Chinese content? What?

Look, I don't know. I just follow Price. They are all just letters and numbers to me. If it trades, it's liquid, and there's a good technical setup -- that's all I need.

It just so happens that this particular company is engaged in creating Chinese internet content. Ok.

But man oh man do I like the potential reward-to-risk setup here so let's get straight to the point...

Vega risk is real.

— Sean McLaughlin, NLD 📈 (@chicagosean) January 24, 2023

I tweeted that earlier today as I was feeling my position value decay away for no conceivable reason as the market was coasting sideways.

I felt helpless as my index options position was melting away, far beyond the level my theta risk suggested it would in a quiet market.

It turns out, the quiet market was precisely the reason.

It was a stark reminder to me: Long Vega also entails risks that I need to be aware of.

Most people, myself included, tend to worry about getting caught short volatility (short vega) in a market environment where volatility is rapidly rising. We’ve all heard the stories of traders holding naked short options that were overleveraged into a volatility spike. Those stories make the headlines. And rightfully so.

So it’s easy to forget that being long volatility can be just as painful when volatility is grinding lower as VIX certainly was today:

The Bull has been rolling. Have you noticed? Judging by the response I got from an innocent little bullish tweet last week during the midst of a mild pullback for stocks, you'd think I'm insane for thinking stocks have a chance to go up.

So many angry people looking for lower prices.

Maybe they'll be right someday? Chances aren't zero.

Meanwhile, I'll just keep paying attention to price and relative strength which is an excellent guide to point me into winning trades in any direction.

So for today's trade, we're going to ignore the digital assaults on our senses by the angry bears and get analog in our approach to riding this bullish wave.

Me and Strazza did The Flow show earlier in the week, and one of the names we discussed as being a possible trade to get into has finally popped its head above the trigger I was waiting for.

This one has the potential to be a quick mover, so let's get right to it!

I got a lot of feedback on my last letter where I suggested active traders need to stop trading Covered Call spreads for tactical trades and instead do a simple Naked Puts trade.

Thank you to everyone who engaged.

Anyway, here’s one question [edited to the important parts] I got from a reader where I thought my answer might be instructive to more of you:

Hi Sean,

I read your information on naked puts. When I intend to buy a stock, I would like to sell a put. I just don't know how to go about it. I just don't know where the strike price would be. I understand that I would have to buy the stock at that price (whether it is better or worse than hoped).

If you could give me an example that would help.

Cheers!

This is a great question, but one without a clear-cut answer. Here was my response:

I'm about to show you what a healthy chart off the bear market lows looks like. One of the beautiful things about this chart is it's not heavily reliant on any one company.

This is a sector ETF for a corner of the stock market we believe should continue to do well for the foreseeable future. There will be winners and losers within the sector, and we don't know which ones will ultimately be the leaders, so why not just trade 'em all?

Additionally, trading the sector ETF significantly lessens any earnings-related or product announcement or FDA-approval-driven gap risk.

Look, I get it.

Maybe you have some long-term holdings showing significant gains that you don’t want to pay taxes on. But you want to squeeze some additional income out of these positions because either you’re greedy (fine) or you want to practice responsible risk management (a better reason).

That’s fine. Go ahead and continue selling covered calls from your yacht. You do you.

This post is aimed at the rest of you knuckleheads who seem to think entering covered call trades as tactical short-term plays is a productive use of your time and capital.

Yes, you! You know who you are.

Let me show you two pictures.

In a recent note, I shared performance stats for our All Star Options Paid-to-Play portfolio, and in the time since, I’ve fielded numerous emails/DMs that all ask basically the same question:

How did you earn money in such a challenging market environment and do so with far lower volatility than the indexes?

Rather than responding individually, I thought it would be better for everyone if I just shared my thoughts here. After all, we can all benefit from good ideas, yeah?

I’ll try not to get us lost in the weeds with the mundane tactical maneuvers employed each trading day. Instead, I’ll stick to the high-level concepts which guide my thinking.

With the NFL Playoffs getting underway this weekend (Go Bills!), it's time we put the offense on the field!

I was kicking around a bullish idea in a consumer staples name during our Analyst meeting today. The chart looks great. The setup is good. We can position for a nice potential reward versus the risk we'd incur to put the trade on. Everyone agreed that its probably a good trade.

But... is it aggressive enough?

Answer: No, it's not.

The thinking that emerged from our chat was that risk is back on in the stock market; therefore, we need to get into the most reasonably aggressive names we can. And one of the areas where risk is most definitely "on" is in the homebuilders sector.

If all we did was watch the evening news or listen to the inflation and interest rate scaremongers, we'd reasonably conclude that a long-term and painful bear market for real estate and housing in particular is a slam dunk. No contest.

If a severe real estate bear market was in the cards, would we be seeing homebuilders ripping of their recent lows the way we have over the past couple of months?

Check out this chart of Toll Brothers $TOL...

In the Spring of 2022, JC came to me and said: “What do you think about managing an options income portfolio for me? I’m looking for some more strategy diversification in my portfolios. It doesn’t need to be anything sexy, just steady.”

Ok, I’m probably paraphrasing a bit, but that was the gist of his ask.

So I got to work on putting a plan together for him. When we looked at it together, it became obvious that we should offer this portfolio to the All Star Charts community who might also be interested in some further diversification. Even if people don’t take our trades, it could be a productive learning experience for everyone.

So we got to work and we launched the All Star Options Paid-to-Play (P2P) service in May 2022.

Each trading day, we either enter a new delta-neutral options credit spread in a liquid ETF (from a list of the most liquid Index and Sectors ETFs), or we play defense on an open position with an adjustment to put us in a better position to win. And we leave resting GTC (good-till-canceled) limit orders to close our credit spreads at profit targets which get filled periodically at the whim of the markets.

So far...

No doubt Gold Bugs have been enjoying the price action in gold instruments recently. It has been a profitable few months to be long just about anything shiny -- even silver!

The All Star Charts research team published a continued bullish piece on the sector today.

Today's options trade is a conservative bet on a continuation of this pattern. Let's get right to it.

The latest Young Aristocrats report is out, highlighting companies with steady and increasing dividends that are also displaying strong relative strength -- a powerful combination. These are some of my favorite stocks to get long when the conditions warrant.

Today's trade is in a sporting goods retailer that just broke out and looks like it's ready to start sprinting.