Summer is over. The moon has passed over the sun, everyone is coming back from their vacations, and the market is beginning to pick up speed again.
We finally had a little bit of consistency in the market, and a few of the short-term moves that we put on are beginning to work for us. The theme of our positions this past week was playing bounces with stocks at the bottom of their ranges. CMG held the 300 level, and this position looks great ahead of this week if it can maintain its bounce-back. SHAK held its support and is beginning a climb higher.
We even had a nice earnings bump in our MRVL position, and we continue to love semiconductors, which all look poised for a breakout. We want to maintain exposure to this sector so we can catch this move, and we want you to do the same. Others we like are CY and SWKS, and we recommend staying away from the crowded AMD trade unless the set-up becomes more favorable.
The most beautiful thing in the trading world is a stock that is trending, and we have just that in FCX and X. We've been in a steady climb off of May and June lows for many material stocks, and we continue to love these here. The reason we look for these types of stocks is that they are very manageable and its easy to put money into them and ignore them for weeks at a time. A volatile position will have you questioning yourself and this can force you to make mistakes when it comes to position management. We'll get into this more below.
Investment Lesson: Position Management
Last week we talked about position sizing, which is important if you want to ensure that you are not risking too much of your account on any one trade. Smaller position sizes allow you to take on more risk, as it prevents you from taking yourself out of the game too early and allows you to put on more positions, which should increase your odds of being profitable.
But what about managing the positions you do have? While for options trades you should size your positions to risk 100% of the capital invested, you don't have to take this 100% loss on each trade. Our strategy has been to actively manage these positions throughout their shelf life, and in doing so limit your small ass losses and maximize your big ass gains. We call it the SAL-BAW strategy for short. Let's take a look at our most recent BAC trade as an example.
We initiated a position on BAC right as it touched the trendline at the bottom of its range. We anticipated a bounce off of this line, as it was also a point of major short-term resistance, and the stock has been trending up since last November. With all of these positives lining up at the same time, we took the trade with a short-term expiry so we could play the bounce to the top of the range.
The best aspect of this trade, however, was not necessarily just the potential for big gains, but more the ability to sell out of it quickly an ensure that we only lost a small percentage of the premium. As soon as the stock pushed under the trendline and resistance, it confirmed that it was going to move lower, and we were able to quickly sell out of it to ensure a small loss. While it rebounded slightly off of the lows, the premium decay would have ensured even deeper losses had we held on.
The lesson here is quite simple; take trades at support lines where you can quickly see potential breakdowns and manage your positions accordingly. While you shouldn't consistently be selling options after a day, there are many set ups where you can ensure a smaller-than-expected loss if the stock doesn't move the way you expect it to. This SAL will ensure you are able to take many more trades, and you can't win if you don't have horses in the race.
- The Minotaur Team