Strategy

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Remember – on this site and in our virtual portfolios ALL trades that are discussed are VIRTUAL trades and all virtual portfolios kept are VIRTUAL portfolios.  While we do our best to track the performance of various trade ideas in order to better understand the results over time – it is for educational purposes only, in no way, shape or form should you consider these to be actual results and you should never execute any trade idea that is discussed here without consulting a professional financial adviser.

Trading Policies

Entering a position: I do not generally enter a position when momentum is taking it in the wrong direction or if the market/sector is moving the wrong direction.  I rarely take a full position right away (see article on Scaling In). Generally, out of the list I share with you, I look for ones that have been going the WRONG way and then (after I check news and other factors to make sure my assumptions weren't wrong) see if there is an opportunity to jump in as a contrarian once the wrong-way momentum seems to be slowing, getting my options cheaper than I originally planned.

When entering a position I generally have a goal, say 100 contracts that I want to buy for my watch price or less. I usually put in a bid a dime under the asking price and hope for a pullback on my first 10 contracts then wait to see which way they go. If it takes off the way I thought, I buy 10 to 30 more (depending on confidence, my target price, why it is moving (news)...) at which point I usually will wait a day to see where it shakes out.

If a position goes my way quickly, this method means I only get 1/2 or less of what I intended but the profits usually make up for it. If it goes my way slowly, I build into a full position over the next few sessions.

If a position goes against me quickly, I only lose say 20% of 10-30% of what I intended to bet so I'm not devastated. At this point it gets complicated because I rechart, recheck and generally rethink but sometimes I will wait a bit (an hour, a day, a week) and add to my position at the lower price, reducing my base cost.

As a rule of thumb, if I'm not willing to put in more money when I am 20% down then I kill the trade entirely. At that point, I either move on or target a new entry, perhaps at 50% down but with options I often need to move into the next bracket by then (like an LVS trade we made where I started with $50 puts, which got smoked, and ended up with 150% of my original target in $55 puts).

Always be aware of the premium you are paying for an option and how the time value of the premium deteriorates every day. If, for example, you buy TXN calls 1 month out for a $1 premium, you are automatically losing .05 per session in time value. Unless you have a very good reason to think the stock will gain more than .05 every single day for the next month, you are just letting money drip away from you!

My goal in buying an option is almost never to hold it to expiration. Generally, on short-time contracts, I am playing for a swing in the equity price (or just the implied volatility of the contract) that will net me 20%.

The 20% quick gain: If this is an equity trade, this is a 5% rule where I set a 4% stop but I almost never trade equities...

Once a trade nets 20%, I immediately set a stop at a 15% gain. Making 15% on a short trade is a lot of money!!! Whether you make $5 or .05 per contract, 15% is still 15% and you need to be able to live with that.

For the purpose of my picks, I generally have no interest in a position once it makes (or loses) 20%, the trade is over if it goes down from that spot!

If the contract keeps going up I will usually a stop at 20% of the profits. At this point I am done with the position and am actually anxious to get my money back so I can move on to another trade as I am unlikely to make another 20% on this one.

Depending on how I feel about the trade at, say 30%, I will often set a sell price at 35% and hope to cash out. It is similar to when I am losing a trade - I ask myself if I would put money in at this price? If the answer is no, then I sell to some other sucker asap!

The 50% gain: At a 50% gain, I am looking to get my cash out right asap. I often feel like a thief for making that kind of money so I look to absolve myself with cash! If the stock even twitches at this level I get out and, unless I am 100% confident in my position, I do not leave it open to chance in the overnights.

Almost without fail, once a position goes to a 100% profit I take 1/2 off the table and set a very tight stop (no more than 20% of the profits) on the balance. At that point it is free money and I may let it ride for some time unless I need the cash for a better opportunity.

Bracketing: If I am in a wildly successful position, say the CME $420s go from $5 to $12, I will look to take the profits and re-bet my initial amount ($5) on the next available bracket (probably the $440s by then). This is assuming, of course, that I would, in a vacuum, make that trade from scratch given the new circumstances. Again, this gives me a free ride with a 40% profit already cashed out and I can relax.

Also, the $440s will not deteriorate as fast as the $420s will if the stock moves the other way, ie. a $10 drop will only cost me half of my position in an out of the money call whereas it would have put me back to scratch had I kept my initial position.

Exiting a position: No one ever went broke taking a profit - or a small loss! Learning to lose is probably the most important part of trading. When I'm wrong, I'm wrong. I get out and move on, end of story.

Like many times in my dating life, I am looking to get out of a relationship with a stock almost from the minute I find myself in one! As soon as I take up a position (because I LOVE the opportunity), I immediately become hyper-critical of every little thing it does and I am looking to leave it for a newer, more attractive opportunity. Perhaps this is cruel but I've never gotten a late-night phone call from a stock asking why I left it so I assume it found another buyer as well...

