What I've learned trading in 2014

I feel a sense of satisfaction with every year that goes by. Every year brings on a different set of challenges as it relates to trading and this year I feel like I’ve learned a lot. Like any professional trader, I will take this knowledge into the new year with one more year’s experience under my belt – continuing to grow and hopefully become better and better at my craft.

Here are a few things I struggled with this year, as well as some things I need to improve upon:

1. Taking profits too soon - This was a big one for me this year. There were things in my personal life which required my attention, therefore occupied my mind during the trading day. The one thing I’ve noticed is that if there is something lingering in your mind, it will come out in your trading performance – somehow, somewhere.

My goal next year is to separate myself from the things I can’t fix in my life when I’m at my desk. If there happens to be something I can fix, then I will attend to that first, before I sit down to trade. I noticed that my profit taking was directly related to me wanting to get up from my desk and take care of other business; which resulted in me cutting losers when I should (this is a good thing obviously), however taking profit too soon on my winner really affected my P/L over time – NOT GOOD!

2. Not prepping enough before the opening bell – I believe this is directly related to the above issue. I felt that I sometimes would rush my prep period in order just to get it over with. I would follow whatever was hot on Twitter and trade it – not sticking to my rules of finding my own voice and inspiration as I wrote about here.

3. Holding less than normal positions overnight – My days have been pretty hectic lately, so when I sleep I really didn’t want to think about positions I had overnight. Since my main strategy is premium selling, I was short-changing myself by not maximizing the amount of time decay I could have received by holding more positions overnight. Don’t get me wrong, it’s great to end the day in cash and have a clean slate each morning, but this should only be done when the MARKET allows for this, not for when I want to.

My goal next year is obvious – increase more overnight swing holds when appropriate.

4. Write more about my trading – There is something really gratifying about writing down my experiences – both good and bad. It’s almost therapeutic for me and I feel that it is a necessary outlet for my thoughts. Not only for the fact that it might help someone else, but also for the fact that I need to keep a mental journal somewhere so I can reference it in the future.

My goal is to write more, do more videos, expand my options trading course and be more vocal on my Twitter.

5. Remember why I am trading – Honestly, the reason why I work so hard at this game and why I keep at it year after year is because of the one thing it provides: Freedom.  I come from a humble background and need to remember sometimes where I came from, what I’ve been through and where I am in my life. Things could have been so much worse for me, but I will not let that happen. I will strive to reach new levels of success and never give up. Why am I doing this? Because life is more than just working a 9-5 job making someone else wealthy, at the expense of your own happiness.

Where you come from, or who you used to be, or how tired you get some days, or how many times people laugh at you, NEVER stop doing what you believe in, because the pain you feel now is temporary – but if you quit, it will last forever.

Happy New Year everyone. God bless you all.

 

What I've learned trading in 2014

Why should you trade options?

Here’s a question I get a lot, along with all its other permutations: “What’s so good about options?” , “Why not just trade stock?”, etc.

There are a myriad of reasons why I like to trade options, but let me tackle just a few of the main reasons for the purpose of this article.

1. Leverage - Most people have a good understanding of leverage when it applies to other disciplines. For example, if I qualify for a $500,000 mortgage loan with a 20% down-payment ($100,000), my initial investment is only $100,000 out-of-pocket to purchase a home worth 5 times that value. If I rent the property out to a tenant I will get substantially more rental income than I would if I bought a $100,000 house with all cash. Granted, I still have to make the loan payments, but I stand a better chance of getting qualified tenants in a more desirable location.

If I buy an in-the-money call option for $1000 and I think that that stock is going to rocket higher, I will reap the rewards of the call option gaining exponentially more profit than if I owned stock – plus my risk is capped at only the $1000 I paid for the option. Now just like the mortgage example above however, I still need to make “payments” to the seller of the option, in the form of time-decay, but that unfortunately is the price of doing business.

