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.
People love the idea of entering options trades with a high probability of success. It’s easy to be seduced by the prospect of winning on 60, 70, or even 80 percent of our trades.
It doesn’t take much imagination to enjoy visions of swimming in all the cash we’d surely be earning with such a strategy. And why not? With that kind of win rate, we’ll often go on runs where we win on multiple trades in a row.
Talk about a confidence builder!
Of course, there is no free lunch on Wall Street. And in strategies with a high probability of success, there is a dark underside that people conveniently like to ignore.
This type of discussion quickly makes us unpopular at cocktail parties. So we avoid it. Many know, but most are unwilling to talk about it.
The trading action in the regional banking sector, and to a lesser extent bond ETFs, drove home a stark reminder to anyone involved in naked options (like me) — that there will be times when we will suffer large losses.
They say to buy when there's blood in the streets.
Does this count?
Hardly.
Many indexes around the world are just a few basis points from new highs. Most stocks in America have been rallying for 9 months.
But sure, there's a little blood, with some of these small regional banks disappearing. But depositors are keeping their money, so the only cost is a few people lost their jobs.
