but I have not looked at the stocks you've mentioned Sean. Just so we can have a first impression, but APRN's it's evade. I mean it's a long term downtrend. If I was gonna do something, it would be sell the rally in a downtrend. It's not on my usual radar, because it's currently worth a $1.35 ish, and it's not worth enough. I'm look for stocks that are at least $25-$30 as an absolute minimum.

Phil Newton: Again, I do kind of break that rule, I'm flexible with it, but on the whole, majority of my stocks are tradable, liquid, higher price, because I'm looking for movement. And I want, dollar movements, not penny movements.

Phil Newton: So this would be an evade for that reason, but you know, just from a chart point of view, it's a sell the rally in a downtrend. You're waiting for a rally. We've just had one actually, back in July, there was a ... actually it actually met our conditions, 'cause we've got a pretty mechanical's drudge. I've got little widget that just highlights the setups, but on the 13th of July and actually setup it closed outside the .

Phil Newton: So you know, just to give you an example, just because it's a technically penny stock, doesn't mean you can't trade it, it just means that I would have to do ... I would probably trade stock -

Sean Donahoe: Mm-hmm (affirmative), yes, around that price.

Sean Donahoe: Okay, Roku. R O K U.

Phil Newton: Roku, this is one you keep mentioning this one to me and I keep ignoring it.

Sean Donahoe: Now, looking at this one, the market's are off this morning. At the very start of the morning the market's are off, I don't know. There's a lot of downward pressure on the market's right now from the bottom market's. -

Sean Donahoe: Dow Jones, I'm looking at the Russel, they're all tickling, I mean they're like, The Russell is tickling. Is that my 200 day moving average there, I think, yeah. So yeah, it's doing a lot of interesting thing. It's tickling the 200 day moving average, the S&P Futures, the Dow Jones, they're all ... I mean you can see there's a lot of lodge candles floating around. I'm kind of bullish, yeah, I'm looking, I mean to my mind I am looking for signs of exhaustion.

Sean Donahoe: This morning is a little surprising, but I mean again it's only the first of the morning. We might get again that tail. Again, I'm gonna keep an eye on this because I'm long, I'm bullish on those markets for a snack pack. But, this morning is a little bit, "Oh, okay, that's how you're gonna play it, are yeah?" But, we'll see how that progresses through the day, I might have to close those positions out for a small loss, we'll see what's going on.

Phil Newton: Yeah, you've got a little something on this, haven't you? So, that's probably why you're ... knowing that, I can understand why you said your viewpoint the way you said it, that makes sense. Now I've not got anything on this, so if I was I would be looking ... so this meets everything, book time, exhaustion time, proprietor, it's in an uptrend, it's dipping in an uptrend, it's around about a logical stopping point. The only thing that's missing for me is, am I gonna trade this today, sign of exhaustion time from experience. And if that happened today, it'd be a great trade, and you know it's almost there. You know, it's not a today trade it's a maybe in the next day or to this will a good set up. But, if I had to do something today, it would be trade it.

Sean Donahoe: Yeah, you know, that would be me today as well. I looked at this one, I mean, this was on my radar last night. It was kind of a, just as I was doing kind of a little bit of research for the show. I would have been long on this, to be honest.

Phil Newton: It actually set up two days ago, with the sign of exhaustion. It voided it before it would have triggered a trade for me, and an interest -

Sean Donahoe: Exactly, exactly. Yeah, that's kind of my thought as well, is it kind of voided itself but -

Phil Newton: They'd probably set up again the way things are going. I mean, if you wanna kind of research the patent it looks like it's developing a multi-bar type of set up, it's sometimes referred to as a "fakey". Which is the common or garden variety of setup. If you wanna research that you can certainly do that, but that's what I've been looking at for today. You know, if it did develop that sign of exhaustion today it would be a classic "fakey" type setup.

Sean Donahoe: Agreed. Alright, next one. CLDR. That's Cloudera, it's basically a cloud security company, multi-factory authentication for applications. What would you think there?

