Taking profits. That’s the name of the game, right? I mean, sooner or later you have to take ’em. Although you can get a lot emotionally out of ramping and watching things rally up and then sitting there and watching the decline, that’ll certainly give you an emotional system that will jack up your system. Doesn’t really work for me, but I know there are some relatively well-known people who have been in those situations. When you talk about taking profits, the tactical parts are easy. You have protective stops in. The trickier part is how do you feel around putting those stops in and where you place them? How do you deal with regret?
Do you mourn the loss? Do you mourn your winning trades? So question came in. We get a lot of questions on this one, and I think it ties into a person’s inability to feel the uncertainty around trading. These are probabilistic outcomes. Probabilities could also change. We talked about this in terms of what is the math that you need. We talked about conditional probability, and most people aren’t really good at that because they’re looking at charts, they’re not looking at the numbers, so they can’t really see the percentages. So first thing is, again, the language that I use might be different from the language that you use. So let me define a term. When you say tighten your stop, that to me is a person putting a stop in that’s closer to the current market value than where they would normally put it. Adjusting your stop is kind of keeping it in lockstep.
Let’s say that you have a trailing ATR stop one ATR. Keep it super simple, so you move every time the security goes up, a certain percent. It could be half ATR, you could do it every 10 cents. That’s an awful lot of work. That turns, again, trading into retail, small-minded stuff, but say that every time it moved an ATR, you adjusted your protective stop up and A-T-R-A-T-R can be one R. It can be two Rs. It depends how you price your risk. You can figure that all out and then what are you comfortable with? You’re only going to get comfortable with it from doing it. Everyone thinks that there’s an intellectual answer to this that’s going to solve. The emotional part doesn’t work that way. I’ve mentioned that before. There are no external solutions to the internal things that you’re feeling around trading. You’ll have to find a way to get used to the uncertainty and the probabilistic outcome of trades, and only after doing it many, many, many, many, many times, dozens of times, maybe hundreds of times, can you get comfortable with a process that works for you? It’s not going to come from thinking about it and doing it two or three times.
You might have an inkling about something that feels good, but it’s only going to be through massive repetition. The good news is you’re making money, so that should help. I am not one to necessarily trim, right? I don’t scale out. I figure the moves have economic powers that I can maybe understand, but I might not even know all the reasons why a trade’s working out. All I can see is the price is going up. If you sit there and say, oh yeah, it’s of course because this AI thing is booming and this and that, you’re just parroting shit. You heard other people say, you don’t have any damn clue, and so I don’t even bullshit myself and start talking. I know what’s going on. All I know is I put the risk on if it goes up, I’m going to adjust my protective stop, try to stay out of my own way and let the thing go.
Why does it go and move or trend? I don’t care. I don’t care. I don’t need the emotional feedback on that. All I care about is the price. That’s how I manage the risk. I can always learn why the move happened after the fact when I’m not in the risk and I don’t have to worry about it and be like, oh, yeah, that’s kind of interesting to read that, but who cares? Because again, I’m not trying to be right. I’m trying to make money. You need to know what you’re doing it for. Sometimes you look at a winning trade and you’re like, I was right, so now I’m validated on a few fronts. To me, that’s the wrong way to do it. Don’t worry about being right. You have to be relatively right. If you’re right, 40%, you’re doing pretty damn well. The key is keep your losses small.
