By Jeff Bishop – WeeklyMoneyMultiplier.com
Stocks are raging higher today… and trying to finish out the week on a positive note. Despite weak retail sales numbers and jobless claims on Thursday.
The market seems to be striding higher on hope…
Hope that we’ll reach a trade deal with China that doesn’t hurt the economy… hope that the government can get its act together… And hope that Brexit doesn’t cause contagion.
I’m closely sifting through economic data, studying market volatility, and other big-idea catalysts.
While I do have other positions on, some bearish (TLT calls, QQQ puts)…and some bullish (UNG calls). I’m probably going to lay low for the rest of the day. After all, its hard to top a 500% option winner.
For example, one options trading frequently asked question (FAQ) that keeps popping up is:
How do you recover from trading losses?
Some traders focus too much on their PnL (profits and losses). So much so, that they make decisions based on it. This is the wrong approach. Instead, focus on your process. That is, identify your setups, know the catalyst, and be able to pick levels for your entry and exit.
By focusing on your game plan, you’re less likely to get distracted by PnL swings. Don’t grade yourself by PnL…rather… grade your decision making.
Furthermore, don’t worry about making your losses back right away. This can lead to revenge trading and even bigger losses.
Some of the best minds on Wall Street are in their 60s, 70s, and 80s. In other words, you have time to make the losses back. Try to learn and improve when you study past trades. Not every trade is going to be a winner…but if you study them…you’re bound to learn something that can help you the next time.
Options Trading FAQs
If you don’t already know, my money-multiplying strategy involves specificity. That means I’m only getting into a stock when I see my setup. You see, I only trade specific stocks and exchange-traded funds (ETFs) and use both company-specific and macroeconomic (macro) variables for idea generation. Moreover, I focus on my money-multiplying pattern.
Now, here are two options trading FAQs I’ve also been getting asked a lot:
- How do I find ideas?
- Can you explain in more detail what exactly your money pattern is?
Well, I can’t tell you how to find ideas… but I can show you my idea-generation process.
How to Find Trade Ideas
For the most part, I created a watchlist of upcoming macro variables that could move the market, as well as an earnings calendar. For example, here’s a look at the macro variables and earnings calendar from the last weekend.
Now, what I can tell you is the fact that focusing on a basket of stocks is a lot easier than watching 8,000 stocks. I’m not knocking scanners like Finviz – it works for a lot of people… but I like to do my due diligence and let Weekly Money Multiplier clients know about my next moves.
If you’re asking yourself, “How do I find trade ideas?”
Build a list of stocks to narrow your focus. Maybe your edge lies in the technology sector… You can look at names like Amazon.com Inc. (NFLX), Netflix (NFLX), Alphabet (GOOGL), Microsoft (MSFT), and the technology ETF – PowerShares QQQ Trust (QQQ).
You see, when you focus on a list of stocks, say 10 to 20 names, it allows you to focus and understand what goes on in those companies and the sector.
For me, I’ll trade ETFs like iShares 20+ Year Treasury Bond ETF (TLT) and stocks like AMZN. However, more specifically, I will use options to gain exposures to these names. So maybe I notice the economic calendar, and see that the Federal Open Market Committee (FOMC) has a meeting announcement and will comment on monetary policy… I’ll look for an options position in TLT.
For example, there was a disconnect between the bond market and the stock market. Generally, if you see stocks rise, bonds will fall… On the other hand, when traders and investors are taking risk off the table… you’ll tend to see bonds rise.
However, we’ve seen both the stock market and the bond market remain strong. My idea: bonds could continue higher given all of the potential negative catalysts. Well, I was specific with my entry and remained patient with TLT focusing on my money pattern, and I was able to generate these profits:
Hint – I used the money pattern to signal I should be buying calls in TLT.
Additionally, I will look at corporate earnings and company specifics, and combine that with the money pattern… just as I did with the XPO Logistics (XPO) trade.
Now, don’t worry, I’m not going to leave you hanging… and not teach you about the money pattern.
This brings us to the next most frequently asked question (FAQ): Can you explain in more detail what exactly your money pattern is?
Moving Average Crossover (Money Pattern) Explained
Let’s look at how XPO trade in detail.
This was good for a 500%+ gain…
If you don’t already know, the beauty of options allows me to take minimal risk, and multiply my money at the same time.
For example, check out this hourly chart on XPO Logistics.
Now, I don’t usually trade earnings, but when I do, I trade relatively small in relation to my account size. For beginners, I don’t suggest buying options into earnings… unless you could really afford to lose all of that money.
Here was my thinking in XPO:
- The stock broke below the 200-hourly moving average, and that’s the new resistance area. It’s tried to break back above three times, but no cigar. That signaled to me the stock was weak.
- The blue line – 13-hourly simple moving average (SMA) – looked like it was going to cross below the red line (30-hourly SMA). When this happens, it lets me know there could be bearish trading in the name. Consequently, it made sense to buy puts in the name.
- The options market was implying a 9.70% move in XPO during its earnings week, as noted in Your Jump on the Week – Macro Risks and Volatility. This stock has moved significantly more than the options market anticipated before, and I figure it could do the same this earnings report.
Here’s a look at the hourly chart today:
Now, generally, I would wait for this pattern to actually show up… but I knew I couldn’t let this trade go away. So I bought put options ahead of earnings, anticipating for this bearish crossover (also known as the money pattern). The stock fell more than the options market expected – crashing more than 20% at one point.
Keep in mind, the money pattern isn’t only for bearish bets. If the blue line (13-hourly SMA) crosses above the red line (30-hourly SMA) in any of the stocks and ETFs on my list, I’ll be ready to buy call options, if I have an idea in them.
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