2. Being the House – Not only can I buy options, but I can also sell them, which gives me the ability to play the odds as if I were a casino owner and the market are the people sitting at the slot machines and roulette tables. What a great setup! Of course, like any casino owner will tell you, you will occasionally have someone who will be a larger-than-expected winner – but over time, you will eventually be the profitable one if you keep letting people play the game. Here are some articles on how to do this: http://optionboost.com/members/tag/selling-premium/

3. Protection – Who says that I have to pick only stock or options? I can combine these two investment vehicles to enjoy the advantages of both. Perhaps I want to buy puts on my existing long stock positions, or I want to sell calls on my long stock position to collect some premium (income) as every day passes, or maybe I want to sell some puts to have my stock positions grow when the stock pulls back and I get assigned more stock through the exercise of the puts.

There are many more reasons, but suffice it to say: Options give the investor flexibility to structure just about any scenario as well as the ability to flip any scenario the opposite way to bet against it.

Feel free to shoot me an email on the contact page if you have any questions.

Hope this helps.

http://optionboost.com

 

Why should you trade options?

3 ways to profit from selling puts

I often receive questions about how to properly sell puts, what the risks are, how much money can I make, etc. The truth of the matter is, selling puts is a very risky strategy if you don’t have a plan.

The idea of acquiring stock through selling puts is not new. Many traders have utilized this strategy for income as well as building into long stock positions. Here are a few ways you can become profitable and stay out of trouble.

1. Always have one goal in mind: Reduce cost basis.  If I went out and bought 100 shares of XYZ stock at $10.00 per share and then sold a 5.00 strike put for $1.00, I should be thrilled to own another 100 shares of XYZ stock at a cost basis of $4.00 per share (strike price of the put, minus the $1.00 of premium you collected for the sale of the put).

This is tricky though, because what happens if the stock falls too fast and I’m underwater too much on the put I’ve sold? Well, here’s where you need to know about adjustments.

2. Making adjustments to my short put position simply means “rolling” it down to a lower strike price, or out farther in time, or both. Example: If I sold a 5 strike put for $1.00 and it quickly went against me and went up to $2.00, I could simply close it out and re-sell another put which is lower in strike and further out in time for the $2.00 I need to make back. This is a simple way to make a rolling adjustment, but it does require some skill as when to know the time to roll (try look at support lines going back a few months for a guide).

3. What happens when you don’t get assigned the stock, or you don’t have to make adjustments to your position? YOU COLLECT THE PREMIUM OF COURSE! This is the bread-and-butter of the strategy – you collect a sweet income on all the puts you have sold and the premium (profit) goes straight into your account by expiration).

Hope this helps!

 

3 ways to profit from selling puts

MailBag - Covered Puts, option strategy

I recently received this question from one of my members. I think that there are some valuable lessons here on Options Assignment, Selling Premium and Margin.

Here is the question:

Hello Derek,

I have a question about trading short covered Puts. I must have the concept totally wrong. I own a lot of Ford stock. My basis cost 15.54, very near what F closed on Friday 11/21/2014..15.43. What would happen if I  sold 50 F (Weekly) Nov 28 2014 16.5 Puts? Is this what would happen?

1. My margin account would be credited a sale premium of approx. $4,000 Since I own 5,000 shares of F would selling the Put require credit over and above my share holdings?

2. Should I expect that the option(s) will be exercised before the option expires..”like immediately”?

3. Meaning all of my 5000 shares will liquidate probably immediately…”is that correct”?

4. Lets say market at exercise (immediately) is 15.43.

5. My margin account would immediately be credited 15.43 X 5000 minus commissions is that correct? Approx. $77,110  Plus..I keep the premium minus commissions. Is this correct? Approx. $4,000. For a total credit to my account of approx. $81,150?

What am I not understanding about doing this Short covered Put? Why would anyone not want to do this??

Where is the negative side to this trade? I have got to be misunderstanding something what is it?

 

Here is my response:

The terminology of “covered” means that you are offsetting the directional nature of one position with another position which works in the opposite direction – So for a Put to be “covered”, you would need to have 5000 shares short against the sold put; this would negate the directional nature of the short put and leave you protected to the downside.

In your example, since you are selling a deep in-the-money put, there would not be any premium in the contract – in fact, I think it probably would be negative premium, so the only thing you are selling is intrinsic value – meaning that there would be no “buffer” between the strike price and where it would be exercised. So you would be essentially getting assigned (if you are lucky) for the exact amount you could buy it on the open market. The problem lies with the fact that when you sell it, you are locking in the amount you collect, yet the price keeps fluctuating while you are holding the contract (if this makes sense).

