Years ago, I became a student at Options Animal because they promised to teach me something that seemed almost like magic — how to “adjust” a trade that wasn’t working into something profitable. Adjusting is indeed a powerful tool. The techniques I learned at OA and that I now have the privilege of teaching to others have made my trading safer and more profitable. However, I also learned something just as valuable – that there is a time to walk away from a trade and move on to something new.
The market can be fickle. Some days, there are “hurricanes” of bad news and the market seems to chug along. Other days, a whisper of a wind seems to send the market into turmoil. What is moving the market today is most likely due to investor fears around weakness in the global market, strengthening of the US dollar and the unwinding of quantitative easing.
A fact of life is that emotions can wreck the boat in trading! Could they also help keep the boat afloat? There are a variety of four-letter-words involved: FEAR, HOPE, RISK, RICH, POOR, EDGE, SELF, EXIT, PLAN, SIZE, TOOL, GOAL, TASK, GAME, LOSS, WINS, NEWS. Which ones are the critical ones for us? I find goal, wins, and size the most critical ones for me, with the others taking their place within these three. How could I have a goal if I was not thinking of creating wealth (RICH) by monitoring my RISK, and seeking a high probability trade through TASK on my list of action. Can I create a WIN without an EDGE, and appropriate TOOL for my GAME? What SIZE is the best for me? I want to prevent a LOSS by utilizing a PLAN, and observing an EXIT in the right place. I am not seeking to FEAR the market, or win with HOPE. Although I included the word NEWS in this group of four-letter-words, I wish that it was not what was driving the equities up or down in price!
I like to compare equity markets to a swinging pendulum. When a force is exerted upon a pendulum, it begins to swing back and forth. Each continued swing becomes less and less significant until the pendulum finally comes to a resting point in the center. We have cycles in equity markets much like the swings of the pendulum. In late 2008-early 2009, the pendulum moved very far to the bearish side of things as the S&P fell precipitously. This, of course, had been followed by an equally impressive swing to the bullish side of things through present day. If we think of that center resting point as “fair value” in the markets, the real question is just how far from the center we are in our current values. Some argue that we are at the resting point of fair value, and there is room to swing this pendulum further to the bullish side before this run is over. Others contend that we have moved significantly from fair value and are overvalued at this time looking for the pendulum to swing back to the midpoint through a price correction of some size. Underneath this swinging market pendulum is true economic growth that should correlate strongly with the degree of momentum and swings. History may give us a clue as to just where this pendulum is at present time.
One of the central tenets of the Options Animal methodology is that each trader must trade his or her personality. Some people are more aggressive, some conservative. Some are more patient, and some people thrive on the thrill of immediate results. Then, there are some, like me, who seem to have multiple trading personalities. A trader who tries to fight his or her inner nature will likely fail. Sometimes that means sacrificing possible returns in order to have the comfort level to trade without fear. I would like to share how I have adapted a time worn methodology of portfolio management to help me accommodate my own unique psychological needs.
It was my turn to post a trade for members of OptionsANIMAL a few weeks ago. I examined several equities on my watch list with that in mind. We had been in an Uptrend from August 14th to September 15th. However, there was a heavy selling day on Monday, September 15th that put the trend Under Pressure. I focused on the Federal Reserve that week. Their minutes were going to be broadcast during the week, which left me to wait until the event had taken place before I chose my educational trade.
Think your due diligence ends once a trade is placed? Thank again! The OA 6-step method requires a trader to carefully examine an equity technically, fundamentally and sentimentally in order to develop a reasonable expectation for how that equity will move in the future. A proper expectation is far more than simply, “bullish” “bearish” or “stagnant.” A solid expectation incorporates all aspects of the due diligence process and covers various time frames.
A lot options traders have a common path when it comes to their understanding of options strategies. The first trade that they will typically do is a long call. The long call gives them the potential to make a lot of money with a relatively small amount of risk. The maximum profit is theoretically unlimited - assuming the stock goes to infinity. And the risk is limited to the debit spent to purchase the option. Long calls can be appealing. The problem is that they, usually, lose money.
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.