Phil Newton: I think the setup was two or three days ago to be fair. For today, if I had to do something on it today, be a void it, and overall I would bearish. It looks like it's in a downward sloping range or channel and it would've setup 1,2,3,4,5 days ago as we did this. So, if I was gonna do something it would be bearish, but I would be late to trade. It did actually generally setup at a few days ago so just looking at it. But, it's not on my usual radar, it's just above $17 dollars there, or there abouts. But you know, from the setup point of view, it meets the criteria, it looks really nice actually, but it would've been two or three days ago, would have been the ideal entry.

Sean Donahoe: Yeah, I would've been exactly the same, I would've voided this as well. Like you say, a few days ago if it punches through the low of $16, $23, maybe I would continue to be bearish and everything else, but right now it's at the lower end of the ballies, I don't see it doing much more than that. It's kind of at a point of interest if you're looking back to the June earnings there and everything else, it's hovering around that. If I saw a sign of exhaustion, yeah I might keep it on the radar to see if it does anything new.

Phil Newton: I think this is a nice one to illustrate, I suppose you could argue cyclical type analysis. I refer to it as history repeats itself. It's just a nice clean chart, it just looks nice. You got rallies, sell off, rallies, sell off, rally, sell off ... you know I think there's more to it down to you know maybe $13, if I was gonna do something on it today, I know I would be late to the party. I potentially would have to sit through a little bit of a rally if that was to happen, but yeah, it looks like an interesting chart. It's worth taking a look just to see that cyclical movement -

Sean Donahoe: Okay, so the next one is Okta. And I can't, I'm gonna pronounce this wrong, Okta.

Phil Newton: Okta, isn't it?

Sean Donahoe: Yeah. And I can't remember what they do . I can't remember what the company does and often times we don't care, 'cause we only look at the charts.

Phil Newton: I don't care, it's a number on the charts. Again, from price point of view it looks fine, volume, again I'm just kind of ... would I be treading this normally, I'm look for at least a million shares on average. You know, this probably, it's not on my universe of stocks, but as I re-do it, 'cause it's been while since ... this might get highlighted, 'cause it looks like the volumes really picked up to have an interesting average volume. So, this might be a, in our future watch list anyway.

Phil Newton: So long term uptrend, it's dipping in an uptrend, it's at a logical stopping point. I'm looking for sign of exhaustion. It's not a today trade for me, but it's certainly a maybe in the next few days. If I was forced to do something on it today, I would have to -

Sean Donahoe: Again, we are looking at the live tickers and everything else, so there could be a little bit of a ... looking at it at the end of the day or over the next couple of days, it's on the sidebar. But yeah, that is a like a dip in an uptrend, look for sign of exhaustion.

Phil Newton: It's a maybe trade as opposed to no or not today.

Sean Donahoe: Okay, another one. Alteryx. Now again that is, if you're following along at home playing along, AYX. A data analytical company, big data. Again, all the markets are off today, everything's dipping today quite hard as we're recording this at 7:00am pacific time on the 10th. Just for-

Phil Newton: The phrase is, "A rising tide lifts all ships." The opposites also true, but that's what we're seeing today. The market's are off quite strong, everything's selling off. So, maybe we'll see it turn around. We saw this at the end of last week where everything just basically puked. We were high fiving each other, it didn't last long. There was brief pause, little bit of a rally, maybe we'll see that intraday turn around again. You know, up a day, down a day at the moment -

Sean Donahoe: Well I'm not seeing it -

Phil Newton: You know, I wouldn't worry about it -

Sean Donahoe: I'm looking at the SSD 500, it's not punching through the 2868 at the moment.

Phil Newton: It's a dip in an uptrend. Yeah, it's not really doing anything for me to get, "Oh my God, I best do something with my portfolio." It's not, I mean yeah the markets are off 25 points, but I'm not panicked. It's not a big deal in the context of, look at the last 12 months. Within the context of overall price movements, it's not a big deal. And so, coming back to AYX, to be fair same as the previous chart there, same as Okta. It's in a long term uptrend, it's dipping in an uptrend. Just come up to a gap fill which is quite interesting, so this makes it a good logical stopping point. You know, it's not a today trade in the traditional sense, it's certainly a maybe trade. The only thing that's missing for me is a sign of exhaustion, and to be fair we're just about to get a gap fill as we're talking, so maybe we'll see an intraday turn around.

