Today on Know Your Options, Liz & Jenny discuss the randomness of charts. They compare their style to Slim's who is a chart analyst. They believe in probabilities and volatility, and live by the mantra - Everything is in the option chain! They show you the randomness of charts in FOSL, and stress the importance of being able to make a decision when trading.

Liz: Hi everybody! Welcome back to the Liz and Jenny show. I'm Liz, this is Jenny, and this is our Know Your Options segment. It's weird because the Know Your Options segment really throws me off, I feel like it's Tuesday. But it's Wednesday!
Jenny: Neither of us knew what day of the week it was today. I thought it was Friday.
Liz: I know we're all thrown off.
Jenny: You know, probably because we had red on yesterday.
Liz: You know what, I bet you're right.
Jenny: We had red on for Veteran's Day, which is normally a Thursday, so I thought today was Friday.
Liz: So it will not be airing tomorrow at night. Yeah, no that's probably why, exactly.
Jenny: So today, let's talk about why we're talking about charts.
Liz: So you know, we've received e-mails over the years. Sometimes we forget to drive home certain points and sometimes we say things that might sound more flippant than they actually are, but have a deep meaning. She knows what I'm talking about, but other people out there might not.
Jenny: Right. Often times we might make jokes about things, and again, I have said this before. We'll make jokes about things, and if you've been doing this long enough you know they're a joke, but …
Liz: But if you don't…
Jenny: But if you haven't been doing this long enough, you might think we're serious.
Liz: You might think we're serious.
Jenny: Or you might think that we're being, like you said, flippant.
Liz: So we're going to talk about charts today because when we look at charts, we do pull them up. So I know we've talked about charts, we've talked about the analyze tab. There's a reason we don't pull up the analyze tab. There's a reason we pull up charts sometimes, don't pull up charts other times. But right now we're talking about charts and truly, I want to say there are, you know, Slim, who's on right after us, he's a chart reader. He's been doing it for years and he's got the experience to say whether he knows if it's a doji or a star or a abandoned baby, which we always want to protect. He has been doing it and claims to be doing it for a reason.
Jenny: Right, yeah, he's a chart reader. We are not. We believe in randomness and we believe in option pricing and the volatility of the market, and the probabilities.
Liz: When we look at a chart, what I'm looking at is how my gut makes me feel. So what my gut tells me should mean nothing to anybody out there, except what their gut tells them. When I'm looking at a chart and when you're looking at a chart, we're saying "Hey, do I like this?". I might like it and she might not. Or she might like it and I might not. It's our opinion and it shouldn't mean anything to anybody else.
Jenny: I know chart readers will get mad when I say this, but most people when they make predictions they're right half the time because it's like a coin flip. Is something going to go up or down? You know, who knows?
Liz: Fifty percent of the time, right. Fifty up, fifty down.
Jenny: Yeah. Sometimes we'll say something like "Oh we're putting a bullish trade here or a bearish trade there" and people will write us and say "Well, how did you know that was going to go up?" Well, we're right half the time.
Liz: Do you know what I was going to say? If you want to take a look at … will you pull up a chart?
Jenny: Sure, let's go with the platform.
Liz: Pull up FOSL. Just for fun.
Jenny: Okay.
Liz: This is something that I saw yesterday. Keep it exactly how you have it. Pull up FOSL. Okay. So we're going to pull up FOSL and this had earnings yesterday, we didn't trade it.
Jenny: Oh look at the jump.
Liz: Yeah, so check out this chart. FOSL right here, I would be kind of like you know what it's kind of always within a certain range. It's kind of meandering down, a little bit down, a little bit up, comes back to it's range. There you go. Move it to a three year. I just noticed this yesterday and that's why I thought this was good for this. It's all over the place. So that's just the kind of stuff that we don't know. I don't want to be lulled into a false sense of security by looking at the chart. The thing that I can really sink my teeth into and wrap my brain around is the option pricing and the option probabilities.
Jenny: Well, we wholeheartedly believe the strategy is more important than the direction.
Liz: Right.
Jenny: So we try to do the best we can by implementing the proper strategy. Often times we have to choose a direction. Not every trade is neutral and even choosing a neutral trade is choosing a direction.
Liz: A neutral trade is choosing a direction, you're absolutely correct. It's okay to have a directional bias on something. We do put them in all the time with a directional bias, but when we're looking at these, I want people to realize … I think that it really hit home when we received some of these emails because, just because I think, or just because the chart is at the top of its range or the bottom of its range, that might make me feel comfortable, but that doesn't mean that it should make anyone else feel comfortable.
