First, let’s be clear why you would want to trade like Warren Buffett. In a word: Success. Warren and the other ‘Huskers in Omaha manage Berkshire Hathaway Corporation. Between 1965 and 2013, Berkshire Hathaway has had an overall gain of 693,518%, outperforming the S&P 500 by more than a factor of 70. Arguably, one of the most successful traders in history.
One of the fundamental tenants of the trading method we teach at OptionsANIMAL, is that you should be very familiar with each and every equity that you trade. That means more than simply studying a chart. Knowing a company means understanding its business model, pulling back the curtain and looking at the company’s profitability, understanding whether or not it has a lot of debt and how well it can service that debt. In short, it means looking at the fundamentals as well as the technical picture presented by the chart.
How many of you have heard of the new IPO with the ticker symbol GPRO? Do you know anything about the entrepreneur who founded this company? Any idea of how he thought about the product? How long did it take him to develop the wearable HD action camera? How much did he invest in the initiation of the company? Was it offered publicly from the start?
Glossary of Terms
I have been asked about a glossary of terms many times over the years. In doing some research I have not found a standard for terms used for options trading. I have had students discuss the meaning of some terms. It seems their opinions vary based on their background and the training they have had. So below I have put together the definitions the way I use options trading terms and acronyms. I’ll take any input you might have and if appropriate I’ll add it to the blog. For now you are getting what I think of and I’ll add to it over time. This first pass is just terms that students have asked about. I hope you find it helpful:
In my last post, I wrote a little about my technical analysis journey. This post I’ll write about how I use technical analysis to trade options.
First let me give you a bit of foundation on the way I trade. I no longer buy equities. I only use options. I do not trade earnings. I consider earnings a technical, sentimental and fundamental reset. I will trade up to earnings, and I will trade after earnings using technicals while considering fundamentals and sentiment. I feel everyone should start out using trades that involve equity ownership. I am just crazy enough to believe I no longer need to. It has taken me almost six years to get to this point.
A few years ago I read a book written and published by Gil Morales and Dr. Chris Kacher with the title Trade Like An O’Neil Disciple. I’ve been a fan of William J. O’Neil’s for several decades, so this one grabbed my attention. As I read through the text, I gave it super attention and made notes about the methods that they used to generate more than 18,000% in the stock market. The best possibility was to be able to identify the Pocket Pivot setups and prepare to trade that with success.
An acquaintance of mine recently spoke at the Pepperdine Lectureships. She spoke about how two people can think they are talking about the same subject but really they are not. They use the same words, but they have different meanings for those words. She went on to give an example of what she meant that I had never heard. I’ve done a good bit of studying myself and yet I had never heard of her example. It would take WAY too much to explain her example here. It was awesome, so go listen to the Pepperdine Lectures.
Should you be legging into iron condors?
Generally, I do no try to leg into iron condors. I place the trade all at once. Trying to be “tricky” by placing the put side at the lows and and the call side at the highs usually doesn’t work. What happens is that you’ll give up nickels and dimes trying to chase a couple pennies.
To see what I mean, take your equity and try to guess where it will be in the next 5 minutes: higher, lower, or flat.
Seriously. Pick an equity, look at clock, write down your prediction and wait 5 minutes.
The Boston Marathon was in the news a lot recently. The technology involved in the race was amazing to me. I knew the name of one runner so I tracked them. It was amazing to watch the race online and track the runner I knew. One of the announcers had amazing knowledge of the elite runners. He noticed the lead runners checking their watches. He felt that they were checking their split times to see if they were on track based on their previous runs. He indicated these runners were very disciplined. They knew their strengths and weaknesses. They knew when they should run with the crowd and when they should break away. One runner had run the course many times over the past year so that they would know the best possible route to take.. They knew the shortest route to take. Of course everyone ran the same route, this runner knew the shortest path to take through that route. They practiced on a course that was at the same altitude to prepare their bodies. Their discipline is amazing.