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Market Move Expansion vs Market Move Contraction Options Premiums Explained on Stock Charts

Jun 27, 2022

Hey guys, what's going on in this video, we're gonna cover something of great importance that is move expansion versus move contraction. How does it relate to trade in weekly options and specifically, what are the probabilities of a move contraction after a move expansion? How can you utilize it? And guys, this is a pretty advanced subject. I would expect you to understand the 13 market moves curriculum, uh, to better understand the information in this video. So if you're trying to advance as a trader pay, very close attention, because this one aspect that I'm about to show you, it' probably the greatest learning lesson that derived from this last 10 days of trade in. And so I'm gonna explain it on the charts. So chart number one is the basic chart of S and P 500. As we have predicted the 3, 3, 3 sequence. Now understand when the move is contracting, what happens to the option?

Premiums is, uh, you're gonna have a situation in the sideway market, right? Just after you had a nice move hire, and things are stolen out. Most of the traders would expect this to break out to the next leg higher. Now we've warned you that it's not gonna be the case this time because we're following some historic analogs and more the historic analogs guys in the next video. Make sure you don't miss that one. It's gonna show you exactly what will market actually do next. So talking about options, premiums, when the market is gonna, uh, switch to bull side, such as in case right here, and it's gonna go sideways your options, premiums on both sides on calls and put sides. They will decrease in value. So this actually creates a huge buying opportunity for you. You want to buy options, uh, when we trade directional options, when premiums actually go lower.

And so this 3, 3, 3 move has made certain traders in our group anywhere from, uh, they went from 50,000. Some guys went up to, you know, seven, 800, 900,000 and important to understand what happens next. That would place a huge bat on a 90% probability outcome and it stalls and it doesn't work. So a lot of these gains unfortunately, were given back to the market. Uh, nonetheless, this is a huge lesson to understand, um, and know, uh, how in certain rare market instances, you have to be very careful with this move contraction. Unfortunately, it is not going to be as apparent as we would like it to be. So you still have to stick to your strategy and you want to bet in a 90% probability outcome, instead of trying to bet on something like what happened actually in this instance, which is a, was a very low event of an outcome.

What has followed the 3 33 sequence for those of you that, uh, are not sure what is a move contraction or expansion? Uh, let me just state real quick for better understanding of this video. There's such thing as for you to track, how much does the market move on a particular day? For example, a stock, you know, like Tesla can move, uh, $40 on certain days, it can move a hundred dollars in certain days, it can move just $10 in certain days. So when Tesla daily trading range could be 20, 30 bucks and it stays there for a little while, uh, the day when that trade-in range starts expanding. So maybe last few days is trading at 20, 30 bucks. And you notice the day where now the trading range is expanding. It's going higher to 40, $50, $60. That would be an expansion on the move.

So as you can see right here, we have, uh, an expansion, we have bigger candles. So in other words, the market is making a greater move, uh, before the move is actually contracting. So this sideway trend would be a diminished size of the move. So the move is contracting the daily move. We're pertaining to how many points does a particular underly. Um, the underline, um, moving up down between highs and lows on a certain day between the previous, uh, closing, uh, of the trading session. So what you have here normally in any 3, 3, 3 sequence, you would have a move expansion. The move expansion allows you to make a ton of money, especially if it is preceded in this major daily trade and range shift. So we went from smaller, smaller size move, where the market was going sideways, uh, maybe trading in down to a max of 40 points, uh, lately on this, uh, in this particular interval on the time frame.

And then you just, you go to a three X, four X of that daily move. So instead of the market now going up or down 40 points a day, now you have a market, uh, going down by 130 points. And so when you look at the relationship of this candle, the candle size, let's say to the prior candle size. So this candle is a lot smaller than this candle. So in this particular case, we're talking about a move expansion, a move in the S and P went from 40 points. It expanded all the way to hundred 30 points. Okay? So that's the condition of a move expansion. You go for a smaller size daily move, which will be portrayed anywhere in the chart by a smaller candle. When the next day candle is substantially higher, that would be a move expansion. Now it doesn't mean that the market is dropping or going lower.