In day trades I generally put in a sell order in as soon as I take the position. If the momentum is strong in my favor I may raise my stop but if I buy something at 10am and someone is offering me 20% more at noon, I tend to take it! That kind of action is usually what Mr. Greenspan calls "irrational exuberance."

I have bought a contract, sold it, bought it again, sold it and bought it again all in the same day on many occasions (you have to trade electronically to do this, brokers can't take it).

Just like a relationship, I find it is best to just end it, not drag it out. I usually offer up my whole sale amount right at the current ask, not bid and give it a little while. Never, ever, ever put in market orders. Never, ever, ever, ever...

Did I say Never? Never, ever, ever...

OK, moving on. Never put in market orders - THEY will steal your money every time. Set a price you are willing to buy or sell for and stick to it. If I want to buy INTC $20 calls for .35 I will usually bid .30 and see what happens. If I get it, I am already 17% ahead of where I would have been. After a while or a short while if the stock is moving on me, I will give up and pay the .35 but I will feel better about it as I know no one is giving the stuff away for less.

If I put an offer in for .35 and I don't get it and it goes to .45 and I put in .45 and I don't get that I usually wave bye bye as that train has left the station. You need to rethink what you were trying to do at that point because if I had bought it for .35 and it hits .50 that quickly, I am sure as heck gonna take my 40% and run! That means you may be the proverbial bag holder at this point.

The Valero Rule: Whenever I am going to make an oil trade, if I want to win, I strictly enforce the Valero Rule.

You may hear a rumor or you may see a price spike or you may have information but you will never have anything on the guys who trade this stock!

The rule is very simple:

Do not take a long position when VLO is going down.

Do not take a short position when VLO is going up.

To confirm the Valero rule and make a trade I usually look at XOM, a lagging indicator and the OGX, OIH and XLE, middle indicators of the whole market and, of course, the actual price of oil or the USO ETF. Additonal stocks in the group are CVX, CHK, SU, SLB. We also have guest slots depending on news.

When almost all of these stocks are moving positive, I am confident buying - when moving negative, I will short with a vengeance.

When Valero changes direction, take your bets off the table!!!

The price action of Valero is like a window into oil arbitrage as the company, a massive refiner, buys oil on the spot market, adds value to it and then sells the refined products on the open market.

One look at the stock's appreciation over the years tells you not only are they good at their jobs but they also seem to get better and better at it each year!

How do they know? I don't know, I just know that after obsessing on this for over a year I now just accept the fact that they are much better at this than I am so I follow the Valero rule pretty religiously. Whenever I make an oil trade or talk about one, I try to remember to say that it is subject to the Valero rule but now I will be able to point to the article rather than rehash the basics each time.

The Microwave Oven Theory of Behavior: I am going to tell you something that I feel makes me a good trader. It is a Nobel Prize quality theory, so make sure I get credit:

People love to make random decisions and stick to them like they were directly given it as a commandment!

How does this relate to microwaves? Well, aside from the fact that our brains are constantly being fried by the things every day (ever drive on the highway and see one of those dishes aimed right at you? Do you know birds die if they fly too close to them?), this is what I observe.

You put something in the microwave, say pizza, and you put in a time, say 3:33 (or maybe you are a whole number person and do 3 or 4 minutes). Now, unless you are a chain store pizza buyer your pizza slice is probably not always the same size or maybe it has different toppings etc but you probably put in the same number every time.

Axiom number 1: People tend to repeat behavior, especially if it was successful once.

So the light goes on and the little thing spins and you are either a watcher or a walker (as you may have guessed, I hit the button and leave the room) but either way you usually end up standing by the oven with 20 or 30 seconds to go waiting for it to stop.

Here's where the Nobel Prize committee has to recognize me:

Axiom number 2: Everyone likes to think they knew (not know) something.

Now you are standing there watching the pizza spin and looking at the timer.

You may think it is done.

You may know it is done (you see cheese boiling)

You may be hungry.

You may be in a hurry.

But you will wait and you will watch the little numbers count down until you hear that beep. Go on, try it - I dare you to open the door with 3 seconds left!

Axiom number 3: We stick to arbitrary prior decisions despite new information to the contrary.

You pick a random number of seconds to cook food and then, despite observations to the contrary or a change in the situation, you stick to your original decision - In fact you are trapped by it! It is very, very hard to ignore your own advice, even though you didn't intend it to be advice to your future self at the time - just a number you picked on a whim. Your future self always defers to you because he/she thinks you are (were) the greatest thing since sliced bread!

