Happy Friday, Evolvers!
Today, we’ll switch things up a bit as I answer a rare question, completely unrelated to trading…
But first, let me break down some of my thoughts on the market this week…
The S&P 500 ETF Trust (NYSEARCA: SPY) saw its first red week as the index shed more than 1.3% in five days (at the time of writing).
This first red week follows three weeks of sustained bullishness. Considering this, I would take great caution in holding anything long right now.
Among individual stocks, Tesla Inc. (NASDAQ: TSLA) remains at the top of my watchlist for potential put plays.
You may be wondering … why am I looking to short TSLA?
The stock is up more than 70% in the past month, leading me to believe a major dip could be right around the corner. (Keep an eye on this chart!)
But in the meantime, it’s time for our Friday Q&A. Keep reading and I’ll answer your questions…
“What are some of your favorite things to do when you’re not trading (or studying)?”
First and foremost, I’m a family man. I have a beautiful wife and three perfect young children.
Whenever I have free time, I try to spend it with them.
And let me tell you, having three little Croocks running around the house is a full-time job in and of itself!
When I’m not trading, I’m often singing lullabies, changing diapers, or playing with my kids.
But aside from family time, I try to get some physical exercise on my days off.
I love playing basketball and tennis. (I’m a huge San Antonio Spurs fan, so if the Spurs are playing, you can bet I’m watching.) I also try to go to the gym whenever possible.
Trading may seem like an entirely mental game on the surface, but your mind and body are far more connected than you think.
I find when I’m well-exercised, I trade better. And even more importantly, I feel better.
Don’t just sit around at your desk all day. Go outside and get some exercise!
Lastly, I’m a devout Jew and take my faith very seriously. I celebrate every Jewish holiday and take great pride in upholding the traditions of Judaism.
“What are the most common options-trading mistakes you see your students making?”
A few, in particular, come to mind…
Mistake #1: Not Having a Game Plan
More often than I’d like, I see students entering trades without a solid game plan.
When I ask why they entered the trade, they say something like “the setup looked good.”
But when I ask them what their plan is in X, Y, and Z scenarios … they don’t know what they would do.
On the other hand, I plan every trade I make — and I upload them all to Profit.ly.
Within those plans, I make notes about where I expect the stock to go and where I’ll sell if I’m wrong.
That way, I’m prepared for anything that happens while I’m trading the setup.
Bottom line: Before entering a trade, you should have a game plan for every possible scenario you can think of.
Mistake #2: Ignoring Volatility and Liquidity
Options don’t trade the same way as stocks do. You have to consider volatility and liquidity as much as anything else in the options market.
If the contracts you’re trading have high implied volatility (IV), the contracts will be more expensive, which means the underlying stock needs to make a bigger move than normal for you to make big gains.
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I often see newbies completely ignore volatility, then ask why their 500% IV contracts aren’t up more. The answer lies in IV, so don’t ignore it.
Additionally, options traders must factor in the liquidity of the contracts they’re trading.
If the volume and open interest are in the single digits, the bid-ask spread will be large, making it nearly impossible to make money on those contracts.
Bottom line: Look to trade contracts with mid-to-low IV and healthy volume.
Mistake #3: Slow Decision-Making
Everything happens faster in the options market…
In a few hours, contracts can move hundreds of %…
This is why, as an options trader, you must be able to make decisions quickly.
Is it easy to make expensive decisions on the fly with thousands of dollars on the line?
Of course not. If it was, everyone would be a multi-millionaire options trader!
On the contrary, making financially significant decisions in mere moments is unbelievably difficult — but it’s what separates the truly killer traders from the 90% who lose money.
Have a great weekend, Evolvers!
Go outside and get some exercise during the day … then study all night!
Be careful going long next week. I’ll talk to you all on Monday!