Another week gone by – another $1,000 per week goal reached by LST subscribers worldwide.In fact, this week, we made $4,500 on 3 out of 3 wins! – well surpassing our goal of $1,000 per week.We bought the E-mini S&P’s at 2086 and sold at 2116We bought call options on the GDXJ junior Gold minors – sold a portion today for around 150% returns — buying at $.65 and selling at $1.55We bought silver at 16.03 and sold a portion today at 17.29. For more info, check us out at www.lifestyletrading101.comToday we are going to talk about changing market conditions and how YOU have to adapt your trading strategy as the market changes as well — otherwise, you’re going to fall into the ocean.Today’s episode is brought to you by our sister company GMAT PILL — those of you applying to business school will have to take the GMAT exam — it’s very difficult exam that typically takes 3-6 months of studying, but GMAT PILL lets you ace the GMAT in < 1 month. The online video course covers everything from verbal sentence correction, reading comprehension, to math problem solving — complete with online videos that you can download to your mobile phone and a simulation online computer adaptive test. If you’re studying for the GMAT, pop the pill – the GMAT PILL, and ace the GMAT.

 

Adapting to Changing Market Environments

OK – now onto today’s topic of adapting to changing market environments.

Just like when you’re surfing in water, when you’re surfing the markets, you need to adjust the angle of your board and how much weight you put on which areas of the board as you surf the waters so you can adjust and adapt to how the strong the waves are.The stock market is ever changing – and so you need to adapt in order to stay a profitable trader.The strategy that we used over and over again in January, February, and March — that made us thousands of dollars — is now not as effective as before — and we’ve adapted using slightly different strategies.Why? What changed?Well, because the market change – as it constantly does. How so?Well, Implied Volatility — or the VIX index — has dropped a LOT — and that’s largely because the market has rallied a significant amount since the 1800 lows — we are now over 2100 — that’s a 300 point gain in just a few months.With that S&P rally came a significant drop in volatilty.If you’ve been paying attention, in the first few months of 2016, we’ve been talking about credit spreads — in particular, put spreads –betting that the market would stay above a certain level and collecting money every single week.That strategy worked well because volatility was high. If you look at the VIX — it was mostly over 20 during those few months. Ideally, you want to sell credit spreads when volatility is high — ideally when VIX is above 20. Well, guess what — VIX is now at 14-15 —implying less than 1 percent move in the S&P on any given. How did I get 1%? Well, the general rule is you divide by 16. 16 represents roughly 1% move — so if VIX is at 14-15 — it means the market expects small moves of less than 1 percent each day — and that’s implied volatility.Usually, actual realized volatility is historically lower than the levels that are implied.So we’re talking about really low levels of volatility.So in this low volatility environment, how does this affect our options strategy of selling credit spreads?Well, in the past — we generally were about to position our credit spreads such that we get a 5:1 risk:reward ratio.What that means is we can collect a maximum profit of $1,000 on a trade if it works our way — and our maximum loss would be 5x that amount — so our max loss would be $5,000That’s a 5:1 ratio.An 80%  chance of collecting $1,000, but a 20% chance of losing 5 times as much ( in the worst case scenario when the market gets all the way to the other end of our long strike within that option spread).So that 5:1 ratio is considered good — and can only happen in a somewhat elevated volatility environment. So what about now?Well, now with lower volatility — that 5:1 ratio has become closer to 10:1.Meaning if we position the trade such that max profit = $1,000 — well, now max loss is $10,000 instead of just $5,000.How do I know this? Well, before you place a trade — you are able to preview that trade — and it tells you how that trade, if you were to execute it — would affect your margin requirement. The amount that your margin would increase — well, that’s your theoretical max loss.So now, you’re risking $10,000 to make $1,000 — which compares to before you were risking $8,000 to make max profit of $1,000.It can still be a high probability trade — but the problem is if you’re wrong — then it hurts — a A LOT.So it’s less worth it now to sell credit spreads both on the call and put side. And it was more worth doing this strategy before when volatility was elevated.

So now that the markets have changed — how have we adapted?

Well, we recently stopped recommending credit spread trades because of the low implied volatility environment. Instead, we’ve been recommending more futures trades and long call/long put options. With low volatility, options are generally cheaper.This strategy has worked well for us. As you can see earlier this week, we closed out a bullish long trade on the E-mini futures (ES) from 2086 entry to 2116 — that’s a 30 point gain. Each point is $50 — so if you want to calculate the profits from holding onto just 1 ES contract, that’s $50 per point * 30 points  = $1,500 in profit.But that’s not the only trade. We also had 2 other trades. See blog entry for details the Silver trade and the gold miners trade.

Summary

The lesson here is to adapt to changing market environments. A strategy that worked well before, might work now, and might not work in the future. SO you really need to adapt and anticipate – adjust your strategy based  on new information from the market — and that new information comes in everyday.

Stock Market Wave Surfing Course

Lastly, I wanted to let you know that if you are interested in learning how to surf the stock market for $1k every week, you should sign up for The Ultimate Stock Market Wave Surfing Video Course that we put together at www.lifestyletrading101.com – In it, we cover the history Wave Surfing Theory – more commonly referred to as Elliott Wave Theory, and specific patterns that appear in the stock market over and over again – most importantly, we teach real-life examples of how they appear in the market with detailed charts and analyses — and how to trade these patterns profitability – what booby traps to avoid, etc.This course is available for pre-sale –if you use the coupon code PRESALE100  at signup you’ll get $100 off.That’s it for now. Signing off, this is SS — and I’ll see you guys next time. May the waves be with you.