As millions of Americans are scurrying to finish their taxes and are poring over receipts, itemizing the money they made and the money they should have made, it’s a great reminder to spend some time reviewing your portfolio, as well as the strategies and practices that worked for you — and more importantly, the ones that didn’t work.
No doubt your trading account has hit some ups and downs in the past few months, and you’re ready to make (and keep) more gains next year. You can achieve this goal, and then some — and you don’t have to do it alone.
In the meantime, there’s a lot of fear in this market right now. Earnings season is starting off with a thud as stalwarts like Alcoa (AA) and General Electric (GE) aren’t exactly getting the party started. Long investors worry about the bottom, short-sellers worry about recovery and everybody seems to be concerned about the financial sector.
TO MARKET, TO MARKET
So, what’s my biggest fear right now? More than anything, I dread a market that goes flat. You and I need market movement. It doesn’t matter in what direction; we simply need underlying stocks to move — and move fast — so that our options trades go into hyper-warp speed.
Fortunately, we don’t have anything to worry about right now because, boy, do we have movement. And my readers have had some pretty nifty winners all because of extraordinary and helpful market volatility.
In just 93 days this year, we’ve experienced 37 triple-digit moves on the Dow (DJI). That’s better than one day in three — that’s huge. Heck, this week alone, we had two 400-point market moves. That’s even huger.
But there is a fly in the ointment. Often, the triple-digit moves have been at odds with one another. That’s to say that one day the market soars 284 points only to be followed by a 179-point collapse the next day.
The market’s fight with itself creates trends that are glaringly evident. Options traders can have a 20% profit one day only to see it soar to 100% the following. We’ve seen the opposite as well.
WHIP YOUR TRADES INTO SHAPE
We aren’t picking our options trades based on how the market might or might not move — we’re going straight for the momentum plays, whether to capture a stock’s upside by buying calls or to ride down a stock using puts — irrespective of what the market might do.
So, sometimes we’re banking profits quickly because the overall market direction might have influenced the position (i.e., when the market goes up, it tends to take most stocks higher with it; same goes for a downtrending market kneecapping the falling stocks even harder). Other times, we haven’t been so fortunate.
But still other times, our positions have stood strong regardless of market influence, and those are what we aim to find each week.
So, what can we do to even things out?
I have basic buying rules and I always use stop-loss levels for taking big profits and small losses. I have used these specific formulas throughout my entire 35-year trading career to get, and hold on to, triple-digit profits. They have held us in good stead.
DON’T FALL APART OVER FALLOUTS
When you are buying options, stop-losses are an important lifeline to your success. Stop-losses are exit points that act as ejector seats for your trades. If the option or stock stop-loss price is hit, you automatically exit the position.
Through many hours of back-testing my Power-Plus Profit Tracker system, which helps me identify big-momentum stocks, I have found that stop-losses greatly improved the results of my methodology. Stop-losses will prevent you from taking major losses and letting big profits slip away.
Plain and simple: Stop-losses are a MUST for all options traders. If you don’t use them, you are putting yourself deliberately in harm’s way.
I give you a contingency stop-loss in my introductory Fast Options Profits and higher-intensity Maximum Options trading services — that is, parameters where you should exit the position if the underlying stock hits the specified price.
You can — if you choose — apply stop-losses using an option price (i.e., a 50-cent stop loss on a $1 option, for example), but make sure to use the option’s bid or ask price, not the ‘last’ price because an option may not trade for a long time after the stock has hit the stop-loss price. To be clear, though, I prefer using the underlying stock as the basis for a stop-loss, for option prices can do funny things.
While the terms of the stop-loss are flexible, be sure of this: Stop-losses help hold on to valuable profits as well. Another use of stop-losses is a trailing stop-loss. I usually use a mental stop-loss here, meaning I don’t actually put the order in through my broker — I simply watch the stock. In fact, you can check stock or option prices at any time on OptionsZone.com by clicking here.
Contingency stop-losses are used to prevent profits from slipping away. For example, if you have a call option with a big profit, keep adjusting the stop-loss as the stock moves in your direction (i.e., keeping it 3%-5% away from the stock price). When it reverses course and touches your stop-loss, take profits.
You definitely have choices when it comes to stop-losses. You can follow my guidelines directly or adjust them to achieve your own investing goals. As I said, we’re all unique and have different levels of risk tolerance.
If your tolerance is more — or less — than mine, you might just follow your own guidelines. Just as long as you’re actively managing your account and honoring your stop-losses, you’ll make more and even sleep better at night during turbulent market times.
SET YOUR (HIND) SIGHT ON PROFIT
Watching the market can make you seasick, so concentrate instead on honing your options game and enjoy the ride. Review your past successes (and failures) to chart your course ahead. Remember that stop-losses are an options trader’s best friend, and as long as this volatility keeps up, the options ship will stay afloat and lead us to treasure.
As an options trader, your most important learning experience is to review your own personal track record periodically. Evaluating your own trading history will disclose the mistakes that you made — and we all make mistakes. Here, you can alter trading tactics to avoid making the same mistakes in the future.
I strongly suggest that you write down a series of guidelines that you have established after looking at your past trades. These guidelines might include being more aggressive about taking profits or changing where you set your stop-losses, and the list goes on.
Check out your bad trades and find out what went wrong. Where you simply asleep at the wheel and took a loss? Were you ill and missed some important moves? An honest review of your past performances will pay off with improved performance and profits in the future.
If you enjoyed this article, check out Ken Trester’s “Cover Your Bases With Options Home Runs” and “Cheap Options Aren’t Always a Smart Buy.”
