Lose Small to Win Big

 

Date: 8/10/2021
Author: Chris Hood

 


Be sure to check out new episodes of my video podcast each week, where my ace pupil Brian Jones and I talk the ins and outs of options trading- and give you insights and strategy that you can immediately put to work for you in the markets.


Every successful trader develops specific strategies that work best for him – two traders with radically different approaches can both be exceptionally profitable.

We’re all different.

We have different personalities, goals, and psychological makeups.

Some can sit in front of the screen most of the day, while others are always on the go. And where one person may have an account of a million dollars, another might only have 25K.

Each of these plays a role in our strategies, and each method requires a different management approach.

Let’s take some examples.

In a bullish market, two of my top strategies are long calls and put credit spreads.

A long call is a debit trade.

This means you buy the option assuming that the underlying stock and/or rising volatility will boost its price.

If you think XLB is going up, I can purchase two contracts to take advantage of the rise.

For instance, you might buy the 83 strike on XLB for the Dec 17, 2021 expiration for 530.00 dollars. Then, when the option reaches your profit target, you sell and pocket the difference.

For put credit spreads, you’re the seller.

You sell the spread for a premium, assuming that the stock price will increase or stay about the same.

Seeing the recent drop in AMZN, you might decide it’s found bottom support and play the anticipated price rise.

You decide to sell the Sep 3rd, 2021 3270/3260 put spread. You collect a premium of $347.00 with a risk of $653.00. As long as AMZN stays above 3720 by Sep 3rd, you can keep the premium.

Few traders hold until expiration.

You might buy back the spread as it loses value and collect 50-70% of the max profit. This lets you get your money off the table and recycle your capital into another trade.

Both are perfectly reasonable bullish strategies to use.

However, they require that you approach your trading in two different ways.

Here’s why.

The long call strategy has an inherently lower probability of success.

Assuming you can read the charts correctly, you might reasonably expect to win 60% of the time on your long calls. However, when you win, your profits can be huge.

Trend-trading or getting in just as the stock gaps up can make you a small fortune.

Credit spreads, however, tend to have higher win rates. Perhaps 75% or more if you set them up correctly.

On these, your profits are capped, and you won’t make nearly as much per win.

If your portfolio is dominated by long calls, you’ll need to exit quickly when the trade goes against your position.

Personally, if my option drops 25% in value, I’m out.

I may have the timing wrong and be a bit too early, or reality crushed my bullish assumption.

To make money long-term, you need to win enough on your 60% to make up for the losses on the 40%.

One big win can more than compensate you for several small losses.

If most of your trades are put credit spreads, you’ll be making small gains with the potential for significant losses.

One total loss can wipe out profits from many small wins.

This situation requires you to trade more often with stringent exit rules to ensure your portfolio balance continues to move upwards.

I use some relatively sophisticated techniques to manage my spreads.

Still, a simple, workable plan is to get out any time the stock has two closes on the daily chart below the 8EMA.

So your preference of trade type matters in your overall strategy.

WHAT you trade must determine HOW you trade.

Always keep this in mind as you build your plan.

Keep trading, keep learning, and you’ll be on the road to a successful career.

Join me and our Alpha Hunters as we make steady and consistent profits.

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