We seem to be at a bit of a crossroads in the market. This week we saw another aggressive attempt at a shakeout, with a news-based selloff taking the market down 1.5% back to levels we hadn't seen since June. A lot of the set ups we had been eyeing all week were quickly destroyed in the aftermath following Charlottesville protests, and while the firing of Bannon should lead to a more business-based agenda in the White House, there are clearly some more tumultuous times ahead.
That being said, we're only slightly under our highs, and it's not like there's no opportunity in the market. Steel continues on its powerful uptrend, and materials continue to be a Minotaur favorite. While many gas companies we've traded in the past like COP, HAL, and CHK have taken a bit of a fall recently, we can't imagine these stocks will be trading at these levels in a year or two.
At the end of the week, we initiated positions in SHAK, BAC, and SQ, all for three different reasons. SHAK is sitting right at the low end of its range, and should bounce here off of support. We're playing for the bounce, and should it fall lower, we'll be able to exit without a significant loss of premium. BAC is a play on the trend line that the stock has adhered to recently, and a break lower from these levels will signal that this trade will not work, and we can salvage premium there as well. SQ is a textbook wedge set up, and a bounce in tech should send this stock back to previous highs. We have less of a leash on this position, and we sized it accordingly.
In times of market uncertainty, there is no reason to take trades unless you have an exit strategy, or size your positions appropriately to handle risk. We'll talk more about this below.
Investment Lesson: Position Sizing
One of the first lessons we like to instill in all premium members is the importance of sizing your positions effectively. Human tendency is to bet big on your "best ideas," because those are most likely to make you the most money. However, even your best idea is likely far from a sure thing, and you could stand to lose more than you should based on inefficient position sizing.
At Minotaur, we stress the importance of 1-2% of your entire account as the maximum you should put towards each option trade, and 5-10% as the maximum size for any common stock position. This not only encourages diversity in your account / trades, but also ensures that even a streak of losses will not blow up your entire account. You can't make any money if you run your account into bankruptcy, and by taking a more conservative position on aggressive options, you can stand to win big and lose small.
You might think this goes without saying. No one goes all in on their first few hands, right? You'd be surprised at what people do when they get a hot tip or think an idea is too good to be true.
We've had a lot of people see the numbers we put up, and consider that to be a green light to put all of their money on the next idea. We trade a very aggressive, but informed style, and we are always managing our positions. When emotions get involved and your money is at stake, it is difficult to ensure that you make stoic decisions based on strategy, and not react based on how you are feeling or what you hope to accomplish.
It's always so interesting to me to hear people talk about how $100 worth of bitcoin bought 10 years ago would be worth millions today. I've seen the amount of anxiety that people get when that $100 option turns into $500. You don't know what your emotions will force you to do in any moment, so the best option is to take emotions out of the equation by sizing your positions small enough to where if you lose, you can still lay your head down at night comfortably.
- The Minotaur Team