57 Percent In 24 Hours
I don’t recommend options trading. In fact, the majority of the time I spend discussing options with folks is trying to talk them out of pursuing their latest, greatest idea.
However, there are very limited situations where the leverage offered by Puts and Calls comes in handy. The trade I entered yesterday and just closed this morning is one example.
Here’s what led to the trade:
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A failure of a long entry signal to materialize based on Friday’s action. To me, this said that the rise in the market yesterday was questionable at best, and possibly a complete fakeout. Note that without a disciplined trading plan, I would not have been anticipating a long entry signal and noting its absence; I would have been emotionally chasing the market and trying to stay on the “winning” side, and that is, as they say, a loser’s game.
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Options Expiration Week- with only a few days left to expiration, there is very little time value remaining in options prices; if I see the potential for a quick (albeit small) move in a stock, this is the period where I’m most likely to attempt to exploit that move with options.
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Irrational Exuberance - seeing the relief on everybody’s faces that the “scare” was “over” and their retirement accounts were “safe” reinforced my suspicion that this was indeed a false rise in prices. Did they really think this could all work out overnight? Then when I saw that midday headline from some journalist having an orgasm about the Bulls being Back In Charge, I took it as a signal that the optimism was completely out of control, and I bought Puts.
With a little help from Lady Fortuna, those Puts were entered near the top of yesterday’s sideways action, and I sold them a few minutes before I started writing this post for a 57% gain after this morning’s selloff.
Why am I not “holding out for more”? Greed. The necessity of differentiating between “letting your winners run” (one of the most worn-out cliches in all of trading) and “being greedy” is crucial. I entered this trade due to what I saw as an overbought market and irrational exuberance in the public’s attitude. This morning, the market is down and Joe Schmo is crying about his 401(k) again. The situation has resolved, and to stay in the trade any longer would be hoping for a larger gain and being greedy. Hope and Greed are the parents of the rotten child we call Chapter 13. They should not be our friends.