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