You Feeling Lucky Punk?
The stock market is open for trading 225 days of the year – EVERY YEAR. What this means is that there are over 1,430 hours, over 85,800 minutes by which an investor, trader, or person with a trading account, can access and execute a trade. What you need to ask yourself is “Is now the time for me to be doing this?”
To put it in a simpler way, tens of millions have gym memberships or “workout,” most of which enter and move around equipment. Very few have the discipline, work ethic, and set goals actually show the results for their efforts either by having the beach body or being on stage in a bodybuilding or strongman competition. Why, they train properly and avoid over training.
If you head isn’t in the right place, if the chart isn’t setting up yet, if there’s too many 9-5 tasks needing to be done today at work, or if you simply aren’t in the mood: DON’T TRADE!
Get Mom On The Phone, Quick!
Regardless if I’m going to do a $200 trade or a $200,000 trade, before I push that BUY BUTTON, I always ask myself: Would I tell my mother to do this trade?
Conviction that you are making a good choice to make the trade you are looking at leads to making better profits down the road. I’m not a fan of bidding on positions when trading options cause, if you are thinking of bidding to get it lower, then you still aren’t really convinced that it’s going to be a good trade.
It’s easy to be socially anonymous and post how you are bagged and allow that to somehow be public positive affirmation in a world of reverse psychology, but if you had to take a moment to think about mom, you’d KNOW better about what you’re about to get involved with and surely be thinking about your STOP LOSS.
No Plan = No Trade
Trading options is one of the simplest forms of wealth creation on the planet if, and only if, you have a plan before getting involved in it. If the 32Trades Plan isn’t simple enough for you, here’s the general rules you need to design on your own:
- Plot a design for how high or low and when that move can take place
- Calculate your exit and stop loss from here
- Get in to it
- See your trade go as planned (or stop you out)
- Exit your trade
Steps 1-3 and 5 are all under your control (assuming you aren’t stopped out). You can (and will) hope and dream the trade goes even better than you planned many times, but you can’t do anything once you have made step 3. Hope doesn’t pay bills and dreams are for kids; two reasons why you need to find a way to get very familiar with the stop-loss order. If you have a plan in place, you can’t get surprised.
Using a stop loss will save your portfolio 90% of thew time. The 10% rule is the common sense part which is best described using a scenario:
It’s July 8 and you bought JUL 22 SPY 209 PUTS @ 0.90 mid session. SPY went on through the session to break past the YTD high and close the session at 212.65. As of the close, your 0.90 PUTS are worth 0.73.
Using a stop loss with SPY at its YTD highs and 2 weeks left for SPY to pullback to a level near or below 209 for you to cash in would be a poor use of the safety feature. Because there is adequate time and a superior probability that the position will be a profitable one, this would be a situation where common sense would eliminate using a stop loss.
The Bonus Round
You planned your trade, calculated your exit, hit you target, and are ready to exit the trade, but hang on… it’s still trending in your favor. A smart trader would take a majority portion scale out of the trade to lock in a majority portion of the profits and ride the remainder a bit longer. As it continues, a superior move would be to take off the portion which met or exceeded your exit target and ride any remaining FREE contracts for as long as the wind will take them.
Hit It & Quit It (Quick)
So you’re looking to get into a trade and trying to decide if its a real trade, or a DaGrinder type with a couple hundred bucks. When you’re buying contracts 2 weeks or 2 months out, you already know you’re going to be holding these contracts for atleast one night if not a few more. The opposite should be the focus for those smaller trades.
When you trade small money, you are 95% of the time trading weeklys which means you want to avoid being in that position longer than needed as decay will be eating into any profits planned in advance. What you are looking for, especially since the majority of the moves will be small ones, is to find a time when you can get in and out as quickly as possible.
Size Doesn’t Really Matter
I constantly need to remind myself of this rule. Sometimes, instead of seeing a chart and saying “I an see this popping $3 from here so I’m going to grab $2-$4 Out The Money and let it come to it. This would let me grab 30 contracts with the amount I’m prepared to use on this trade.”
Getting half that amount $1 Out The Money or even 1/4 the amount already In The Money and letting the same planned “pop” get to the target makes for a safer trade most of the time and one which is much easier to manage using a stop loss with. When you are In The Money or very close to it, the small dips and rips will have much less volatility on the bid/ask fluctuation as compared to those further out.
If you use this method of entering 80% of the time you will soon begin to realize that these types of trades will be building your portfolio up more rapidly than the 3-5-10 bagger Out The Money trades ever will (unless there is another BREXIT type event). They won’t all be home run trades, but getting on base gets you much closer to scoring a run than just getting up there each time and swinging for the fences.