We have now finished our dive into the different markets and conditions and we have even gone over the different types of trades that work best in each specific condition and now we need to explore the individual trades and match them to the market conditions.

So let’s get started with the first market condition and that is consolidation. In consolidation we are looking for tight ranges and typically lower volume trading. This bodes well for trades that need these conditions to thrive. Examples of these trades are covered calls, iron condors and naked puts. There are other trades that will also work but these are the most common.

I think it is worth exploring why these trades work so well in conditions of muted movement. The reasons these trades work so well in this type of environment is because you can profit in several ways with at least two of these trades and that would be the covered call and the naked put. These are both bullish trades but they have one characteristic that makes them unique. That characteristic is that you don’t actually need bullish movement to profit in these trades. You just can have have too much bearish movement. For those who are not familiar with these trades, you can profit in these trades if the market or equity trends sideways or trends upward and even if the market or equity only goes down a little bit. This makes these theta trades pretty awesome!

We are going to concentrate this week on the naked put. Although this is a bullish trade, consolidation works quite well for it. We are going to look for a consolidation pattern and then go through the trade setup. We will throw on a naked put and follow the trade through to its completion.

Let’s begin…first we need an overall bullish trend for this type of trade but being in consolidation works just as well. We have a candidate in ENB. First, we need to make sure this equity is suitable for trading from a liquidity perspective. It must be easily traded in and out of or we could find ourselves in trouble if we needed to get out of the trade if it goes against us. In a nutshell, liquidity is how much interest is there in trading this equity and can be defined as over a certain number of shares traded on average. For our purposes, over a million shares traded is plenty liquid enough. ENB fits that bill nicely as it trades well over a million shares on average over a 3 month period. It also has lots of open interest in the options as well, this is another requirement for liquidity. For all intents and purposes, ENB is very tradeable.

ENB is in a one-year uptrend and happens to be consolidating right at this point, this is what we are looking for. We are looking for a put option that is approximately 30 days out in time and around a .40 delta. Looking at the option chain our best bet is the first put OTM. That would be the $35 strike. There is not a tonne of premium in this option but it is also quite a head start for the trade.

Check out the video below to see the trade and the details of the trade.

Trade Well Friends….Coach Holmes