- See the most valuable trading lessons I learned from this historic year in the stock market…
- My secrets to avoiding fear, uncertainty, and doubt around options trading…
- PLUS — more responses from our recent readers’ poll! See if YOU make an appearance…
Happy Hannukah, Evolvers!
This is my favorite time of the year — eight nights of tradition, reflection, and quality time with family.
With that in mind, I think this is a good time to look back on my INSANE year of trading and pull eight valuable lessons out of it (one for each night of Hannukah).
But before we get to that, I want to feature a few more responses from our recent reader’s poll about your favorite options trading strategies…
A Few More Reader’s Poll Responses
Alexis G. isn’t letting the haters scare her away from the options market:
“I am very new to options, heard so many horror stories of it, yet it was next on my list of trading tools to have in my arsenal. I would like to thank you for your course. I’m already diving in headfirst and leaving the negative behind. With that being said, thank you.”
I’m glad you brought this up, Alexis!
There’s so much fear, uncertainty, and doubt (FUD) surrounding options trading. In my opinion, most of it is incorrect or misplaced.
It seems like a lot of old-school dinosaur traders view options trading as a degenerate strategy. As if every options trade is a 50% OTM call YOLO…
Clearly, these characters don’t understand the variety and flexibility of the derivatives market. I’m proud of you for not falling for their FUD. Godspeed, Alexis!
A Familiar Framework
Meanwhile, Ziv has joined me in applying Tim Sykes’ 7-Step Pennystocking Framework to the options market:
“My favorite options strategies are calls and puts because I can play them while using the 7-Step Framework.”
Ziv, I’m happy to hear that you’re using the 7-Step Framework in your options trading. This is exactly how I first approached the options market. You’re in good hands.
“I thought recently you explained to us that you don’t play spreads and straddles, although I did read up on them on your blog post on Nov. 23rd. I will experiment and dig deeper with other strategies, but right now, calls and puts give me leverage to play higher-priced stocks with a small account using the predictable 7-Step Framework.”
Let me clarify this. I rarely trade spreads or straddles, and I never alert them to members.
That being said, I think Evolvers should be familiar with every possible strategy. Even if you don’t trade them, you need to know about them.
After all, who cares what works for me? Remember that every trader’s unique. You never know what setups could work for YOU.
My trading journey is a perfect example of this. I’m Tim’s student, but Tim doesn’t trade options. I had to apply the strategies he taught me to the corner of the market where I’m most comfortable.
Had I avoided options trading entirely simply because my mentor didn’t trade them, I wouldn’t be writing this today.
Don’t worry about what others are trading. Do what works for you.
Now, let’s get to the first four trading lessons I learned this year.
Lesson #1: Blow-off Tops Often Lead to First Red Days
Students always ask how I choose my bearish put trades. The answer lies in identifying blow-off tops — which can lead to hugely profitable first red days.
Blow-off tops usually happen in a single day when a stock forms a euphoric peak.
So how do YOU determine when a blow-off top might take place?
There are three telltale signs that I always look for:
- The stock is up 100%+ in a few weeks (or less)…
- The average daily trading volume is two to five times normal levels…
- The price action struggles at a crucial round-number resistance level…
Bottom line: You want to buy your puts as close to the highs as you can. By diligently searching for the signals I just mentioned, you’ll have the right outlook for nailing put trades.
Lesson #2: Don’t Go Long Before the First Green Day
Back in August, I stepped outside of my usual put-buying strategy and did something a bit out of character — I bought calls on BioNTech SE (NASDAQ: BNTX).
This is a trade to learn from. I made a mistake that I think every Evolver should try to avoid.
I broke my rules, entered the trade too early, and missed out on some monster gains.
Even worse, I let a big opening flush scare me away and lost money.
But my biggest mistake was trying to go long before the official first green day.
I saw the long reversal forming on BNTX, but I mistimed my call-buying. Timing is everything (more on that later)…
Be patient. Don’t try to be a hero and call the bottom before it forms. Wait for the first green day and adjust your long strategy from there.
Lesson #3: Timing Is Everything
One reason I love trading options so much is their potential to maximize the timing of my trades.
If you get skilled at picking the right strikes and expiration dates, you can theoretically make WAY more money trading options than trading stocks.
That being said, the variety of expiration dates available to options traders can lead to some poor decisions from newbies. It’s a double-edged sword.
You can be 100% right on a trade thesis, but if you enter the position too early (or too late) … you might as well be 100% WRONG!
This effect is even more exaggerated if you’re trading options. If the stock moves just a few percentage points in the wrong direction, your contracts could lose 30%–50% of their value.
Be very careful when you enter a position. And if you’re trading options — be even pickier about which strike prices and expiration dates you trade.
Lesson #4: Focus on the Big Picture
When I was trading Moderna, Inc. (NASDAQ: MRNA) earlier this year, I made some mistakes.
I allowed small details to cloud my big-picture view of the chart.
Had I spent more time zoomed out and studying the daily and weekly charts, I may have seen the big-picture bearish indicators popping up.
Instead, I let the smallest indications of a bounce scare me out of buying puts. I was probably too focused on charts with shorter time frames.
In hindsight, the bearish indicators far outweighed the bullish signals. But sometimes it’s difficult to see the big picture in the moment.
Anyone who day trades can relate. Your momentary reactions can occasionally overtake your big-picture trading mindset. Try to avoid this at all costs.
Although I’m still disappointed with this trade, I realize mistakes are unavoidable. Every trader makes them.
The important thing is to address them head-on and learn from them. Vow to never make the error again.
There’s generally far more to gain from sticking to your initial conviction than in allowing short-term trading signals to veer you away from your trading plan.
Keep your mind on the big picture. Don’t let minor hiccups distract you from major indicators.
Wow! I can’t believe how many CRUCIAL trading lessons I learned (or reaffirmed) throughout 2021. And we’ve still got four more to get to next week…
In the meantime, I encourage you to reflect on your own trades from the past year. Be honest with yourself about your trading trajectory.
Pull up past charts, backtest your results, and evaluate your profits. Pay attention to which strategies worked (and which ones didn’t). I’ll be doing the same.