Jenny: It's important to find products you like. Trade products you like. It's easy for us to trade based on volatility. To look at the volatilities and say "Hh, this volatility is high, we're going to trade that." That's what we like to do and that's how we like to trade, but people also want to have positions in things and if you want to have positions in products, find products that you like.
Liz: Find products that you like, exactly.
Jenny: So I was reading the paper today and it said something about how the busiest stocks have been Apple and Facebook and, sure, those are products that everyone knows.
Liz: Right. Everybody knows, everbody's familiar with, everybody looks at. So we wanted to kind of glance on here because we say if you're buying a stock it's 50/50, because it can go up and could go down. That's really when you're looking at a chart, what we're saying. We always say it's the strategy that you implement over your directional assumption. Tom says "You got to be able to order a pizza." What does that mean?
Jenny: You have to be able to make a decision.
Liz: It doesn't mean you like food, or you like pizza. You just have to be able to make a decision.
Jenny: You have to be able to make a decision. You have to make a decision to trade. You're given lots of choices, and when you go to the trade page, you see all these options out here and lots of information you have to be able to make a decision. Speaking of the chart, looking at the chart, are you bullish or bearish or neutral, you have to just make a decision and implement the best possible trade.
Liz: Exactly, and you have to go from there.
Jenny: Based on your own assumption, but everyone has to make their own assumption. Viewers who send us things, and even on Twitter, tweet us things. Look at this, this is ready to break out, or this is going to go down, or this is going to move this way or that way and you know we've looked at them. We've kept track of them, and half the time people are right and half the time they're not.
Liz: I'm actually smiling because I love to see it when my assumption gets validated by something that's telling me it's going to go in that direction. When I see it I'm like oh they're wrong, when my assumption is not validated in the direction that it's going to go, and in true disclosure it's about almost exactly fifty percent of the time that things are accurate.
Jenny: So I will, when I'm putting on a trade, if I'm … I'm number one trying to take advantage of volatility, and so if I'm trying to take advantage of volatility and let's just say it's a product I wouldn't mind owning. I go out and I will look at the chart and see where the strike of my put is and ask myself "Am I comfortable owning the product there?" So, speaking of FOSL, looking at this chart, let's say the volatility were high and I could sell the one ten puts and I would look at this chart and say "Oh, am I comfortable owning the product there?" Meh. You know, that's the process I go through. That's what I ask myself.
Liz: That's exactly it. That's typically when we're looking at "do I mind owning the product there?" Then it makes sense to kind of look at it and be like "Well do I want to own it at one ten?" If you're looking at a small-
Jenny: Oh, I'm sorry I moved it.
Liz: That's okay. Do you want to own it at one ten if you're looking at a 1 year chart. Well, maybe, but if you're looking at a three year chart, I don't want to own it at one ten.
Jenny: Yeah. So also today I had some free time, that's why I was reading the paper instead of doing emails I was reading the paper.
Liz: Where'd you get … I haven't even seen a physical newspaper in so long.
Jenny: Because I wasn't home. I stayed in a hotel. So I was all by myself. I went to breakfast all by myself and I didn't bring my computer because I though I'd have a quick breakfast and there was a paper on the table.
Liz: So you just read the paper?
Jenny: What else was I going to do?
Liz: I physically, and we'll get back into this, but I physically haven't gone anywhere without my iPad, my computer or something in a long time.
Jenny: I didn't bring anything. I just brought myself and there was a newspaper on the table.
Liz: Good for you, good for you.
Jenny: So it talked about BABA. BABA, so hot, everyone wants to buy BABA and I thought, well let me take a look at BABA. I have a hard time wanting to buy BABA up here.
Liz: I have a hard time wanting to buy BABA up here. Now granted, this doesn't have much history, but that's that we're looking at. Do we know where it's going? No, but what we're doing is formulating our own personal opinions from there. What we really don't, want to drive home is, just because our personal opinion means something, it shouldn't mean anything to anybody else.
Jenny: You know it's funny. I have a hard time wanting to up here but we did put on a trade on here. We put on the upside ratio spread.
Liz: We put on the upside ratio spread on BABA.
Jenny: It's not about the stacked direction as much as the strategy.
Liz: Right as strategy selection because we looked at the probabilities of the numbers actually wrapped around there. I mean, we say that we can get most of the things that we need by the option chain and the probabilities are right there. Should we show the probabilities real quick, because we said [inaudible 00:09:50] saying probabilities?
