Turn Off the News
I apologize for the victory lap, but there’s an important lesson here…
I’m approaching an exit in one of our better trades over the past year. There is only one week left until May monthly options expiration and I’m holding some deep in-the-money (ITM) calls in $LEN.
This trade started out near Thanksgiving as a bullish Risk Reversal. I sold out-of-the-money (OTM) May 82.50 strike puts on Nov. 23 and used those proceeds to purchase OTM May 92.50 strike calls. The puts were worth a little more than the calls, so the net effect of the trade was to leave me a small 20-cent credit.
I sold half of my calls Dec. 15 and used those proceeds to close all of my short puts. That trade also left with a little credit left over. It also left me holding half of my long calls with a net credit in the trade! This means that I was sitting on a guaranteed winner, with nothing but upside to gain. Sweet!
As you can see from the chart, this trade went on to perform quite well.
But this post isn’t about trade mechanics. It’s about turning off the news and following price.
In an environment where headlines were shouting about rising mortgage interest rates, overpriced homes, declining home purchases, and slowing new home builds, one would be forgiven for not being overly bullish – or even bearish – on home building stocks.
If I based my trading and investing decisions based on the evening news, coming to this conclusion would have been a rational decision.
Thankfully, I only follow price.
When it comes to finance and economics, the media talks about yesterday’s news. Price action tells the story right now. And trends and relative strength offer a hint of the future.
When I pay attention to the latter and ignore the former, good things happen for me. I don’t know any better way to do it.
As a swing trader, missing big winners is a cardinal sin. The math doesn’t work if I don’t capture occasional big wins which more than pay for all the small losses that make up the majority of my trades.
Had I let “news” tint my reading glasses, I likely would not have taken this trade, missing out on one of my biggest winners in more than a year.
Turn off the news.
Trade 'em Well,
Sean McLaughlin
Chief Options Strategist
All Star Charts, Technical Analysis Research