Phil Newton: But you know, it's just a really interesting location. So, maybe we'll see that turn around. So, it's certainly a maybe, we'll keep an eye on it for the next few days. Same thing, if I was forced to do something on it today I would have to be bullish, an uptrend every day.

Sean Donahoe: BTFD. Okay, I've got one last one for you which is not a, this is a sneak one in the under the radar, this one -

Phil Newton: This is a surprise one, yeah.

Sean Donahoe: Let's have a look at that, 'cause I've mentioned this in the group yesterday as well. It's one I'm bullish on, I want to see how it's doing this morning. And again, dip in an uptrend, logical stopping point, setup nicely, had confirmation yesterday, today it's off. But, still bullish, I'm not gonna back outta this one just because I mentioned it. I'm not being steadfast just because I am absolutely prepared to be wrong, and that's fine and change my mind, but I'm bullish on this one still.

Phil Newton: Well here's the thing, yeah I mean, I think I'd have to agree with you. If I was gonna do something, I would be bullish. I mean, certainly the reason why it got in, it meets all the criteria, but you know the whole markets selling off. I mean, it's not breaking the recent lows that got you in the trade in the first place, you know, this might just be a very quick higher, another higher low to ... you know, maybe there's a few in today people jumping on board here.

Phil Newton: I personally think there's gonna be a turn around broadly speaking on the markets, 'cause that's what the stock that we've looked at are suggesting. The stocks that I did on the scan yesterday, that's what it's suggesting. And, you know, just looking back at the markets broadly speaking, that's what it's suggesting. Let's just go to again S&B Futures, -

Sean Donahoe: Big spike in Volatility. Always good to look at the VIX, has a big, big ass spike today from 60 -

Phil Newton: I think for me to be worried, I just . I would have to see price on S&B Futures bill out 2800, and we're at 2853 as I'm recording this. Until it goes below 2800 I'm not really thinking anything other than by the dip. If it went below 2800 that would be the cap, 'cause if you think back that was kind of the pivotal point it was trying to get through for most of the year, and eventually it got through that back in July. It's that kind of resistance acting as support, so as long as it stays above 2800, you know, that's quite pivotal for most of this year. You know, I wouldn't be so worried about it to be quite honest. That's why I'm thinking we're gonna see a turn around soon, you know that these are dips in an uptrend and you know and the market's still in an uptrend as far as I'm concerned.

Sean Donahoe: Yeah, I mean, there's a lot of talk this morning, I'm just scanning the headlines and everything else about tech sell off and -

Phil Newton: Blood on the streets! Panic, Panic! I know the NASDAQ certainly puke and it's off 2% on the futures. But to be fair, the same logic, I mean look at approximately the same point on NASDAQ futures, I would have to be looking at about 7100, and we're around 7250, alright we're closer to that level than the S&P but you know, I wouldn't be so worried about that to be quite honest. You know, as long as it stays above that 7000-7100 level, I'm still bullish on this market, even though NASDAQ's taking an absolute nailing at the moment.

Sean Donahoe: Yeah, I would be looking at, you know, like 7085, I'd be looking at the hundred day moving average, because when everything starts tanking, that's when technicals really start becoming important and they find their levels based on a lot of technicials. I mean you can look back -

Phil Newton: I think more people start praying, and they're praying towards the hundred average. No, but I know what you're saying, the longer, longer term players, using those as benchmarks to say, "Okay, this is a good level to stop doing something." And you know, they're the guys with the institutions, the funds, the people who are looking to put big chunks of money, they're looking for the 5-10% sell offs, so that they can buy the dip from a percentage point of view. That's what they're looking for, and visually that's usually around, you know, after a rally and it sells off back to the $100, $200 periods, you know, that's what makes them self-fulfilling prophecies.