This is what happens to people just 3 minutes after a decision is made, what about trade decisions that are made days or weeks ago?

Ah hah, so it does go back to trading (I bet you thought I was losing it!)....

Rather than reresearch, reread, rethink, reexamine our targets, we tend to treat them as set in stone. Learning not to do this will make you a much better trader (and also help you to finally redecorate the living room or clean out your desk or whatever).

Old decisions were made by the old you. The new you has learned things since then (even if it was just 3 minutes ago). The new you is older and wiser and more experienced and has had the benefit of reviewing your GUESS (because that is all it was) in light of real world circumstances and the new you is ready to make a proper decision.

Often the new me can't imagine what the old me was thinking when I made a trade or set a target (or gave that girl my phone number) but since I know how often the old me makes mistakes, I have no problem overriding my decisions even if it means a complete reversal!

If you can do that, you can beat the market because 95% of the people you are trading against cannot let go of those arbitrary targets they set for themselves when circumstances were different.

When Google, for example is upgraded to $500 but it stutters at $480, SELL! Open the door and take the pizza, it's done!!! If it isn't (you take a bite and it's still a bit cold) then get back in.

That's right, the old me bought Google at $420 when an analyst said $490 and the stock went to $470 in 2 days and I feel like a genius so I start counting my $50 profit and thinking about what I will do with it.

The next day it flatlines at $468-$470 and volume drops but the old me said $490 and I was right before and I said I have another $20 coming to me....

This is terrible logic!!! Why are you listening to the old you? (I know, it sounds kind of schitzo) You've had 2 days of observation yet you are willing to ignore that in order to slavishly follow, not even what you thought, but what some analyst thought 2 days ago (and he was probably listening to the old him).

You are you from the future. Full of knowledge that the old you wishes he had at the time.

HOMEWORK: Watch Back to the Future part 2 where Biff steals the sports almanac and gives it to the old him. Listen to what he tells himself.

Also, watch Deal or No Deal (NBC) with the Microwave Theory in your hand and think about how you make decisions.

 
 
 

Zero Hedge

Treasury Shorts At 6 Year Highs; Hedge Funds Quiety Exit Stocks As Oil Shorts Crushed Again

Courtesy of ZeroHedge. View original post here.

With the last traces of the Trumpflation rally still noticeable, US equity inflows continued last week as positive economic data surprises rose to a 4-year high. Inflows into US equities ($4.4bn) continued for a 4th straight week, cumulatively adding $45bn. This is the longest consecutive stretch of inflows since June 2014, i.e., when the severe dollar shock began. Recent inflows have been in line with the macro data surprise index, MAPI, which reached a 4-year high this week, which however is likely set for an abrupt reversal once the ha...



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Phil's Favorites

Hofer Defeated in Austria Presidential Election: Brussels Relief Will Be Short-Lived

Courtesy of Mish.

Anti-immigration candidate Norbert Hofer conceded the Austrian presidential election to independent candidate Alexander Van der Bellen in an election that will bring a sigh of relief to Brussels.

The Financial Times reports Far Right Concede Defeat in Austrian Presidential Election.

Norbert Hofer, the Freedom party candidate, won 46.7 per cent of the vote in Sunday’s contest according to early results and projections. His opponent Alexander Van der Bellen, a Green politician who ran as an independent, won 53.3 per cent.

If the forecasts are c...



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ValueWalk

Shorts

By Investment Master Class. Originally published at ValueWalk.

Article by Investment Master Class

“He who sells what isn’t his’n must make it good or go to prison.” The amateur speculator soon learns this little Wall Street jingle and is often deterred by it from making a short sale.  It is essential, however that he understand the mechanics of short selling, its economic function and perhaps the ethics, if any, of such a transaction” Philip Carret 1930

]]> Get The Timeless Reading eBook in PDF

Get the entire 10-part series on Timeless Reading in PDF. Save it to your desktop, read i...



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Kimble Charting Solutions

Stock/Bond Ratio back at 2007 highs, different results this time?

Courtesy of Chris Kimble.

Below looks at the S&P 500/Govt Bond (TLT) Ratio over the past 12-years

CLICK ON CHART TO ENLARGE

The S&P 500/TLT ratio is now back at 2007 levels. Double Top or Breakout Time.

Do find this interesting at this time, bullish sentiment on $TLT now stand around the 10% level, which happens to be the same level it was in mid 2007!

Different this time???  Always fun friends!!!

...

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Members' Corner

ItalExit? A Catch 22?

Courtesy of Nattering Naybob.

Over at Philstockworld... High Finance for Real People - Fun and Profits... 

Pharm - There is an Italian Referendum on staying in the EU in 2 weeks. Wonder how that will work out?

