Happy Friday, Evolvers!
In today’s Q&A, we’ll discuss the importance of entries and exits and break down how I’m positioning my trades following this crazy week of price action…
I think it goes without saying that the current price action is unpredictable and volatile.
For long-term investors, volatility is generally seen as a negative because it has the potential to damage the value of their precious equity portfolios.
But for traders like us, volatility is a gift.
Take me, for example…
If I wasn’t able to take advantage of big price swings, I never would’ve been able to rack up $4 million in trading profits.
REMEMBER: The bigger the change in share price, the bigger the potential rewards are for traders.
That said, volatility can be a double-edged sword. A market like this one isn’t ideal for inexperienced traders to dive headfirst into. Be cautious!
However, if you’re disciplined with your position sizing and picky with your setups, this market is a unique opportunity to scalp elevated volatility.
But for now, it’s Friday, which means it’s time for our Q&A. Keep reading and I’ll answer your questions…
“How are you positioning your trades at the end of this crazy week?”
As I mentioned yesterday, and you obviously noticed, this week was a particularly volatile one.
The SPY was alternating between red and green moves like a traffic light, making it difficult to time scalps and impossible to hold swing positions.
The market looked absolutely terrible on Tuesday and then again during the first half of Wednesday…
But by Wednesday afternoon, as the SPY was trading down to $384, I felt the price action was about to shift once again.
I sent a mid-day email saying I thought the market had bottomed in the near term. And I was right…
Yesterday, the SPY erased all of its losses from Wednesday … and then some.
Once I saw the bullish frenzy beginning yesterday, I had confirmation that the near-term bottom was in. I knew I wanted to buy some calls…
So, I bought Walt Disney Co. (NYSE: DIS) 3/24/2023 $95 Calls for $1.36.
Why did I choose DIS as my calls play? Because the stock is incredibly oversold.
Coming off of a volatile week with a hard bottom, I think it’s a good bet to buy calls on especially oversold names.
Pay attention to the relative strength index (RSI) … charts with an RSI of 30 or below could be ripe for call-buying.
‘It seems like you usually get in and out of options positions pretty quickly. Do you ever hold contracts until their expiration dates?’
I NEVER bag-hold contracts all the way to their expiration dates. This is a recipe for disaster.
Let me explain…
One of the most difficult aspects of options trading is timing your exits…
Knowing when to take profits, when to hold your entire position, and when to cut a play that’s going against you are crucial skills for any aspiring options trader.
The first step is to have a clear entry and exit plan.
Decide beforehand at what price you’ll sell and immediately close the position when the stock hits that level.
Anyone who holds contracts until expiration is probably down on the position, praying that some miracle turns the trade in their favor at the last second.
Either that or they’re greedily trying to squeeze more juice out of an already-winning position.
WARNING: Don’t get greedy on the way up, holding out for more profits that may never come.
Experienced options traders rarely do either of these things, especially if they’re trafficking in short-dated options (like I usually am).
If a trade is clearly going against you — cut your losses immediately.
And if you’re up big in unrealized gains — take the win and close the position out.
Have a great weekend, Evolvers!
If you came out this rollercoaster week unscathed — or better yet, ahead — give yourself a big pat on the back.
Study hard over the weekend and I’ll talk to you on Monday!