Also, remember with puts, you are assigned common stock, so you would be assigned an additional 5000 when exercised – the only “liquidation” that would happen is if you sold the put and it went against you and your margin ran out – and your broker would give you a margin call or maybe a “real time” liquidation of certain positions (I think Interactive Brokers does this).

Anytime you sell a short put uncovered, additional margin would be needed not only to cover the assignment of the stock, but also to cover any potential losses your broker might incur (most brokers do a percentage analysis – they say “how much money would this guy lose if this position fell 25%, 50%, etc ” then they calculate the margin based on this and other factors).

Also, the way assignment generally works is that your contract is put in a queue, to be exercised when the exchange is ready, not necessarily immediately, and most likely the end of the day – so the price of the underlying could fluctuate a lot before it is actually exercised (added risk).

In my opinion, the greatest advantage to option trading is being able to collect out-of-the-money premium in order to leverage this collected premium to your advantage in other positions. For example, if I had a basis of 15.54 in F stock and wanted to acquire more, I would maybe sell 14 put out in Feb for .30 and collect the premium which would give me a basis on my new set of shares of 13.70 if assigned. The idea is if I already own some at 15.54, I would be thrilled to own more at 13.70. Warning though: this is not a “set and forget” type of trade, but one that needs to be managed if it goes against you; i.e., rolling the put down and out in time if needed.

Hope this helps.

 

 

 

MailBag - Covered Puts, option strategy

Fight Isolation! - in your portfolio

As with any profession, there are a few good sources of information which change your entire outlook on your craft. The authors of these gems rarely receive the fame and fortune they deserve, rather they seem to be content with exploring and sharing their wealth of knowledge through painstaking research and discovery.

One such gem – which is considered by many as one of the “Bibles” of option trading – is Sheldon Natenberg‘s book Option Volatility and Pricing. Sheldon is a pretty humble guy considering his impressive background. He began his trading career in 1982 as an independent market maker in equity options. Since 1985 he has been trading as an independent floor trader at the Chicago Board of Trade.

Recently, I stumbled upon a video interview of Sheldon sharing his thoughts on volatility as it applies to retail traders – as well as some of the things he looks for in trade setups.

Here is the video:

 

 

My main take-away from his discussion is how he looks for opportunity within a group of related stocks and picking the outlier of the group (either abnormally high in volatility or low) and trading that particular stock as it reverts back to the mean; in other words, “don’t look at stocks in isolation” – find the instability in the group for your opportunity.

Furthermore, Sheldon states “find where you have a disagreement with the market” then base your trade on that. This is important to remember, especially now when the market is going up, up and away and most everyone is trading with a BUY BUY BUY! Keep  yourself grounded in your own convictions and know when to get out if you are wrong.

I hope you enjoy the video and it helps your trading.

 

Fight Isolation! - in your portfolio

CMG - The Flying Burrito Continues

Man alive, Chipotle is at it again! Not only does it soar over 80 points post earnings, but it looks like it’s continuing the push higher – piggybacking off the latest IPO of $LOCO, the El Pollo Loco restaurant.

Honestly, I’m not really writing this post to discuss the valuation of the restaurant chain, or what the future may hold for the stock price; I am writing about a recent trade that was established in CMG by one of my students. The trade serves as a great example of how one needs to look at trades in an objective way – and not to rely on your broker to give you a fill which makes sense to the rest of the world.

After the recent run-up post earnings, my student decided to take advantage of the higher premium and sell an iron condor after the stock started to establish a range (good job!).

The trade was an iron condor, selling the the Aug1 weekly 680/685 call spread and the 625/630 put spread, for a credit of around .73 or so.

Now some people assume that when you enter an order for an iron condor in your trading platform as one order, that it will fill you with somewhat equal premium on both sides; i.e., the .73 cents for the structure will more or less be split evenly between the call spread and the corresponding put spread.

Here’s the kicker: Your broker doesn’t care. They don’t care where or how you get filled on a trade, as long as you get a fill and pay some commissions. 

The result was that she was filled at a .71 cent credit on the call side and a .02 cent credit on the put side, which made this a bearish trade, not a neutral one as you would expect.

This becomes a big deal later on when you need to make adjustments, because since the trade is all premium on the call side, there is little to no protection on the way up which helps to “finance” your roll to a higher call strike.