The referendum has nothing to do with leaving the EU, that's what the MSM wants everyone to think. The ubiquitous "they" are trying to confuse and scare the Italians with a line of BS.

StJL - Probably not well Pharm! Although the procedure to get out of Europe would be a lot more complicated for Italy because they are also using the Euro. At this point, probably nothing more than leverag...

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Market News

Breaking News And Best Of The Web

Courtesy of John Rubino at Dollar Collapse

OPEC agrees to cut output. Oil jumps, stocks rise, gold falls. The political focus shifts to upcoming Italian, French and Austrian elections, all of which could go against the establishment. India’s war on cash may turn into war on gold. Political class still searching for an explanation (see “Best of the Web”). Trump’s cabinet takes shape, with mostly old and a few new faces.  

Best Of The Web

A new look – NYSE margin debt and the market – Financial Sense

The guys from ‘Government ...



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Chart School

Semiconductors Hit Hard

Courtesy of Declan.

Internet troubles have limited me tonight, but the one chart I want to show is the near 5% loss in the Semiconductor Index.  Having escaped relatively unscathed from recent day's selling it was a whirlwind of action for the index today.


This had obvious consequences on the Nasdaq. The Nasdaq did relatively well to suffer just over a 1% loss.  However, there were 'sell' triggers for On-Balance-Volume and Directional Index. There was also an acceleration in the relative underperformance of the index to the S&P. ...

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OpTrader

Swing trading portfolio - week of November 28th, 2016

Reminder: OpTrader is available to chat with Members, comments are found below each post.

 

This post is for all our live virtual trade ideas and daily comments. Please click on "comments" below to follow our live discussion. All of our current  trades are listed in the spreadsheet below, with entry price (1/2 in and All in), and exit prices (1/3 out, 2/3 out, and All out).

We also indicate our stop, which is most of the time the "5 day moving average". All trades, unless indicated, are front-month ATM options. 

Please feel free to participate in the discussion and ask any questions you might have about this virtual portfolio, by clicking on the "comments" link right below.

To learn more about the swing trading virtual portfolio (strategy, performance, FAQ, etc.), please click here ...



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Digital Currencies

Largest US Bitcoin Exchange Is "Extremely Concerned" With IRS Crackdown Targeting Its Users

Courtesy of ZeroHedge. View original post here.

Last Thursday we reported that in a startling development seeking to breach the privacy veil of users of America's largest bitcoin exchange, the IRS filed court papers seeking a judicial order to serve a so-called “John Doe” summons on the San Francisco-based Bitcoin platform Coinbase.

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Mapping The Market

The Most Overlooked Trait of Investing Success

Via Jean-Luc

Good article on investing success:

The Most Overlooked Trait of Investing Success

By Morgan Housel

There is a reason no Berkshire Hathaway investor chides Buffett when the company has a bad quarter. It’s because Buffett has so thoroughly convinced his investors that it’s pointless to try to navigate around 90-day intervals. He’s done that by writing incredibly lucid letters to investors for the last 50 years, communicating in easy-to-understand language at annual meetings, and speaking on TV in ways that someone with no investing experience can grasp.

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Biotech

Epizyme - A Waiting Game

Reminder: Pharmboy is available to chat with Members, comments are found below each post.

Epizyme was founded in 2007, and trying to create drugs to treat patient's cancer by focusing on genetically-linked differences between normal and cancer cells. Cancer areas of focus include leukemia, Non-Hodgkin's lymphoma and breast cancer.  One of the Epizme cofounders, H. Robert Horvitz, won the Nobel Prize in Medicine in 2002 for "discoveries concerning genetic regulation of organ development and programmed cell death."

Before discussing the drug targets of Epizyme, understanding epigenetics is crucial to comprehend the company's goals.  

Genetic components are the DNA sequences that are 'inherited.'  Some of these genes are stronger than others in their expression (e.g., eye color).  Yet, some genes turn on or off due to external factors (environmental), and it is und...



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All About Trends

Mid-Day Update

Reminder: Harlan is available to chat with Members, comments are found below each post.

Click here for the full report.




To learn more, sign up for David's free newsletter and receive the free report from All About Trends - "How To Outperform 90% Of Wall Street With Just $500 A Week." Tell David PSW sent you. - Ilene...

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Promotions

PSW is more than just stock talk!

 

We know you love coming here for our Stocks & Options education, strategy and trade ideas, and for Phil's daily commentary which you can't live without, but there's more!

PhilStockWorld.com features the most important and most interesting news items from around the web, all day, every day!

News: If you missed it, you can probably find it in our Market News section. We sift through piles of news so you don't have to.   

If you are looking for non-mainstream, provocatively-narrated news and opinion pieces which promise to make you think -- we feature Zero Hedge, ...



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