A move expansion could be when you have, for example, smaller drop day like this, and then the market shifts higher. This would be a move expansion. So when we're talking about contention or expansion, we're not talking about bullish or bearish, we're just talking about the size. Okay. And it's important to understand the size of the move because it's the shift that determines the premiums in your option. So there's a few factors that determine the premiums of the option. It's the size of the, of the move and the speed at which the move is actually expanded. So the option premium, for example, in this case, when you switch from a small red candle into like a candle, that's twice the size of this red candle, this would give a rather substantial boost, uh, to the options premiums, especially on the call side, uh, especially on the second day full of free when you get another green day and another green day, right?

So, um, now this is the Mo this is the best setup right here for options premiums. Because when you go bullish sideways, this is your biggest moneymaking opportunity. This is the point where your options premium surprise cheaply, because to most of the market participants, it is not clear yet that the market is about to fold the hell out. And so you buy options here on the put site, really cheaply you're get in the bargain. And then, so when the next day we basically predicted there's gonna be a beginning of this major 3, 3, 3 sequence, which by the way, guys is very, very rare. Um, but to nail this to the point before that whole sequence plays out, puts you in a suggestion to profit tremendously from the market. And so normally if you study the historic cases, you would know what happens next. So I'm about to show you that, uh, but this 3, 3, 3 guys in, in this type of sequence, you put option premiums are going to increase substantially each day.

You're gonna have a gap down and a further drop a gap down, and a third of the drop. So where most of the traders go wrong on such a sequence, 99% of the traders. They're gonna miss this entry point. And then the next day they're gonna be wondering, oh my God, well, it's probably too late, right? Because you just went for this nice upsize move to sideway trend. The market is calm. Nobody's seen the storm. And the first day you get this extended move after getting used to maybe 40, 50 points a day. Now you're down 130 points in the market, a trader looks at this situation and they're like, well, it's too late to get in. And so they don't get in, they missed the trade. They missed the next morning, gab down. And at that point they're like, oh my God, well now certainly I'm on late.

I'm late to buy puts here. And then the third day they're waking up and the market keeps going lower. And at that point they break and they say, well, hell with this. I'm definitely buying puts now. Well, what you should know from the historic probabilities of 13 market moves, we go 20 years back at this point, the there's guys, there's never been a situation where you would have 3, 3, 3, and a fourth move three. In other words, a fourth gap down, you could have still a red day, but that fourth day normally would be a move two, a seven, which both begin. They begin the day with the slight move higher of some kind. So, and that's exactly what happens here in the sequence. Uh, but understand that you've gotta know the sequences first to capture the first part of the move, which would be this major move lower.

And then you just gotta focus on the probabilities, which in this case they didn't work, but not in the case, they would work in majority of the circumstances. So at this point, after witnessing this 3, 3, 3 sequence guys, which is highly bearish, understanding that the next outcome on the next day's move cannot be another three going back 20 years. All right, we understand that at that point, the market could, the market is likely to bounce as it does in 90% plus cases. So for example, to give you a, a good historic example, we're looking now at April, 1994, where we had a move 3 33, a couple of prior candles, then not three moves here. Here's move two for example. But if we're focusing on these last three candles, there are three, three moves, and you can clearly see that after that the market sets low, it's a move 13.

So after huge 3, 3, 3 sequence, the probability of getting the fourth three is highly, highly unlikely. As a matter of fact, it has never fucking happened. That's how unlikely it is. So at that point where most of the traders they're still like, well, no, let's, you know, clearly the market is crashing. Let's go buy Mo putz. When you have a lot of negative headlines in the market where everybody right is just bearish. I mean, the people that were so bullish a we a, we be wish a week, a week before now, they turn in bearish, uh, people that have been bulls for a while. Uh, these guys on CNBC now, them guys that turn in bearish, you know, this is the worst time to be a bear in like 99% of instances. So this is the time that would actually make sense to switch directions. If you study multiple, multiple, multiple historic examples, this is not your time after 3, 3, 3 moves.