Jenny: Yeah, let's talk about probabilities and even I know volatility is low right now, so even if you go to SPY, and everyone has their ideas of, you know, where the S&P 500 is going and what is going on and the volatility's low right now. When you have a higher volatility, you're going to get further away. You're going to have, if something has a seventy percent probability of happening … or let's take a look. So we'll give an actual example.
Liz: What were you going from with this, just the probability of a put?
Jenny: So right here. If you want to go sixty-five percent probability of that put expiring out of the money. Here you've got the two hundred put which is four dollars away and thirty-seven days to go.
Liz: Right and so we always base them around the sixty five percent probability of expiring out of the money. So everything is kind of how you feel. We've got the sixty-five percent probability, we're collecting two dollars to do that. Is that worth the risk? So and that's kind of where we'll go and look at the chart.
Jenny: So here with the sixty-five percent probability out of the money, this is with the current implied volatility of around fourteen. If volatility were higher, that same sixty-five percent probability out of the money put would be much further away than two hundred.
Liz: Right.
Jenny: That's my point. So when we talk about wanting that higher volatility, if we had a higher volatility, we can sell a put that would be much further. We take more comfort in that but [inaudible 00:11:20] was the other day in just talking about, you know what, the volatility's fourteen and an half percent and you know the probabilities are the probabilities.
Liz: That's just it, that's where I'm kind of smiling is the probabilities are the probabilities. So just cause we're collecting more, doesn't mean the probability is higher, it's one or the other. If the sixty-five percent probability is right here, if the volatility's higher, maybe we're collecting more or it's farther out.
Jenny: Right. We're collecting more [crosstalk 00:11:34]
Liz: … and or, it could be either.
Jenny: But it's still the same probability of that ending up out of the money. So, you know the probabilities are the probabilities. We find that you're more successful or it makes more sense to take on the risk when you have the higher implied volatility but plenty of people, even in this low volatility still go out an sell these options in the low volatility.
Liz: In the low volatility, yeah, I mean …
Jenny: Because the numbers are the numbers.
Liz: Right but we kind of like to piece everything together. So we just talked about the charts. We just talked about the probabilities. We talk about the volatilities. Those are, I think, all smaller pieces that fit into a great big puzzle and then we use them and layer them and interchange them accordingly.
Jenny: Right and again then that's where I would look at the chart. If I say, "Okay, I'm going to go out here to December, thirty-seven days, find an option. Let's look at selling a put, at at sixty-five percent probability out of the money, that's the two hundred and I would collect two dollars so my break even's one ninety eight. Let me take a look at that chart."
Liz: There you go, that's how you use it.
Jenny: Am I comfortable getting along owning SPY here at one ninety eight and I would say to myself,
Liz: Self.
Jenny: "Self, no I'm not." So I wouldn't do that trade, but that's my own assumption based on what I think of this chart.
Liz: Based on what you think of the chart but in the same breath, if you're just selling sixty-five percent probability of things expiring out of the money, and that was your mantra and you don't feel like we have the gut feeling. I have a gut feeling like you know what, that's not good for me but some people are just, sixty-five percent probability, I have the money, I'm putting it in. I don't care what it is.
Jenny: Right, so maybe we didn't like that. Does that mean we're going to do the opposite trade? No.
Liz: No.
Jenny: We're just going to find another product and do another trade.
Liz: Exactly. That's a good point.
Jenny: So I just want to take a look at your chart, only because I remember …
Liz: We're almost out of time.
Jenny: We're almost out of time, but my dentist told me in January-
Liz: I love your dentist!
Jenny: My dentist is crazy. In January, he said, "The S&P is going to double by the end of the year, by December." Do you remember when my dentist told me that?
Liz: Oh, I remember that.
Jenny: Where was it in the beginning of the year?
Liz: I don't know if it's going to double.
Jenny: It's not there yet.
Liz: Well he's got a long way to go-
Jenny: [inaudible 00:13:55]
Liz: … a long way to go in a month and a half.
Jenny: All right.
Liz: All right, we're going to take a quick break. When we come back we've got Trade Small, Trade Off so stay tuned.
70/47. We've got our downside break even, and I can't remember exactly what it was, but pretty far away. 62.43 or something, and then 70/47, we are shipping this … and we are out of time.
Liz: We're out of time!
So we are going to come back with Trade Small, Trade Off and stay tuned. We're opening up the phone lines right now, so give us a call.