I received a great, and well-meaning question from a new All Star Options subscriber about a recent trade we entered in $VLO that offers a great lesson or reminder to those who need it.
Question:
What are your thoughts on when the value of your options hits a 50% gain in one day? The September 175 calls for VLO I purchased hit +48% yesterday. Do you trim/roll/close with such a quick gain? I understand this is more of a personal preference as it relates to what you want to make on a trade, but if you hold those 48% increases, they could eventually increase to +150%!
He kinda answers his own question in the end, but here is my response:
Every once in a while, I’ll put on what I call “all or nothing” trades.
What this means in practice is that I’ll put on a defined risk options trade knowing full well that the trade is either going to net a profit, or it’s going to be a zero – a full loss of invested capital. There’s no in-between.
Usually, this happens because I love a setup, but the price level on the chart that would invalidate my thesis is pretty far away. If we get there, it’s more than likely that whatever premium I paid to enter the trade will have nearly evaporated. There will be nothing left to sell, even if I want to.
Two trades with March expiration options have concluded for me this week that demonstrate the yin and yang of these types of trades.
On Feb. 14, I put on a bearish bet in Hormel Foods $HRL. I bought the March 25 puts for 15 cents. This trade was put on at a time when I was looking to add some bearish exposure to my portfolio to help balance out the heavy long exposure I had in other positions.
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The book isn’t addressed to traders, though it frequently references our profession in its anecdotes and many of the stories are very relatable.
And it certainly has me thinking about better ways to decide to quit a trade, quit a strategy, or quit a product.
I frequently go down rabbit holes, experimenting with models to extract consistent, repeatable, acceptably risk-adjusted returns via index options. I’ve written about my near-constant obsession with this project numerous times. It continues.
As a trader, it's always good to be working on some kind of “side hustle.” In our cases, this is more likely to look like building a new strategy, fine-tuning a scanning method, or constructing a money management scheme that can propel us into becoming more profitable traders.
I see something in the charts, or read something in the news, or listen to something on spaces and it triggers me into taking action.
Sometimes I’ll take aggressive actions because this idea I have – wherever it came from – is something I feel strongly about. I feel that the odds are heavily stacked in my favor. Or perhaps the payoff, if I’m right, can be so overwhelmingly profitable that it’s impossible to ignore.
We all have these feels about certain trades we’re in from time to time, right?
We get excited. We get optimistic. We start counting our winnings before they’ve even hit our account. It becomes impossible not to daydream.
Many swing traders and investors are currently sitting on a First Class problem. But it’s a problem, nonetheless.
These traders are sitting in positions with huge open profits.
I can use NVDA as an example. But there are many, many big winning trends still acting well.
Those of us who like to style ourselves as Trend Followers will soon be faced with a difficult decision – how and when to determine when a trend has ended.
It’s easy in hindsight to look at a chart and spot the moment a trend was invalidated and an optimal exit price is clear. But in real-time, it’s not so easy. In fact, it’s impossible. Because contrary to popular belief, no trader can reliably and consistently predict the future.
But the stakes are high in these moments. For a trend follower, the occasional big wins are what we rely on to make our nut.
The life of a trend-following trader can best be described as long periods of near-constant frustration punctuated by short moments of fleeting bliss.