Sean Donahoe: One other thing as well is midweek, you tend to see a lot of people quickly adjusting their positions in a little bit of a panic, little bit of sphincter tightening as they're kind of like, "Oh, we, take my money off the table, put it somewhere else." You'll see a lot of adjustments, probably for extended hour.

Phil Newton: I think this is just adjustments with the numbers that we saw released last Friday, I think this is just people acting and responding and adjusting portfolios and you know all the people with long term view point. That's all this is, 'cause we've not seen it. And you'd normally see this, because you know, if we go back 10-15 years you would always see big figures and adjustments on non-firm payrolls and interest rates were up and just ... you know, that used to happen on a regular basis and we've not seen the big jumps in the numbers or big adjustments in economic data. It's been so stable and so stagnant for the better part of a decade, then when you go back sort of 2000-3-4-5, where interest rates were being adjusted, figures, there was big jump from one month to the next, economic benchmark measures, and you know non-firm payrolls and the likes. There was always big jumps and you would always see the following week where people were adjusting portfolios and positions. From my perspective, this is just normal business's looking like normal services being resumed, because we've seen an artificial stagnation since 2008 and such.

Sean Donahoe: No, absolutely. So, I actually just did a quick scan of the FANG stocks, because again they're the measure of a lot of the stocks that make up the Dow, the S&P 500 and the NASDAQ and it's Amazon taking a bit of a pay sting, Facebook, Netflix is off. But, you know, Google, Facebook, and Apple -

Phil Newton: It's a big chunk off, yeah 4%, Tesla's on tests on average. You know, when you look that the ... this one makes me laugh. I would imagine that ... again, I got my way to avoid the headlines, but I would imagine Tesla's in the headlines again, it's off, 5% at one point and whatever it's gonna be at the end of the day. But visually, I'm looking at the chart, it's not really doing anything more than what it hasn't done on average in the last 8, 10, 12 months. It's not putting in anything more than an average big day move. I mean it's still a big day, don't get me wrong, but it's kind of in the realms of, as big as days go, this is a normal big day. If that makes sense.

Phil Newton: It's not an, "Oops, best close the position day."

Sean Donahoe: Exactly. So, with that being said, ladies and gentleman, that is it for this weeks show. A little extended trade, fade or evade, but it gives you an idea about what's going on in the markets. What we're looking at. Where our kind of sentiment is. So, with that being said, remember that this show is not free, it will cost you a five star review at You can subscribe and review us on your favorite to hear the show and again, do make sure that you join us in the Facebook group., and you can see what we're doing every damn day, what we're looking at . And basically our commentary on what's going on in the markets.

Phil Newton: Awesome, and if you'd like to connect with us you certainly can do that. Personally, I prefer email so [email protected] But if you'd like to get to us through the group that's fine as well or via the social media's you can find them also at I think we're on the Twitter machine there as well. And I'm sure, I imagine that the link to the Facebook group's gonna be there also. But yeah, if you wanna contact me via email, it'll come directly to me, [email protected] I'll even hit reply if you send me an email. As everyone who does know is I get back to you quite quickly.

Sean Donahoe: Awesome, awesome. And mine is [email protected] That's the direct hotline you can get a hold of me in the same way.

Phil Newton: That's the new super improved bat phone.

Sean Donahoe: No comment on that.

Phil Newton: In my case, bat shit crazy phone. No comment. What have we got coming up in next weeks show Sean?

Sean Donahoe: Well we're gonna do checking the pulse. Basically, I wanted to kind of back track a little bit, we kind of touched on it today, but how we examine the market, what we look at in the markets, what we do to kind of get a feeling, a sense of how the markets are rolling, what we're expecting, and how that can affect our portfolio. So, with that being said, we'll rock the hell on and see you again next week.

Sean Donahoe: Take care for now.

Phil Newton: Bye for now.

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3 Key Takeaways From This Show

  • Options are great for mitigating downside risk
  • Most people seem to avoid options because they don't truly understand how they work
  • Options allow you to take more positions without assigning large amounts of capital to a single position

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