You don't go on the third day of a move three and load up with buts. That is the worst fucking thing you can do because by definition in 90 plus percent outcomes, you gonna have some kind of pump. You're gonna have some kind of bounce. So you don't want to bat in the direction of, of the lowest probability. You wanna start betting in the direction of the highest outcome based of multiple, multiple instances in the history. So based off the current sequence that we've had on the 3 33, the highest probability outcome was at 10 77 7, because not only, uh, this event here, the 3 33, uh, was such a huge expansion of the move. Okay. In most of the instances, when you get these three gap downs back to back, you ultimately will arrive at a gap up. We can call this loss gap, the exhaustion gap.

You may be familiar with that. Uh, but at that point, uh, it is highly, highly unlikely to have a fourth gap down. In most instances gonna be a gap up, especially guys, when you combine that with other market conditions, such as the VX. So very phenomenal action on the VX in the last 10 days, despite of the market breaking lower, despite of us going for this highly bear sequence of 3 33, look at what happens to the VX. Like it just completely fails to break out this 34 level is this, it's not a big deal for the VX. There's been multiple instances in the last few years when we're in the middle of a bull market, where vs shot up to 50, a 70, 80, it has happened. So the phenomenal bullish divergence here on the VX confirms that the market is done dropping that we shouldn't be expecting another 3, 3, 3 sequence here.

And what would happen in most instances is just like I pointed on this, uh, 1994 example is you would have multiple moves higher, right? These are huge size candles. The keyword here is the huge size candle. So for example, the last three candle size wise is this move 13 candle is even bigger. Like in other words, the market drops one last day. It reverses this candle is greater in size overall than the last three candle. So couple of these candles can put you up guys. They can erase a lot of these gains rather rapidly, as you can see, you could be back to this level of the second day of, uh, of the move three, which would put us easily back to, you know, slightly above 3,900 level. So very important information to understand that instead of getting an increased size move to the bull side, as you normally would get with the move 13, okay.

We had a decrease in the move. So we went normal initiation of what 3, 3, 3, you're gonna go for a move expansion, move expansion, move expansion that will ultimately result in a move expansion again, but to the upside. And so we had a very, very rare circumstance here following the federal reserve meeting, normally the volatility and the size of the move would expand. And in this case, because the market has been dropping so much, going into the federal reserve meeting, we had a very astronomical probability of an expansion of the move to the upside, which we did not get. Instead, we got a little bit of a bounce. We got a little bit of the bounce, right? The federal reserve announcement. And we got a, somewhat of a good size reversal the night after, which would coincide with this candle around here in 90 94. But look at that, after that, it's a triple seven.

It's just bullish, move bullish booth. Now buying the dip, buying the dip, buying the dip. Okay. So we just didn't get an as accurate of a move expansion. Okay. Which killed a lot of options premiums on the bull side. So, but this is very rare where the market keeps dropping and it keeps set in new lows and the VIX just fails. This is not the time where you want to be a bear VIX fails to break out higher consistently when market keeps dropping and dropping and dropping, this is a time for you to check the situation, say, hold on, what is going on here? Okay. Why is Dick's not going higher? Is Vic's completely broken. Is the system entirely manipulated? Okay. That's what most of the traders think, right? But a much simpler way to view this is, look, these are very rare market circumstances.

The market is selling off, but it is selling off in a very, very orderly fashion here. This is why the VIX is not breaking much higher from this 34 level. We can't say that it's going lower, but we can't say, I mean, this is clear, right? The VIX is failing to break up. I mean, it should have been on, on the next day after the federal reserve, Vic should have been here. It should have been at 40 there's. No reason won that reverse or why Vic shouldn't have gone like right here to a 40 level, but it didn't. It actually dropped in relation to the prior, uh, day. So VIX actually went lower instead of higher. This is a huge, huge case for bullish divergence guys. And at the same time, if we study instances where vis showed us a bull divergence like this, normally we would have a huge move to the upside in the actual stock market.

