Tuesday, April 23, 2013

Sometimes Patience Is Hard

Sometimes the hardest thing to have in the markets is patience, I know this all too well as when I first started trading my attention span was that of a rock...thats right I was all over the place. But know I find trades that I like and I extend my duration (thus my patiences). I have seen huge improvements in my trading by doing this, but in the short term this sometimes means some pain. Luckily with options we can trade around a position to reduce cost basis (whether short or long).

The biggest thing to remember if you are going to trade like this is to TRADE SMALL. You can't be a gun slinger trading like this. If you trade too large in the context of your account, you will never be able to stay with the trade long enough to see it work out. And you risk blowing up your account. This is probably the biggest change I have made over the last 5 years trading, and thats my trading size. I use to think that I always had to trade in 5 and 10 lot trades. I almost felt ashamed by trading a one lot. But not anymore.

I have also realized that there are certain strategies that I am comfortable with in individual stocks and others that I will only use on indices. You have to find what works for you.

This post was inspired by my current position in JNJ and a comment that I got on my short call position on the /ES. I was asked if I was worried about the unlimited risk on the short call I sold on the /ES. The answer is NO! That does not mean however that I am unaware of the risk to the upside. But I am comfortable with the position due to its size and the different strategies I have at my disposal to trade around the position.

JNJ Testing Patience

This chart is starting to look pretty parabolic and so strong for a consumer staples company. We are working on putting in the 17th consecutive week to the upside. I have been short this name a few times over the last few months and cashed in some profits early on. But then a week and a half ago as I analyzed the chart a bit further my conviction to the downside has grown and I got short naked $85 puts when the stock was trading around $82-$83/share. As I write this JNJ is making another new high at $85.68. The up move is starting to look like a strait line and the only thing I can liken it too is throwing a ball up in the air, eventually the energy your transferred to the ball as you through it up in the error runs out and then gravity puts pressure on the ball to fall back to earth.

I am committed to seeing this position through and because I have stayed small I can have patience and I feel like the move is right around the corner. We all know that when it comes to price movement, we take the escalator up and fall off a cliff to the downside. I am looking for a drop in price and uptick in volatility in JNJ in the coming sessions. As you can see from the above chart my initial price target to the downside is $80/share, but I do think that $75 is possible. I will also remind everyone that has been following this position that I do have plans to roll the puts out a month if we don't get the move I am looking for this week.

Lastly I would like to mention that because I chose to use puts to define my risk I have lost less on my long puts that the stock has risen if I would had just been short the stock.

Good Luck Trading!

In The Money Trades

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1 comment:

  1. So I made a comment that by being long puts instead of short outright stock that I was down less money with the puts. I wanted to do the math so I used the TOS onDemand function to go to the exact time of execution of my trades to see where JNJ was trading to see where I would had been shorting the stock. The average price short would had been $83.71. Today JNJ closed at $85.45 meaning I would had been down $1.71/share of a unrealized loss of ($1,026). My average price on the long puts is $2 even on 6 puts. They closed with a mark of $0.90 today. This means I am down $1.10/contract of a unrealized loss of ($660).

    Just thought I would share.