A little pullback in stocks today has opened up the window for us to sell some options premium as a nice portfolio hedge for our predominantly long portfolio.

We don't need a long preamble here. The plan is simple: I'm going to enter a delta-neutral credit spread in an ETF that is currently atop my list of ETFs sorted by implied volatility.

Earlier this week, we took our original risk capital out of our Micron Technologies $MU position, and now we're enjoying a #FreeRide into the summer.

We've got a somewhat more conservative bullish bet going in Analog Devices $ADI via a call calendar spread.

As you can see, we've already got exposure to the semiconductors space. But there is a ton of bullish action here so as long as it keeps working, we're going to wade a little deeper in the semis pool for our next trade. 

Today’s note has nothing to do with trading, and absolutely everything to do with trading.

Let me explain.

The solutions to trading problems aren’t always found when we’re trading. In fact, I would argue most of the time they aren’t. At least not for me.

Have you ever been in the shower, on a walk with your dog, or driving your car when suddenly you were struck with a fantastic idea or an important “to-do”? Not just about trading, but about anything?

Happens to me all the time.

Even worse, it seems that whenever I’m struck with a great idea or a prompt for an errand I need to do, they come in waves. The brainstorming just flows ideas out of my head in a torrent that makes it impossible for me to remember everything. And it always seems to happen when I have no ability to write it down.

So I just try to remember it all until later when I can either perform the task, send that email, write that blog post, make that trade, or adjust that strategy.

But this act of remembering prevents me from moving forward when all I’m trying to do is balance the spinning plates of thoughts running in my head.

Chinese content? What?

Look, I don't know. I just follow Price. They are all just letters and numbers to me. If it trades, it's liquid, and there's a good technical setup -- that's all I need.

It just so happens that this particular company is engaged in creating Chinese internet content. Ok.

But man oh man do I like the potential reward-to-risk setup here so let's get straight to the point...

Vega risk is real.

— Sean McLaughlin, NLD 📈 (@chicagosean) January 24, 2023

I tweeted that earlier today as I was feeling my position value decay away for no conceivable reason as the market was coasting sideways.

I felt helpless as my index options position was melting away, far beyond the level my theta risk suggested it would in a quiet market.

It turns out, the quiet market was precisely the reason.

It was a stark reminder to me: Long Vega also entails risks that I need to be aware of.

Most people, myself included, tend to worry about getting caught short volatility (short vega) in a market environment where volatility is rapidly rising. We’ve all heard the stories of traders holding naked short options that were overleveraged into a volatility spike. Those stories make the headlines. And rightfully so.

So it’s easy to forget that being long volatility can be just as painful when volatility is grinding lower as VIX certainly was today:

The Bull has been rolling. Have you noticed? Judging by the response I got from an innocent little bullish tweet last week during the midst of a mild pullback for stocks, you'd think I'm insane for thinking stocks have a chance to go up.

So many angry people looking for lower prices.

Maybe they'll be right someday? Chances aren't zero.

Meanwhile, I'll just keep paying attention to price and relative strength which is an excellent guide to point me into winning trades in any direction.

So for today's trade, we're going to ignore the digital assaults on our senses by the angry bears and get analog in our approach to riding this bullish wave.

Me and Strazza did The Flow show earlier in the week, and one of the names we discussed as being a possible trade to get into has finally popped its head above the trigger I was waiting for.

This one has the potential to be a quick mover, so let's get right to it!

I got a lot of feedback on my last letter where I suggested active traders need to stop trading Covered Call spreads for tactical trades and instead do a simple Naked Puts trade.

Thank you to everyone who engaged.

Anyway, here’s one question [edited to the important parts] I got from a reader where I thought my answer might be instructive to more of you:

Hi Sean,

I read your information on naked puts. When I intend to buy a stock, I would like to sell a put. I just don't know how to go about it. I just don't know where the strike price would be. I understand that I would have to buy the stock at that price (whether it is better or worse than hoped).

If you could give me an example that would help.

Cheers!

This is a great question, but one without a clear-cut answer. Here was my response:

I'm about to show you what a healthy chart off the bear market lows looks like. One of the beautiful things about this chart is it's not heavily reliant on any one company.

This is a sector ETF for a corner of the stock market we believe should continue to do well for the foreseeable future. There will be winners and losers within the sector, and we don't know which ones will ultimately be the leaders, so why not just trade 'em all?

Additionally, trading the sector ETF significantly lessens any earnings-related or product announcement or FDA-approval-driven gap risk.

Look, I get it.

Maybe you have some long-term holdings showing significant gains that you don’t want to pay taxes on. But you want to squeeze some additional income out of these positions because either you’re greedy (fine) or you want to practice responsible risk management (a better reason).

That’s fine. Go ahead and continue selling covered calls from your yacht. You do you.

This post is aimed at the rest of you knuckleheads who seem to think entering covered call trades as tactical short-term plays is a productive use of your time and capital.

Yes, you! You know who you are.

Let me show you two pictures.

In a recent note, I shared performance stats for our All Star Options Paid-to-Play portfolio, and in the time since, I’ve fielded numerous emails/DMs that all ask basically the same question:

How did you earn money in such a challenging market environment and do so with far lower volatility than the indexes?

Rather than responding individually, I thought it would be better for everyone if I just shared my thoughts here. After all, we can all benefit from good ideas, yeah?

I’ll try not to get us lost in the weeds with the mundane tactical maneuvers employed each trading day. Instead, I’ll stick to the high-level concepts which guide my thinking.

With the NFL Playoffs getting underway this weekend (Go Bills!), it's time we put the offense on the field!

I was kicking around a bullish idea in a consumer staples name during our Analyst meeting today. The chart looks great. The setup is good. We can position for a nice potential reward versus the risk we'd incur to put the trade on. Everyone agreed that its probably a good trade.

But... is it aggressive enough?

Answer: No, it's not.

The thinking that emerged from our chat was that risk is back on in the stock market; therefore, we need to get into the most reasonably aggressive names we can. And one of the areas where risk is most definitely "on" is in the homebuilders sector.

If all we did was watch the evening news or listen to the inflation and interest rate scaremongers, we'd reasonably conclude that a long-term and painful bear market for real estate and housing in particular is a slam dunk. No contest.

If a severe real estate bear market was in the cards, would we be seeing homebuilders ripping of their recent lows the way we have over the past couple of months?