So we would, this is why, in some instances like this, you see this huge candles, right? They're upside candles, the market may initiate lower, but by the end of the day, you're like you're way higher. And so this was a very rare Vant where you had a lot of market sectors, uh, a lot of bullish divergences everywhere. And yet the market failed, uh, to move higher, move higher, slightly and move higher slightly on Friday. But overall, the move to the upside was contained instead of making a move of maybe 200 points on S and P the move was contained to just 40 50 points. And so that's going be bad, no matter what, that's gonna be bad. If you're trading directional options, if you're trading inputs, that's gonna be bad. If you're trading calls, it doesn't matter how you trade this. When the market is going through and move expansion, look big red candles.

Okay. If you're trading puts the next day, would you can't really make much money on puts because look, the move is contracting and you can't. And if you're, if you're playing for a big breakout to the op upside, which is what would happen in 90% of instance here, you can't really make money. Either. It, it gets slightly higher and then it reverses and, and it ends in the middle. So you can't make money on calls. You can't make money on puts. All right. So from a standpoint of trading weekly direction options, this was the list probability of what was gonna transpire on Thursday and Friday. The market just basically stalled and it gave us, um, a, a move contraction instead of a move expansion. So hopefully that makes sense. And just to help you view this a little bit better, I mean, clearly you see the scandals, there are smaller, all of these scandals here, guys, they're smaller than the size of these scandals.

So you can look at this chart and say, well, oh, where all the market is still dropping. Sure. Okay. But, uh, you know, there's cleared bull divergences here, guys. Uh, even though the market is not making that 130 point move that we had here, 130 points, 130 points, uh, you know, more bigger, bigger move expansion, expansion expansion. Now we have smaller moves, smaller moves, smaller move. But look, what happens to the volume and we get this crazy, uh, bull candle around here. This candle is even higher than the, than the bullish volume we've got right here before all this bullish run has happened right here. Right? So the SI the bullish divergences are Omni present in this market. But when you combine that with a move contraction, even with high probabilities of a bullish reversal that had like 90% case this week, okay. When the move stalls, like, it's the worst thing that can happen to you as a short term trader.

So you get killed in those premiums. You get killed in the size of the move because it's contracting, you start making a little bit of money, but then the move fades, you can reverse the position, trade the other. As soon as you reverse your position, the move stops to the downside. It just you're trapped. This is a station where you're trapped, and this is not gonna happen very often. So if we have another circumstance at some point this year where we have a move 3, 3, 3, where you have this, okay, you're still better off betting to a move expansion probability, because this is an abnormal circumstance. Okay. I'm gonna show you exactly. When was the last time we had such an abnormal circumstance, and that was exactly in June of 1974. So this is a chart of S P 518 to 1974. Uh, we'd been using this recently as a historic analog, but even going back and analyzing this situation, which almost day to date matches with June now of 2022.

You see that even the bounce here in 1974, it was much greater than the bounce we just had. So this recent, uh, bull round right here, we just had, that would be matched on the, on the prior picture of S and P 500. I was showing, uh, and this bullish move right here, guys. I mean, we should have had a much more bullish move, but clearly looking at this chart, you're like, oh my God, are you really saying, we're gonna go drop all the way through October of this year, guys, find out in the next video, I'm also gonna be giving you the best trade, uh, that was unanimously the best trade for anyone that traded in 1974. So if you wanna know what could be the absolute best trade for you to take between now and October of 2022, guys, I'm gonna reveal it in the next video.

Now, if you want to understand more move expansion, move contraction, how to apply it. Um, you know how to benefit from observations like this in the market, as, as a day trader, uh, trading and weekly options, make sure you visit 13 MTV. If you don't know all the 13 market moves guys, study them, study them. You gotta understand the moves. Uh, you know, first before you can go to a few million dollars, you gotta nail the move 3 33, and then you gotta nail the follow through sequence. Uh, at one point, if you devote your time to studying this information, you will persevere and you will beat the market. You will be a huge success story.


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