Trade The Journey

Trade The Journey

Entry, Management, Exits!

Currents events lifted the veil of invincibility and superiority once held by America. The world is watching.

I find myself drifting towards a Global Macro strategy instead of an investment plan based solely on returns from the United States. I’m finishing “Inside the House of Money” now, and it has quickly become a favorite. The book features interviews with Hedge Fund managers, central bankers, and researchers specializing in different asset classes.

These managers believe that the general approach to the Market is better than a specialized system. To do this, you have an insatiable appetite for knowledge. I resonated with Jim Leitner’s interview and approach to the markets. During the interview, he remarked that he could make trades based on reading the Economist.

He would read the articles and then reflect. His reflection centered on one question, “How can I form a trade based on what I read?” He mostly trades options because he can identify his risk and reward from the offset.

I made the shift recently from trading stocks primarily to only options. Options have a steep learning curve. It took me three years to understand what options are and how they trade. It wasn’t easy; in fact, I gave up on trying to understand options for a long time.

After a year, I came upon an options article and decided to read it. Midway through the article, it clicked. Since then, I’ve gravitated towards trading weekly options.

Some say all aspects of the trade are essential. For me, the entry is somewhat trivial, while the management and exit are where profits are made. Successful trade management demands flexibility and consistently adjusting your expectations.

I placed a weekly options trade last week using Starbucks stock as the underlying. The problem with the trade initially was my entry; I couldn’t get filled. Upon the Market’s opening, the stock dropped below the options spread entry price. I based the entry position on the midpoint between the bid-ask for the spread.

It would have worked if the stock opened and remained at the level before dropping. Starbucks isn’t a volatile stock, so I had a pretty good chance of managing my position without incurring a loss. Looking back, I should have placed two credit spreads, which I believe they call an iron condor.

I’m still foggy on the names. I wasn’t filled, so I lowered my entry price and expectations. I did and entered the position.

My goal was to place a larger position than usual. I have a semi-strong aversion to risk. To push myself to grow, I have decided to increase my risk over a series of trades. I like to sleep at night, and I would find it hard to do so if I placed trades beyond my risk tolerance.

Starbucks reached an all-time high the preceding week, and it was having a hard time continuing the resurgence. I placed a bearish call credit spread, and the position was in the money after being filled at a lower entry price. Starbucks drifted lower and lower.

Initially, I thought I was the worst options trader on planet earth. I never captured the full move; little did I know very few people do consistently. Once I stopped aiming for the top of the mountain, I found a comfortable way to earn money somewhere in the middle.

I kept the trade open for one day, closing a 60% profit on the position. Starbucks continued its skid to a support level and made a small rally off the support. I could have realized a 100% profit on the position had I kept it open for the third day.

Some use the greeks to trade options and use the chart as a secondary indicator. I prefer to rely on the charts and then the greeks. Price* is information.

That’s the tricky part about trading, knowing when to close. Anything can happen, and a winning position could quickly turn on you. Some options aren’t as liquid as others, and it may be hard to close, so you have to plan for that.

I like to exit when the position has moved decisively in favor. In case it bounces back a little, I still capture a bulk of the profits. Before trade entry, I know how much I am willing to put at risk.

Knowing the amount, I’m willing to lose serves as a reference level. Luckily, I am quite disciplined, and over the years, I’ve learned that “Hope” is dangerous.

I don’t expect all of my trades to be profitable, but I do expect to maintain my composure. A compliment for me would be, “I can’t tell if you had a profitable or losing day.”

Another part of trade management is emotional management. I try not to ignore my emotions; if I’m feeling anxious, there’s a reason why. One way to choose an exit is assessing your emotional tolerance at your predefined exits.

I fully expect Starbucks to move above its twenty-year high; there’s a Starbucks on every corner. I’m not familiar with Starbuck’s fundamental position, so I can’t speak on its real value.

Past Week Summary:

I can’t believe how automatic habits can become. Last week, I ate out once and cooked the remaining meals at home. I didn’t purchase any snacks or small items while out.

My goal is to save 75% of my income, which is possible. Everything I do contributes to my ultimate goal of financial freedom.

Reducing your life to the basic essentials can change your life. The key is gratitude, learning to be happy with what you have.  My mentor told me he always lived below his means and retired early because of it. As I pulled up to the restaurant we frequented for chats, he arrived in Oldsmobile. Perplexed, I asked, “How come you don’t have a Bentley? You can surely afford one.” He remarked, “Why on earth would I want a Bentley, this car runs great.”

When the downturn happened in March, he casually remarked, “I live my life in preparation for moments like this.”

As complicated as trading and investing can become, they both begin with simple money management principles for the retail trader/investor.

My grade for the week is a “B” for steady discipline and improvement.

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