I was talking with a relatively new day trader last night at my twice-monthly trader meetups here in Colorado. We were chatting about stop losses. Or more specifically, his inability to stick to his “mental stop loss levels.”

As you can imagine, this was leading to him taking occasional big losses – which were wiping out good runs in the market.

He’d make a few hundred bucks several days in a row. He’d then lose it all (and then some) on one bad trade.

A lightbulb went off in his head when I reframed the importance of not taking big losses. No doubt many of you are shaking your heads and uttering – duh!

But for this gentleman, it took me breaking it down this way for him to get the picture: 

I dunno why, but thinking about train tracks and rail stocks got me thinking of Blue Steel. There is absolutely no connection between today's trade and the pose made famous by the Zoolander film. But, you're welcome.

Today's trade idea comes straight from All Star Charts' recent Mid-Month Conference Call.

While not aggressively bullish here, I do think there is an opportunity to leverage high options premiums into a high-probability bet.

It's that time of the quarter where we options swing traders need to be extra mindful of pending earnings releases. The last thing we want to do is place a directional bet in a stock or it's options heading into a binary event that could decapitate us in a heartbeat.

This is frustrating us right now because most of the charts we like best (both the bullish and bearish ones) are in stocks with earnings slated to be released in the next week or two.

During our morning Analyst meeting today, we discussed the fact that many of the banking/financial sector stocks have already reported earnings by now, therefore, this is a place we should look.

Specifically, we like the big money center mega/multinational banks that are represented best by the $KBE ETF. Here is a chart that paints a pretty good picture of why we like it:

Our Ian Culley said it best:

Don’t catch falling knives!

It sounds simple enough. But in reality, traders continue to lose fingers as they reach for downtrending assets.

It's true in stocks, it's true in commodities, and it's true in bonds. It's true in any asset class, really.

And the knives keep falling left and right. Let's avoid getting our hands cut and let's just go with the trend, shall we?

While this certainly is not the market environment to be taking aggressive long bets in, there are some stocks that are displaying tremendous relative strength that we can play with strictly defined-risk positions to protect ourselves.

Our Young Aristocrats Report shows us stocks that aren’t just paying dividends but are doing so while they’re going up and thus paying us via price appreciation as well.

And this week's report serves up a great opportunity.

Look, we're not going to sugarcoat it: it's hard out there right now.

Regardless of your timeframe, if you're trying to make aggressive long or short bets in this tape, you're getting chopped up. So are we.

These types of markets grind us out and wear us out. It is what it is. We can't choose the market we're given, we can only control how we react to it.

This much we know -- forcing directional bets right now feels like a fool's errand.

But with options premiums elevated across the board, there are opportunities to put on delta-neutral short premium trades where charts suggest some consolidation may be taking place. However, we need to be careful not to sell premium on stocks that have earnings releases coming up soon. So to avoid that all together, we're going to limit our universe to index and sector ETFs.

The best trade I ever executed was a loss.

That is not a typo. I lost money on this trade. Actually, it was a series of trades. But it was executed with one decision and one combination of keystrokes.

It was the summer of 1998, and it was my first year trading.

The Long-Term Capital Management debacle was weighing on markets. There was money being made on the short side. Big money.

Many of the more successful traders in my office had already earned a boatload of cash with aggressive short trades on this particular morning. And at lunchtime, they decided to head out to the golf course to celebrate another day of crushing the markets.

But not me.

Nope, I was still a piker trader at that time, still trying to figure out how to stop losing money. So while the rest of the guys were high-fiving each other on the way out the door to the golf course, I stayed at my desk banging keys, trying to catch up to the big shots.

As we moved through the sleepy lunch hour, markets were showing signs of another leg down and I was building a short position in about 8-10 stocks. Slowly at first. Small amounts of shares. Nibbles, really.

Here's a snippet that sums up a conversation I had with my Head Technical Analyst Steve Strazza this morning:

Me: Any trade ideas have you excited this morning?

Steve: Nothing. New lows everywhere today.

Me: I know. It's ugly.

Steve: I can give you a handful of nice charts that are breaking out, but they are all going to fail. Can't buy breakouts in this market.

Yep. That's where we're at. Putting on directional bets in either direction feels like a high risk proposition. Long breakouts are likely to fail, while short breakdowns are likely to get caught offsides in a wicked bear market dead cat bounce.

But this doesn't mean we're out of options to earn some profits. Options premiums remain elevated across the board, and we've got some areas with clean levels of support we can use as guiderails to sell some delta-neutral premium with higher-than-normal chances of success.

According to the Wall Street Journal, options volume continues to explode – driven primarily by the growing popularity of short-dated options.

Whether looking to speculate, hedge or collect premiums, options players are increasingly flocking to options that have fewer than 7 days to expiration. And with the proliferation of weekly options and three-times weekly expirations in popular index ETFs like $SPY, $QQQ, and $IWM, traders frequently have the opportunity to trade options expiring within 24 hours!

It is no surprise that these types of short-dated options are attractive to some players. They offer the best characteristics of options: defined risk, leverage, and affordability for even the smallest of traders.

Even though stocks have broadly advanced on the first two trading days of October and Q4, today's market action reminds players that stocks are still risky here and the options market continues to price in this fear in the form of higher than normal options premiums.

As such, the odds favor net premium sellers in these conditions -- so that's what we're on the hunt for.

Ideal setups are ones in which a nearby support level has revealed itself so we can lean against it for risk management purposes.

One such setup can be found in Brookfield Asset Management, $BAM:

Put September and Q3 in the books. It was one to remember.

But we're turning the pages to October today and the rally in the markets is helping to reveal where the new strength may emerge for the next bull run, as well as some significant levels of support for beaten-down stocks and sectors.

Today's trade is fading the recent volatility against a key nearly year-long level of support in a sector that got badly beaten last month.

For this week's trade, we're Selling the BRKB November 260 Puts Naked

Get the full details, risk management procedures and targets for this trade here: