I want to discuss a common mistake that a lot of amateur traders make in not being able to identify what kind of stock market regime we’re in at any given moment.
We’ve gone from a bonafide bear market in 2022… to rocketing higher in 2023 — a clear stock market regime change. And that’s something we need to be able to identify as it’s happening to help increase our odds of success.
Not only was 2022 a terrible market, it was also a dead market by the end of the year. The only real activity we saw in December was tax loss harvesting as people dumped losers from their books.
Hardly anyone was buying stocks, and most were just waiting for the new year to begin for a fresh start.
But then 2023 began, and it was like flipping a switch…
Trading Options in a Changing Stock Market Regime
We had a massive January effect and people started buying stocks hand over fist again, sending the major indexes higher and higher, especially the most beaten-down stocks of 2022 in the Nasdaq and S&P 500.
So now we’re in an entirely different stock market regime, a bullish regime.
But there’s always a period of time at the beginning of a new regime where implied volatility in options isn’t properly priced in yet. Now what does that mean?
It means the options are cheap!
And that’s because there’s still a mass of traders out there who don’t yet believe you can have a big 30% spike in a beaten-down stock that reports good enough earnings.
When it comes to applying this knowledge to trading options, you’re much more likely to see that 30% move to the upside than the downside in this current stock market regime.
Now, when trading options, there are basically four things that can happen to a stock after reporting…
- A massive up move.
- A small up move.
- A small down move.
- A massive down move.
If you can immediately remove a massive down move from the equation — because you know that’s not likely in your current stock market regime — then that starts to create a clear picture of what moves you should make when picking your option strikes and call/put.
Think about it in terms of football betting…
If you have two teams and not much of a point spread, and you know there’s no chance one of the teams will win in a blowout, then you shouldn’t bet on the team that has no chance to win going away.
The point being, you’d rather have more scenarios in your favor than 50-50. Look at it like this…
- Team A wins in a blowout.
- Team A wins a tight game.
- Team B wins a tight game.
Team B wins is a blowout.
In this scenario, we know Team B can’t win a blowout, so I wouldn’t bet on Team B at all. I’d bet Team A because it has a 2-1 edge as far as the three possible scenarios left, putting the odds of success firmly in my favor.
When it comes to stock trading, you also want to put the odds of success in your favor. And right now, we are in the midst of a bullish stock market regime, so trade accordingly.
Are there any topics you’d like to see me cover or questions you’d like answered? Send me an email at firstname.lastname@example.org with your trading questions and I may cover them in a future video. You can also join my free Telegram channel, where I share market insights real time throughout the week, articles, videos and more!
*This is for informational and educational purposes only. There is an inherent risk in trading, so trade at your own risk.
Tired of just holding a stock for tiny 1% or 2% gains?
What if we told you that thanks to a brand-new discovery in the options market…
A “pricing mismatch” could now turn 1% moves on a stock…
Into gains like 51% in the options market!
Take GDX, a gold miners fund, as an example.
GDX gapped down and was falling fast for a week. The technicals didn’t look great, and most traders wouldn’t have touched it with a 10-foot pole…
Then over the next day… the stock only rose 1.8%.
Now, if you were playing the share price, you would have been lucky to cover the cost of a small fry off the dollar menu…
But the options?
A nice +51% gain during the same time frame!
The profits and performance shown are not typical. We make no future earnings claims, and you may lose money. These trades expressed are from historical backtested data in order to demonstrate the potential of the system.