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Hey everyone. This is Kirk here again at optionalpha.com and welcome back to the daily call. On today’s call today, we are going to tackle the topic of trading options with technical analysis. Now, I wouldn’t say that this is by far, the most requested topic or a big topic that we get a lot of questions on, but it’s definitely up there. I think that people often find technical analysis first because they start their journey with stock trading, they learn a little bit about technicals, they think it’s a magic pill to solve all their issues with directional trading and then eventually, maybe they transition options trading and they think that the married combination of this is the holy grail basically and obviously, that’s not the case. We know that nothing is a surefire thing. It’s all high probability. It’s all based on math. But the way that I think about trading options with technicals – I think about technicals first as like… Well, I’ll talk about it first in this call because I think it’s important to cover. We did a lot of research in our signals report that basically I know now and have known for a while that most technical analysis indicators are practically garbage. 95%, 96% of what we tested which was thousands of variations really don’t work. They’re not predictive in their alerts and when they are predictive, they’re not consistent in actually delivering a turn in the actual market that justifies the premium and the stock trade, etcetera. They don’t actually generate enough positive signals that make money to counteract the negative signals that lose money. That being said, it’s not about actually using one particular indicator versus another. It’s actually settings within each indicator. I often think about it as like you have to use the right settings for the right environment basically. I’d relate it to maybe – Running outside is fine, but trying to run at the bottom of the pool, not going to work. Now, that doesn’t mean that running is bad. It just means that running outside is better than running at the bottom of the pool where you’re not really going to get anywhere. I think you have to realize that first off. When I think about then using technicals for trading, I know that there are indicators that work well. They’re not amazing, so let’s get that out of the way. They’re not amazing, but we’re talking 60%, 65% chance of success, have a very good likelihood of seeing the stock stop or turnaround, lose its momentum, etcetera, not always just do a V bottom, V top, etcetera, but it has a pretty good indication of the stock turning around. When I think about that, I layer on top of that now options trading. If I know that I have a technical indicator that’s just based on the stock price, has nothing to do with the options yet and it has 60%, 65% chance of being successful long-term of seeing a turn in the stock or rollover in the stock, whatever it is, if I can layer on top of that, trading options and then also give myself margin for error, that’s where I think that the power of trading options with technicals comes in. Let’s say that a stock is trading at $50 and now we get a technical buy signal. Well, I’m not going to buy the stock at $50. I might sell a put credit spread at the 45 strike and buy the 40 strike. I’m still giving myself a $5 margin of error. I got a technical signal maybe that the stock was turning around or that it could be forming a bottom here, but I’m not going to trust that as the only thing that’s going to happen and stick my flag in the sand and say, “Okay. $50 is the line in the sand and it’s not going below there because that’s not realistic.” What I’ll do instead is I’ll give myself a margin of error by selling the 45/40 credit put spread, so I’ve got a $5 buffer. If I’m wrong or if the technicals are wrong in this case, I still have the opportunity then to possibly make money trading just the options. I give myself a $5 cushion to allow the stock to fall and still make money. Hopefully that concept makes sense. Again, it’s something that I use often in our trading. Now, the way that we have our technical signals setup which you can learn more about at optionalpha.com/signals, the way that we have them setup, we don’t generate signals that often. It’s not a daily. It’s not an intraday thing. I mean, we may generate a signal or two every month or a handful of signals every month for the different securities that we follow. That’s good because we found that that actually works out really well. We’ve traded a lot of these signals and they help us make decisions about trades that we’re getting into. Also, they help us make decisions about trades that we currently have that we consider rolling from one month to the next. In fact, we recently did a trade in SLV which probably by the time this podcast goes live, that video will be up publicly on YouTube, so you can check it out. It’s a big case study that we did in SLV where we used the technical signals to determine whether we wanted to continue to maintain the contact from one month to the next. Before we actually rolled the contracts, we looked at the technicals and we said, “Okay. Are the technicals suggesting that this stock is going to continue on this path or do we have at least a better assumption than not that it might actually roll over?” We thought it might actually roll over. We continued to trade for the next month. We basically took the loser that we could’ve had and closed and we carried it in duration and held it a little bit longer and it actually ended up turning out to be a $312 winner. It’s a really good trade and again, we wouldn’t have done that had we not at least glanced at the technicals. Now, before I close this out, again, the key for me though is that the technicals are not the first thing I look at. You don’t necessarily need to use them. Do I think that they have been helpful in how we make some of our decisions? Absolutely, but it’s not the foundation of what you should do. You should definitely still trade high probability. It should all be balanced. Even if I got for example, a technical buy signal on something, I would not go long that stock if my portfolio already had 10 long securities. I wouldn’t make that decision. I think you have to take this with a grain of salt as with everything I guess with investing. But it’s something that we definitely do use often and do check. It’s just not the most important factor in our decision. Again, if you guys want to learn more about the research that we did and all the back-testing, head on over to optionalpha.com/signals. Again, that’s optionalpha.com/signals. Until next time, happy trading!