If you’ve been following me for a while, you know I prefer to play puts way more than calls.
This week, I’ve been trading puts on oil stocks like Chevron Corp. (NYSE: CVX).
You may be wondering … why am I so addicted to catching the downside of charts?
There’s an old saying that says, “Stocks take the stairs up and the elevator down.”
I want to catch that elevator down, as you can generally make more money in a single day on the downside than you can over entire weeks on the upside.
Take me as your shining example. I’ve made over $3.5 million as a professional trader — and the majority of those gains came from trading put options.
The next logical question is … how exactly do I pick my put trades? What specific signals do I look for before entering a setup?
Well, there are a few indicators and tools I like to use before I dive into a puts trade…
Yesterday, we broke down the first two. Now, it’s time to finish off the list of my top five tips for nailing put trades.
Tip #3: Identify Realistic Price Targets
To catch you up if you missed yesterday’s rundown, I detailed why fresh highs in stocks are obvious psychological levels to pay attention to.
I take a similar approach when attempting to identify a price target for profit-taking, then ultimately exiting the trade.
Let’s go back to my CVX trade from earlier this week. The stock blasted through the $150 level. I kind of expected this, and anyone who shorted it there got their face ripped off.
But in my opinion, the volume and price action was beginning to indicate a slowing of momentum as it crossed into the low $170s.
This is why I looked for the next-highest level of obvious psychological resistance, which I felt was around $175.
You should never aim to be exact with your price targets, just pick a nice, big round number and adjust as the chart signals you to.
At this stage of the CVX trade, I was watching the chart like a hawk, looking for some sort of clear rejection at a key level of resistance before buying puts.
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This moment came when CVX got rejected just under $175. If you know what to look for, it’s so obvious.
If the buyers suddenly fall off a cliff, cents before a big round number, it’s time to get aggressive on the short side.
There’s almost no better opportunity among bearish setups, as these initial cracks in momentum stocks often lead to HUGE flushes.
Tip #4: Book Profits Quickly
If you’re lucky and disciplined enough to find yourself in a trade like this, where your puts are surging, it’s time to immediately identify another price target. That’s the level where you book profits.
Well, this works on the other side of the coin as well — when it comes to booking profits quickly.
If a trade’s going well, greed is your worst enemy. You’ve gotta fight the urge to hold out for some pie-in-the-sky price target.
Pick a nearby, realistic round number. When the share price nears this level, sell your puts no matter what.
Bottom line: I cannot overstate the importance of timing in options trading. Timing is everything.
When traders come to options from the world of common shares, the volatility can be incredibly jarring.
If you’re up big on a short-dated put trade, one tiny bounce could wipe out a huge amount of your hard-earned profits.
This emphasizes how critical it is to book profits quickly when trading options.
Tip #5: See Bounces as Re-Entry Opportunities
Now you’ve hopefully booked profits on the way down, and this is where a lot of traders pack up and call it a day.
That’s a mistake.
If you simply move on to another chart at this point, you’re potentially leaving money on the table.
This is why I want you to start seeing bounces as re-entry opportunities.
I could have moved on to another chart after my first CVX trade this week, but I’m never satisfied.
Instead, I used today’s bounce back to the $175 area as an opportunity to re-enter the trade. (I bought CVX 3/18/2022 $165 puts 15 minutes after the open today.)
Without succumbing to greed, I have a constant hunger for more.
That being said, it’s not about the money to me … It’s about nailing the trade.
I tell you this to explain the importance of paying close attention to these high-volume momentum charts.
Don’t assume a trade’s over because one wave ends. Another’s likely coming.
Take the bounces for what they are — opportunities to re-trade a winning setup.
By doing so, you could put money in your pocket that other traders are leaving on the table.
Nailing put trades isn’t easy. Even in the crazy bear market we’re currently seeing, correctly calling the top on momentum stocks is no cakewalk.
That’s why I’ve shared these five key tips with you. They’ve helped me enormously in developing my put trading strategy over the years.
When times get tough, refer back to this list. These tips will never go out of style — use them to your advantage.