Blog

The PULSE Options Trading System

TradingPub Admin | July 18, 2014

Responsive image

At the TradingPub our goal is to connect you with the top professional traders in the industry and create an opportunity to learn from them.  Yesterday’s event with Chris Verhaegh was an example of how we meet this commitment. We had several requests for the video of Chris's presentation, and decided to couple it with a quick summary of the information he shared during this education session.

The focus of Chris Verhaegh's trading activities is on trading weekly options and here is why:

  • Weekly options provide a quick equity turnover
  • Not as time consuming as trading other financial product
  • Can trade with smaller accounts.
  • Risks can be predetermined prior to a trade entry
  • Can be used as a leveraged directional play

To assist in trading weekly options, Chris has developed the PULSE Trading System, a white box, transparent trading methodology that uses mathematical  probabilities to help find the most promising stock options to trade.  PULSE is also an acrostic developed by Chris as a teaching tool to help traders remember the most basic elements of what the system incorporates, and what should be considered prior to each trade:

P - Profit Potential

As often happens in trading, it is easy to look at a set of facts and come to a conclusion, that you change later, even though the underlying information has not changed.  This is where a system can be a big held to traders, especially if it is designed to consistently compare factual data against predetermined and tested criteria to help draw the right conclusions. This is what the PULSE Trading System does, and not only does it help with data analysis, it takes the pressure off trying to find the right stock and market move. However, the big question on everyone's mind is "How to pick the right stock?". There is a universe of more than 10,000 stocks to choose from and more than 3,000 of them offer options. The PULSE Trading System allows you to sift through all available opportunities, and focus on the ones that offer the greatest potential.

U - Upside Reward

Here the trade setups are positioned to make at least 100% return. Just as with any other trading system there will be losing trades, but the beauty of options is that you will not lose more than 100% (or what you put in each trade), where the upside potential is unlimited. That is why returns of at least 100% are preferred when trading with the PULSE, so if there is a loser the very next trade's return can make-up for the loss.

L - Low Risk

Many of the trades risk only pennies per share and of you are wrong that is all you can lose, pennies. However, if you are right you can earn a lot more than what you risk. The mathematical method used in the system helps with accepting or rejecting given risks and trades.

S - Setup Strategies

There are two types of setups: stock-specific and market-wide. The first one can be derived by using a technical analysis, reading the statistics behind the company and evaluating the stock. Based on how strong those readings are, some stocks can be added to the watch list or enter the top 5 area, where they are closely monitored for movement and then possibly traded.

Market-Wide setups are, of course, those that affect the whole market, despite of individual technical analysis. Further, the strategies are directional and non-directional. With a directional strategy a move up or down is expected and then either a call or a put is purchased. When a big move is expected, but there is no certainty of the direction then a non-directional strategy is deployed.

E - Events, Entry, Exit

Events can be stock-specific, with earnings announcement, being a most common example. The PULSE system does not trade any options before an earnings announcement, those options are much more expensive, but rather waits till after the announcement and then trading of a given option is resumed. There are also market-wide events, and those, just like the market-wide setups are such that affect the whole market. Of course, examples here are the Federal Open Market Committee meetings, 8 per year, and the release of the meeting's minutes. Other examples include the jobs report, officially known as the non-farm pay report (NFP), the unemployment rate report and others. When those reports come out there is more volatility in the market and more volatility means more opportunity to earn when trading options.

This is where E, which also stands for entry, comes in play. Entry includes both time and price. Entry can be best near the close of the day when big volatility is expected, with the hope to gap at the open the following day. Or you can enter near the open of the day and hope that if the market is shocked, it will not be a flat line and you can capture that big shock move.

Finally, also stands for exits. You can exit by placing a target order. You can calculate what the option should be worth and know if it passes that point you can place a limit order, exit and be satisfied with that. Another way to exit is to place a stop order. Stop order here is not a stop loss order, but rather a trailing stop order. For example if a stock is moving in the direction expected you can raise your stop and make more money that way.

Here are some screenshots from Steve's presentation that reinforce the concepts behind the PULSE Trading System

On June 5th PULSE spots a high potential move in Amazon:image013

Seven days later on June 12th, PULSE identifies another strong potential move in Amazon:image014

We can concede that these explosive moves in Amazon are not typical. Here is an example of a trade on Free PortMcMoRan which opened at $0.04 and traded up to a high of $0.35 before closing at $0.30.

image015

This trade in Tesla was performed by one of Chris's students, who turned around and bought a new care with his profits.

image016

And lastly, here is a list of more typical trades that a student executed earlier this year.  Note the entry and exit times were very near the open and close, which is a typical trait of the PULSE system.

image017

Trading stocks, compared to options, provides more if a one dimensional profit earning opportunity. In most cases, traders buy low and sell high and it is all about the move in price. When trading options, the profit earning opportunities are a lot more multi-dimensional. According to Chris, the two most important reasons why options trading is preferred by many investors over stock trading, is that you have limited loses and fast equity turnaround, especially with weekly options.

For those who may not know, there are two different types of options, which is how you can leverage the direction of the market and still gain. You have a call option, giving the owner of the option the right, but not the obligation to buy the stock at a given price before a given expiration date. This type of option practically is bought when you expect the market to go up and gain from the ability to buy at a lower price and sell at the market price.

The other type of option is a put option that gives the owner the right to sell the stock, but not the obligation, at a given price by a given date. Puts are used for two main reasons. You can buy a put when you feel the price of a stock will go down and you can make money by selling the stock at the previously agreed price, while buying at the lower market price. Puts are also used as insurance along with calls. Trading those type of options is possible when you have a directional bias for the market and are known as directional strategies.

However, trading options also allows to use non-directional strategies and one such is the straddle. It practically involves the purchase of a call and a put with the same expiration and strike prices. Straddles are executed when you are sure that there will be a major move in a stock's price, but you are not sure whether the move will be up or down. When the stock moves, in the case of a straddle, losses can be up to 100%, but the winner can far exceed the loss.

A Strangle is similar to a Straddle in the fact that you buy a call and a put.  The expiration of both is the same, but unlike in the straddle the two options have different strike prices. Basically a strangle is put on the stock price and if price breaks free the upside potential is enormous. Straddles a more often a profitable options strategy than strangles are. Strangles have the potential for a  higher return, however,  but will not be as profitable as often as straddles. The PULSE system has very specific rules on when to pursue one or the other techniques.

In summary, the PULSE Trading System has been designed to look for compelling reasons to trade a stock. Once a high potential stock has been identified and confirmed (such as a stock-specific or a market-wide setup event) , then if there is a directional bias a call or a put is bought.  And if there is no directional bias, then a straddle or a strangle is bought.  It is also important to note that the PULSE Trading System does not require precision in the execution of a trade.  If a trading system requires precision to be effective, Chris contends that this is unrealistic and is a system that should be avoided. He feels that even "sloppy trades" should earn a return as long as the PULSE Trading System has identified  potential in the stock.

The PULSE Trading System is a comprehensive program and includes educational videos, tools, and resources:

  • Video Course Library
  •  Weekly Newsletter
  • Stock Watch List
  • Top 5 Stocks to Watch or Avoid
  • Weekly Review Session
  • Bonus Video on "The Polarity Trading Technique"

 CLAIM YOUR COPY OF THE PULSE HERE  

See Chris's PULSE Trading Class Here: