Although the markets can sometimes have tremendous impact on our individual options positions — both existing ones and those we’re considering putting on the table — we’re not in the business of making trades based on binary market events.
Trying to capitalize on a one-off, short-term event is better left to the day traders, as they can watch their computer screens all day and pile into (or out of) these kinds of opportunities within the span of a few days or even a few hours.
But for those of you who are spending your days in the board room, operating room or family room, this doesn’t exclude you from making some quick returns of your own from short-term investments.
The draw to follow what the “big guys” might be doing and the desire to get into “story stocks” like Apple (AAPL) and Research In Motion (RIMM) can be tempting, because everyone wants to go where the momentum is. And that’s a big ingredient to our own trading success, but it’s only part of the story.
I’m less interested in the company names that “everyone” knows and more interested in the names that are going to get up and move — and keep on moving during our targeted three-week position holding periods. That is, I’m looking for momentum (whether to the upside or downside) that will sustain itself for more than just a heartbeat.
Sure, we all want to take home big profits in a short amount of time — and in some cases, we have — but it’s never a bad thing when it takes a few days or so for a trade to get some traction. That speaks to our preferred “unwinding” strategy of banking profits on half of our positions (i.e., if we buy 10 contracts, closing five of them) when they double in value and letting the rest ride for potentially even-bigger gains.
Besides, it’s no fun to be in on the names that “everyone else” is supposedly chasing. Our goal, first and foremost, is to identify undervalued options. Meaning, the gems that are (temporarily) going unnoticed — just sitting there, ready to break out. We’re in this game to spend a little money and potentially make back a lot, not to jump on a fast-moving bandwagon and hope it doesn’t run out of fuel in the middle of the road.
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Short-term market events bring as many challenges as they do opportunities. Think about it: How many times have you had the “perfect” position on the table, only to be rocked out of it because some random event (like an analyst’s upgrade or downgrade) sent a ripple effect through an entire sector?
Remember that analyst commentary is based on a particular stock’s expected performance … by that analyst or firm. And as we were able to witness this when CIBC World Markets analyst Meredith Whitney downgraded Citigroup (C) in November 2007. Whitney received many death threats after her downgrade, and there was no doubt that those came from angry investors who lost a lot of money, as her note led to a $369 billion drop in share value.
One would think that those investors would have instead been angry with the company itself because it wasn’t doing as well as it could thanks to the amount of write-offs it had to make in relation to its exposure to the subprime-lending market.
That’s not to say that analysts’ outlooks aren’t valid, in most cases. It’s just fascinating to watch how much shareholders react, whether they’re loading up on the stock or heading for the exits like their hair is on fire.
Also keep in mind that there are almost as many opinions as there are people watching these stocks. So, stay clear of the “herd” mentality (i.e., that which compels people to follow these proverbial pied pipers in droves) and stick with what works, which is solid technical and fundamental analysis and profitability simulation.
In the quest for fast profits, a little bit of patience (i.e., waiting for our trade recommendations each Friday, as opposed to making an impulsive trade based on whatever’s making headlines on a particular day) can go a long way.
