Options Trade Example in a Down Market
How to analyze a potential trade is kind of a hard topic to summarize because there is no one way to do it and no amount of analysis will guarantee that the trade will perform like you planned. All you can do is try to stick to a discipline where you maximize the chances of being right and if you are wrong then be willing to cut your losses QUICKLY.
With this crazy market this past couple months(Summer 2011) and all the volatility lately, it is hard to stick to a discipline. Honestly when trades are not working for you then realize that CASH is a position especially if the market is trendless or uncertain.
If you are a stock investor then your strategies are limited to either buy, short, or stay in cash. If you are willing to understand options and integrate options strategies into your investing strategies them you can make money in any market.
As an example, the video below shows how I played Netflix when it was falling apart and I didn’t want to buy or short the stock with the uncertainty going in the overall market. As I explain in the video, my strategy was to play a potential bounce on Netflix without tying up a lot of capital or taking on a lot of risk. Even though the market was falling apart I was kind of curious to look at Netflix since its been crushed and thought I would do a quick video showing how I was looking at it.
SPECIAL NOTE – I don’t ever recommend trying to buy a stock in a down market especially a stock that is falling apart from self-inflicted problems like Netflix and especially after coming off of a huge run. I was purely looking at Netflix as a way to play oversold bounce and consider some options as a cheaper way to play it and also to control risk if the stock gapped down. IN FACT MOST STOCKS THAT BREAK DOWN LIKE NFLX AFTER A BIG RUN LIKE IT HAS HAD WILL CONTINUE TO MOVE LOWER.
Remember, it is dangerous ever fighting the trend of the market especially with stocks that are having company-specific problems. (I mean if I was looking to buy a stock on a pullback I would rather own Apple or Amazon over Netflix if because they have strong company fundamentals and strong “story” versus Netflix). My example below I show that I was only planing for a 1 day trade.
Trading Plan
The best approach for any investment is to follow a trading plan :
- Look at the overall market. Is it in a trend ? What is the volume telling you ?
- Find strong stocks that market leaders. Create a watchlist of interesting stock and the optimal entry price levels (ie- light volume pullback and proven bounce off support)
- Before entering the trade know exactly what you risk level is to determine your position size. Don’t CHASE stocks. Stay disciplined.
- After you entered into a position raise your stops to not lose on a winner and be mindful of any warning signs. Stick to your trading plan.