When putting on positions with undefined risk (naked short puts, or short strangles, for example), one question I often get asked is: “How do you determine your position size?”
This is perhaps the most important question to ask when putting on these types of trades!
I have two imprecise, imperfect ways that I decide:
In today's Flow Show, me and Steve Strazza came out swinging with an opportunity to add to an already winning options trade.
Back in late January, we entered into a bullish longer-term bet in Wells Fargo $WFC. You can read about it here. That original position still has until January 2025 to play out (another nine months).
But take a look at this high & tight flag forming on the eve on their next earning release scheduled for this Friday morning:
When I was reviewing my open positions this morning, I couldn’t help but have the feeling that all good runs must eventually come to an end. Everything goes through cycles.
As I was doing post-mortems on winning trades that recently closed, and updating stops on winning trends I’m continuing to ride, a feeling of foreboding hit me that this run feels “too good to be true.”
This isn’t necessarily true, but it has felt like any long trade I’ve put on recently was destined to be a winner. If I’m not careful, I can easily cross the chasm into blind overconfidence. That’s where most trouble starts. Certainly for me, anyway.
In the near future, I’ll probably be looking for less aggressively bullish bets. And the ones I choose will likely require longer timeframes to play out. Meanwhile, I’m beginning to favor some delta-neutral credit spreads wherever I can find favorable setups.
I touch upon this and much more in this week’s Options Jam Session:
The energy sector is looking poised to break into uncharted territory, and we too are going to break some new ground by doing an options trade we've never done before in ASO.
Calling it a "trade" might even feel a little off, considering the timeframe of this one. It might be more accurate to call it an investment. Compared to most trades we do, this one has the potential to certainly feel like one.
It’s common practice to follow the major stock market indexes to get clues into what kind of market environment we’re in.
This is important because when considering trades to put on, I would be better served if my next idea aligned with the current market trend and volatility profile.
But sometimes, the market (as one defines it – could be “the S&P 500” or “the Dow” or “the Nasdaq”) isn’t giving me anything conclusive to make a firm decision against. I’m getting mixed signals. This is common.
One way I have found to get a better indication of the market environment is to simply use my own portfolio as a guide.
Steve Strazza brought up charts of the energy, materials, and commodities sectors on today's Flow Show. These are "peer indexes," meaning they often trend together.
And the current trends suggest we need to add more bullish positions in these areas.
The one name that stood out the most was Freeport McMoRan $FCX:
We put on a bullish bet in biotechs a couple of weeks ago and it quickly rolled over on us. The market had other ideas.
Now here we are, a couple of weeks later, and the biotech ETF $XBI finds itself mired in a range with rising implied volatility signaling elevated options premiums:
The stock market (as measured by the indexes) continues to trek higher, speculative fervor keeps building (as measured by what's happening in crypto), and these forces are combining to make it a dangerous environment to be caught short in.
And if you're short a name that already has a high short interest? Look out!
So naturally, today's trade is a play on punishing the stubborn shorts in a particular stock that look like they are on the verge of getting epically squeezed.
In today's Flow Show on Stock Market TV, me and Strazza get into why we love buying short-dated calls in Carvana $CVNA:
The majority of my current open positions are long-biased. If the market continues to rise, I expect many of these positions to keep working for me.
My few short-delta positions are on the verge of stopping me out for a loss. They were put on as portfolio hedges against all my long exposure. So in a way, I’m happy they haven’t worked out.
That’s the thing about hedges. I don’t really want them to work. Because that means the positions I really want to work likely just got whacked.
Ok, so my hedges aren’t making me money and my long positions are. What else can I do to lock in gains and minimize the potential for giving back a lot of open profits?
Today's trade is in a name that doesn't need Wall Street.
They crush their little corner of the world, operating in the midwest. They do not need to raise money or any exotic financing. Because of this, the company is completely off Wall Street's radar. This means very few (if any?) analysts cover it. Nobody is publishing research reports on it. Essentially, there just isn't anyone talking about it.
Around here, we call these "Eddy Elfenbein stocks." Stocks that are steady dividend payers, operating excellently in obscurity, providing a product or service that so many people use that they don't even realize they are using it.