Happy Friday, Evolvers!
Towards the end of this week, we saw a classic pattern disruption in the markets. Let me explain…
Unless you’ve been living under a rock throughout 2022, you’ve probably noticed that the overall market trend has been downward…
That changed in June, when an epic bear market rally began to form, one that lasted until this week.
Once Federal Reserve Chairman Jerome Powell gave his speech in Jackson Hole on August 26, the market started tanking yet again.
This led to some near-term oversold conditions, ripe for call-scalping, which I discussed in yesterday’s letter.
Better yet, I’m starting to see Evolvers taking advantage of the market conditions I’ve been pointing out…
Just look at one of my top students, Big T, who knocked a recent Amazon.com, Inc. (NASDAQ: AMZN) calls trade out of the park for 126%!
— Big T Invests (@t_invests) September 2, 2022
Truly amazing stuff, Big T!
This is what I live to see and why I love to teach. Nothing makes me happier than watching Evolvers turn their game plans into hugely profitable trades.
Anyway, enough small talk. It’s Friday, so let’s get to the Q&A…
“When I’m green on an unrealized options position, I find it often quickly goes red. But when I’m red on a position, it rarely turns around and goes green. What am I doing wrong?”
Well, it’s critical to understand how quickly the value of options contracts can move.
You’ve gotta be extremely nimble in response, ready to cut (or add to) your position at a moment’s notice.
First, I’d like to zero in on the first part of your question.
If you’re regularly noticing your positions going from green to red, my first thought is that you’re not booking profits quickly enough.
If you follow my trading, you’ll notice I’m relatively merciless about booking profits when my positions are 50%-100% in the green.
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Furthermore, I’ll often sell half of my initial position somewhere in the middle of the pattern to lock up profits.
For example, if your position is up 100% and you sell half, the rest of your trade is risk-free. To use a casino analogy, you’re playing with ‘house money’ at that point.
The profit-taking steps I take come from experience.
I was in your shoes far too many times in the past, watching contracts go from up double digits to marginally red in a matter of minutes.
Again, the prices of contracts can change in a heartbeat. This is why options can be so juicy, but also why they’re so risky. It’s a double-edged sword.
So, try to take your profits earlier in your trades. And don’t be afraid of selling a portion of your position while holding onto the rest.
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Now, for the second half of your question, the answer is easy…
If your position is red, you shouldn’t be holding and hoping for it to turn green. Sell it and move on.
This is why I’m always stressing the importance of Tim Sykes’ #1 rule — cut losses quickly!
“How can Evolvers take advantage of the long weekend?”
Most importantly, enjoy it! Take some time to relax and spend time with your family.
That’s the whole reason the market’s closed on a holiday like Labor Day. Traders like you and me get a well-deserved break — especially from this insanely volatile market.
But don’t confuse taking a break with losing focus.
Should you have some fun and get your mind off the stock market for a bit? Definitely.
But you should also take the extra time when the market’s closed to get some studying in. It’ll help you prepare for when the market opens back up on Tuesday.
If I’ve learned anything during my 10+ years of trading, it’s that the market is often especially busy after a long weekend.
That means you should be prepared for the potential action the market brings on Tuesday morning.
Don’t slack off. I think one of the worst things a trader can do is take too long of a break without doing any sort of studying or preparation.
Whether you watch a video lesson, take notes, review your trades, or even make a watchlist — be sure you use your time wisely.
For example, when I was first starting in Sykes’ Trading Challenge, I transcribed every webinar he did … THREE TIMES!
Internalizing these lessons helped me develop my personal trading framework.
And speaking of my trading strategy, I just wrote an entire book about it, which you can check out right here.
Have a great long weekend, Evolvers!
Enjoy your time off, you’ve all earned it after so much craziness in the markets.
But don’t just sit on the couch watching Netflix all weekend. Remember this…
If you aren’t studying hard, there’s another trader out there who is — and that trader’s ready to beat you.