I’ve received a few emails over the past few weeks from people who had long calls trades that went their way – a good problem to have. But they had questions about how to manage them.
They hear me often talking about selling half of my calls when they’ve doubled in value, giving my original risk capital back, while also offering a risk-free ride on the remaining half position. This is a Best Practice I frequently employ.
The question is some variation of: “Ok, great advice. But how do I do that if I only purchased a one-lot?”
For the record, I trade a ton of one-lot trades, especially on higher-priced stocks. So I’m very aware of this issue.
To take profits out of a winning long calls trade while still remaining exposed for more upside, there are two options that I prefer:
Ever since the 2-year yield bottomed in Q1 of 2021 Technology stocks have struggled. Growth became the worst place to be.
It was NOT a coincidence that once those rates started to rise in early 2021, the Nasdaq New Highs list peaked, the Nasdaq Advance-Decline line peaked, all the ARK Funds peaked, Chinese internet peaked, Biotech peaked and everyone piled had into SPACs before they all came crashing down.
Because the 2-year yield was rising so fast, and the longer end of the curve couldn't keep up, we got the mother of all yield curve inversions.
The media loves to scare people with it because I think an inverted yield curve has predicted something like 50 of the last 8 recessions.
But now it's bon voyage yield curve inversion. Good riddance!
We're seeing the largest 5-day rate of change in the yield curve since the early 1980s:
As many of you know, something we've been working on internally is using various bottom-up tools and scans to complement our top-down approach. It's really been working for us!
One way we're doing this is by identifying the strongest growth stocks as they climb the market-cap ladder from small- to mid- to large- and, ultimately, to mega-cap status (over $200B).
Once they graduate from small-cap to mid-cap status (over $2B), they come on our radar. Likewise, when they surpass the roughly $30B mark, they roll off our list.
But the scan doesn't just end there.
We only want to look at the strongest growth industries in the market, as that is typically where these potential 50-baggers come from.
All things considered, the tech sector is holding up well. This gives me some comfort that this is an area we can sell some delta-neutral options premium to ride out this market volatility.
But we're going to do so carefully, defining our risks and playing it conservatively.
Check out this chart of the Technology Sector ETF $XLK:
The horizontal lines on this chart represent areas we can sell April options premium at that feel far enough away for me to like our odds.