In any case, it’s my opinion that if you are filled on a trade which was not part of your original intention, it’s best to adjust out of it for a small loss or break even.

What my student chose to do is the following:

Cover the call spread side at 1.00 which gave her a .30 loss. Next, cover the short side of the the put spread (the short put) for around .50 (originally sold for $1.26) which gave her a .76 gain. Now, she is left with the long 625 strike put, which she bought for $1.24 and it’s now currently .40, which is an .84 cent loss.

So to recap:

-.30 loss, .76 gain, and an -.84 cent loss = -.38 cent total loss.

Since CMG has went straight up+12 points today, she thinks that moving up another 30 points is going to be a stretch, so she is selling the Aug2 700/710 call spread for $1.05

Now the plan here isn’t to realize the full premium in this new call spread, rather it is to capture the meat of the pullback in the stock in the next week or so. This pullback will not only help realize the premium in the call spread, but also in the long puts she has left.

The idea here isn’t to come out with a win, but a break-even trade or even a small win to help pay for commissions.

This is the power of options – they are flexible enough to realize many different scenarios, especially when you are “wrong”.

Happy Trading.

 

CMG - The Flying Burrito Continues

Where do I find trades?

I read a lot. I mean, a lot more than I have in the past;  a lot more than I did in high school, or even college.

I read from good sources, bad sources, reputable sources and from sources that could hardly even be considered “news”.

Why do I bother with all of this? Well, because it’s what sparks my trade ideas. It gets the juices flowing, the charts opening, the option price scanning….it all starts with a kernel of an idea.

When you sit down at your trading desk and begin to read as I do, you start to draw from experience about what has worked in the past and what hasn’t worked in the past. You unconsciously draw knowledge from thousands of scenarios that you’ve seen before in the markets. You remember how a certain stock behaved after some B.S. “news” story broke and how the retail trading crowd piled in, only to get caught a few days later in a sell-off when reality re-entered the equation.

Granted, sometimes things stay irrational longer than anyone can remain solvent, but your job as a trader is to take calculated risk – not to win on every single trade.

I would also add that while it’s good to remember what moves a stock and why, it is equally good to have some sort of memory of option prices at certain strikes that you are interested in. After all, if you were shopping for a pair of jeans and saw that they were on “sale”, you would most likely have a general idea of their “fair value” based on where you have seen them sold in the past.

Throughout earnings season, I will be posting trade ideas on my Twitter feed. Please feel free to shoot me a message and ask questions – I’ll be happy to help.

http://twitter.com/optionboost/

Where do I find trades?

5 Limiting Beliefs Which Will Hurt Your Trading

The only thing limiting us in life is our belief that there are limits

Turning 40 has an odd effect on some people. I would imagine that wisdom increases with age and with every year that passes you become more “enlightened” as to why you think/feel/act/react the way that you do. Personally, I welcomed this major milestone in my life as a time for some serious reflection.

After all, if I chose to view this milestone negatively – and become resentful about things in life that I don’t have – what kind of person would I be for my friends and family to deal with?

Honestly, I think I’m old enough to understand what it’s like being around a person that only “darkens” the room and doesn’t offer any positive energy to those around them.

Do I really want to go in that direction in my life? No, thank you.

I come from a very small town in the mid-west. I was brought up in a very small family (no brothers or sisters or father) in an environment that wasn’t necessarily welcoming to any type of profession that didn’t bring home a steady weekly paycheck.

Growing up, I’ve done just about every job you could imagine, from cleaning up Park/Recreational area bathrooms, to working in a nursing home, to being a painter (no, not impressionistic art, I painted houses), to filling pot holes for the city, to working in fast food, to delivering newspapers, to building websites…[I won't bore you with the continuation of  this list] and always thought that this is what life is about – you work a job you hate, so you will have enough money to pay rent in a place you don’t want to live and whatever is left over, you buy some alcohol to numb the pain so you can get up in the morning and do it all over again.

I guess my description of that lifestyle is a bit harsh – but it’s obvious that as I get older, I have less of an ability to sugar-coat things. The real point to all this is that when you are trapped in a negative cyclical environment, it’s really difficult to break the cycle. There are many many many people out there that had it far worse than I did, that’s for sure, but realizing that never made me feel any better.

