Stock Watchlist 5/19: CGC, AMAT, AMZN, UNH, BYD + 10 rules I live by for trading options.

Slower day for me as I am primarily managing swings right now that are paying. Cut the losers like PTON that didn't follow through, added back ENPH as it's trying to b/o again; started into CGC off the ACB momentum; while trimming the ONEM & NVDA trades that have calls up over 100% from the initial breakout ideas.

Still holding NFLX SQ CSCO and others.


Of course, the list from last night is still in play if they start to do their thing. GERN did quite well off the open Monday and then faded all day. Such are penny stocks. Tonight's rambling features how to deal with options decay and sticking to a trade plan. Skip down if you're just here for the charts.


I got a great question about how to handle options losers because the IV crush/premium decay can be quite substantial if the stock you're holding the option of is not moving. I trade based on directional movement. My thoughts are aimed at managing trades that I anticipate to go in one direction or the other in a given time period up to expiration.


1) Never go all-in on a single option. Maybe you'll get lucky a few times. But luck will run out eventually. Thus, build a trade plan before entering any trade.


2) Limit your positions to a specific % of your account. If you have $1000 account, then maybe it's 10% or $100 per option with the goal of making 50-100% and finding the next one. It doesn't take long to build a decent account if you make a few 100% winners and scale-up trades even if keeping them at only 10% of account size. If you have a $100,000 account, then maybe its $3,000-$10,000 depending on your risk tolerance. Everyone wants to play hero to support their family and tell friends. I get it. I've been there. But building a strategy that allows for profits to build over time is key to turning this into a career.


3) Play to stay in the game. If you don't want to sell a swing trade but the action is turning against you, you can always straddle or strangle it to hedge with the intent of taking gains on a leg down or up (depending on the original trade) and then let the original position ride after freeing up cash flow from the hedge. Never get to the point of feeling hopeless about a decaying position. If you get to this point, learn from it and realize you should get out sooner next time or take the opposite side to hedge. (It happened to me on FRO last month. I sized in and couldn't get out. I chased the entry and they took full advantage.) Some refer to this strategy also as boxing. Meaning they'll get short in one account, let it drop some, get long in another account and sell the long on the next pop while letting the short ride in the original account. The cool thing about options is you can do this from the same account. I use SPY puts and VXX calls to hedge from time to time too. If I hit SPY puts with a good trade I can use the money for new long setups, or to add to a long position I already have in which I think the setup is still intact, or just wire out the cash as a thank you Mr. Market.


4) The closer to in the money the option is the better. The premiums are more expensive than the further out of the money but if the breakout sticks you'll make more $$$ even though the % gain is lower than the further OTM. If the trade goes against you the decay is not as bad meaning the loss is less % wise and it's easier to hedge against. Sure with CODX last week, I bought options up to $9 away, but I also had $17.50, $20, $21, $22. The high strikes are just gambles that are paid for by taking gains on the lower strikes on the way up and letting some ride.


5) The further out strikes will decay less. If I buy an option for next week it's going to drop to -50% faster than an option for next month or next quarter if the stock doesn't move thanks to Implied Volatility. I use weekly options for day-trades and overnight swings where I anticipate a gap up. Otherwise, swing trades that I anticipate taking some time to breakout higher I will use next month or next quarter options to give me breathing room. Not all breakouts go as fast as CODX. But it doesn't mean the range won't get there eventually. Patience is a virtue once the stock starts to breakout.


6) Scaling can be very beneficial. Having a starter size vs. full size can greatly help save dollars even if your winning percentage is not that good. Add up to your full size if it starts to go for you. One can make money in options only winning 30% of the time if they know how to properly manage risk through creating a plan and sizing accordingly. Scaling out is just as important. Meaning you could take out your initial investment and let the rest ride assuming you have more than 1 contract. There is absolutely nothing wrong with starting with 1 contract to get your feet wet trading these things though. Having skin in the game forces you to learn on the fly. It's on the job training.


7) Don't accumulate so many positions you can't manage them properly. I may have anywhere from 5-50 positions at a time covering 5-20 stocks in my short-term accounts. However, I know my plan for each stock. Write them down if you need to. This is a job. Treat it as such. Somedays I won't even log into the account to look at P&L. Only log in when a stock hits certain price to adjust positions according to my plan. If I stick to my plan, the money will flow. Even if a bad week I stick to my process for next week because it has worked well for me over the years.


8) Pay yourself on the way up. I'm not meaning just sell. I mean wire some out into a different account. It feels good and makes you want to focus on making another good trade to wire more out. Seeing your account grow only works if you keep it that way. Set up a separate account to remind yourself of how well your doing. Expect to win. You would get fired from a job if you weren't doing it correctly right? Same with options trading. If you're not pulling money out as a sign of doing well STOP what you are doing and adjust your planning process, scanning process, entry and exit process, etc. Adjust until you get to a point where you can start pulling money out. It feels so damn good to want to repeat the process.


9) That said, keep emotions out of the actual trade as much as possible. It's hard and we may never fully get to this point, even traders that have been doing it for 20 years. (hell I'm almost there) However, building your trade plan in advance will help. If you have a list of 20 stocks, narrow it to 3 and write detailed plans of what strikes and expiration dates you want to use if the stock starts to breakout. It may be helpful to have an A squad, B squad and C squad. If the nothing from the A's are going, check the B squad, etc.


10) If my ramblings don't make any sense, please ask me to clarify points. You may also think I'm full of crap and that's okay too. Be a critical thinker. Make your own rules. It's your trading business. I'm not pushing the buy/sell buttons for you. Trade ideas from anyone are just ideas. It's your job to check the stock, price action, and determine if you like it enough to build your own trade plan.


Final notes for any trade:


Sell Speedups, cover washouts. You don't have to hold until expiration.


I don't use stop losses on options. Manage the trade. The bid/ask may eat you every time especially on lower liquidity options.


You are going to crush this game the more you continue to learn, study the action, understand time decay, and practice with small size. Scale-up as your account grows and be sure to wire some profits out to help yourself see progress!!!


In the words of the great Jimmy V: "Don't give up. Don't ever give up."

Rotation felt to kick in today. Be cautious on swing trades going forward. I'll be keeping the SPY/VXX 5-minute charts up in case a hedge trade for cash flow is needed.


A few more potential breakouts to keep an eye on though:


AMAT - watching for a breakout over 55.



CGC - needs follow through over 17 to consider adding/keep the swing trade intact.



AMZN - Watching for a breakout over consolidation range.



UNH - watching for a breakout over 300.



BYD - Many casino/hotel/entertainment stocks are setting up like this as businesses start to reopen. Take your pick.


Happy Trading!


50 views

Recent Posts

See All

2018-2020 Stock Breakout Plays