I always knew how grateful I would be when all of this changed for me and I was finally living a life that gave me a certain amount of freedom, rather than simply selling hours from my life to someone else. Life has a funny way of giving you hints as to the path you are supposed to take; which are difficult to notice if you shut yourself off from them.

Looking back and reflecting on some of the thoughts that used to pass through my head, as well as the hordes of opinions of the people around me, I distinctly remember how the same limiting beliefs kept getting beaten into my brain – which to this day – still project their shadows in my mind.

Here are the 5  limiting beliefs that can keep a person in a not-so-perfect state:

1. Our Experiences

Our experiences in childhood and early adulthood form a type of cause-and-effect bond in our minds that can become a permanent belief. Evolution has molded our brains to choose the path of least resistance in our normal day-to-day thinking, which as a result always draws on our prior experience to accomplish certain task, deal with problem, feeling, etc and we react based on this prior information first, even if it might be the wrong or harmful to our long-term happiness.

In trading, everyone experiences a loss from time to time; this is a fact. However, we have to be very careful not to let recent or past losers burn a negative image into our minds that the same setup will not be profitable in the future.

Let’s face it – humans are not hard-wired for trading. We are emotional beings that thrive on the interactions with others; this is why trading is one of those professions that can take a lifetime to learn.

2. Our Education

It’s not earth-shattering news to state that the educational system in this country is broken. Our teachers work tirelessly within the constraints miniscule budgets in order to provide our children with a foundation a knowledge to help them succeed in life.

It is not surprising that some people working within the educational system can sometimes become bitter, annoyed and cynical. Unfortunately, these overtones seep into the minds of children either directly or indirectly.

As we become adults, it becomes apparent that not everything we were taught in school is necessarily unbiased. It takes a truly exceptional teacher to cultivate the individuality of each child and it is unfortunate that it is difficult to put any type of metric to measure this type of success.

3. Past Errors in Judgement

Throughout the course of our lives, we make constant decisions – some have estimated that humans make upwards of 40,000/day. As we grow older and our memories deteriorate, the outcomes of these decisions can sometimes get “jumbled”. What might have actually been a positive experience can sometimes get mixed with a situation that was negative, especially if the environment in which it happened was similar.

When this happens, our brain once again chooses the path-of-least-resistance and assigns a negative experience to a positive. A person can sometimes notice this phenomenon when comparing experiences (stories) with friends or family many years afterward.

In regards to trading and teaching, I’ve witnessed this with my students. One in particular, had consistent wins in a certain stock which provided for a nice quarterly return. One day she experienced an unexpected move and her trade was a loser – not a devastating loser, but a loser nonetheless. Afterwards, she stopped trading that stock, even though it was a consistent winner for her so many times in the past.

4. Creating Excuses

When we create excuses for our failures, this is actually a by-product of protecting our beliefs. It feels so comfortable for us to sometimes wrap ourselves in a warm blanket of denial. This is a protection mechanism for our emotionality; a way to remain blameless for situations which could have provided us with a learning experience which could have been a catalyst for change in our behavior and in our lives.

5. Fear of Unknown

Fear can be thought of as the doorway to our limiting beliefs about ourselves. Fear is the factor that tends to trigger our belief system to engage and tell us what course of action to take or not take.

In trading, obviously fear is something we wrestle with daily. The good news is that since fear is the doorway, the ability to control if the door opens or stays shut is an empowering skill that can be harnessed.

I have actually dedicated another post to Fear, because it is such an expansive topic in trading.  Read more about my thoughts on Fears in Trading here.

Trading System vs. Trading Psychology

As a trading educator, I receive a lot of questions from my students. Looking back over the years, I have noticed that probably 95% of these questions have to do with how to build a successful trading system (indicators, option strategies, what stock to trade, etc) and very little to do with psychology.  This is understandable – since my video course mostly deals with teaching profitable setups, etc.

I would encourage you though to study the psychological factor within yourself – even more so than your trading system. What limiting beliefs do you carry around with you? Why are they there? What can you do to change your thinking when these beliefs aren’t serving your purpose and start becoming a detriment to a happy life?

May I wish you the greatest happiness on your road to success.

 

 

 

5 Limiting Beliefs Which Will Hurt Your Trading