I don’t know that the winners take care of themselves as evidenced by the fact that we even have to talk about this, but again, what you can do is say, what other criteria that you would exit the trade after you just put it on, what’s your risk? Are you trading structure or are you trailing with some number as a percent, right? If it’s can slim, what do they give you? Seven, 8% of the price of the security is the pullback, and then somehow you can position size on that. Take a half a percent and then figure out what the price is of the instrument. You can tell by looking at it and then say, okay, I’m going to give this thing whatever the canceling method is. Then you could trail with one ATR. You could trail with a half an ATR. If there’s some tight consolidation or a base inside of a stage two breakout, maybe you put your protective stop and you price your risk when it trades through support. There’s a whole bunch of ways to do it, but knowing your goal is like what is it that you want your money to do for you versus what are you willing to do for your money? To me, it’s adjusting stops. It’s kind of easy, really. It’s not that terribly difficult for the love of God. Entering
An order is a lot easier than even trying to put in an email. You get the sender’s address, you get the subject, you got the body. Boom. Putting in an order for trading is kind of the same. What’s the ticker? What’s the quantity and what’s the price? When you adjust stops, obviously make sure you remember to cancel the previous one. Sometimes you could do cancel and replace because you don’t want two sell orders on the same inventory, but me, myself, I don’t typically trim. You can wait for the market to turn and learn to see the signs. Are the tops failing? That might be a sign, but I think a lot of you come to this with a greater sense of urgency than you need the market. If you just sit and live and breathe, the market will tell you when the move is ending.
There are signs, right? And again, I don’t want to get into trading lessons here. That’s not what we’re here for. Go look it up. If it’s important to you, you’ll find the answers. Look for market turns, look for reversals and just realize that there’s going to be volatility. There’s going to be noise perhaps, and again, there is. You’re always going to have the uncertainty. It’s never going to go away. The only thing that you can do is figure out what it is that you are going to do under those circumstances. Now, if you’re afraid to be proactive, sure you can have something that’s ar, but to me, if you’re at eight R in unrealized gains, again, you can emotionally determine ahead of time what you’re willing to walk away from, or excuse me, walk away with. How much of your unrealized gains are you willing to risk?
Think of it maybe in terms of units of R, right? If you’re really willing to risk one R on the trade with your initial protective stop when you get in, maybe that’s where you start and you trail with one R so that this way if it does eventually by luck or by randomness or by skill, go to eight R, then you’ll get stopped at seven. Seven is still better than three, so you can think about that ahead of time and say that no matter what, these are the rules that I’m going to follow, and if it goes to 10 R, I’ll stop at nine. If I’m lucky enough to be at 20, I’ll stop at 19. Also to consider, are you adding to your winners or are these just trades that you’re putting on for the sake of putting it on? Because when you say things like it sucks watching it come all the way back, well, what’s the cause of that? That to me is the runny nose of the cold. It’s a symptom of not
Action. It’s of having regret. It’s of like, I don’t want to get stopped because then if it rallies back in my face, I feel like an idiot, but you don’t really know any of that stuff at the beginning. This is why people trim or only take part, right? They have regrets and they don’t want to have them, so I’m going to get, keep a piece on, and so I mean, that’s not my style. My style is more to get out when the risk is going the other way and the momentum turns, and I wouldn’t say I’m a momentum trader, so don’t infer anything. You need that to be happening in the direction, but momentum kind of can move in ebbs and flows. It moves and fits and starts, so you want to just be trading along with the direction of the overall move. Some of you can look at moving averages, right? Have a shorter one. Some of you on the completely short end are looking at intraday timeframes and divergences. Again, in the short term, I’m not even going to talk about it. I just think, again, it’s more about the feel at that point than it is about a technical indicator. So anything in and around trading, it’s very frustrating for all of you because there is no definitive answer for most of these things. You really need to try it on and see how it fits.
You really have to try it on to see how it fits and just realize that when you trade long enough, you will find yourself in those situations where you have those big gains and then have those rules set aside. So if something does go parabolic, you know how to read the market and know how to adjust your protective stops. A good place to start, like I said, is if you’re willing to risk one R, then you can keep that constant just to start and then develop it from there so that in those instances when you do have your asymmetric setup that you follow where you can express a trading edge, you don’t want to trade when you don’t have an edge watch the thing take off, gets to three R, stop it at two. If it gets to four, stop it at three and just see how that feels because the math is easy. Your goal here is to be a scientist and to uncover the data and see how the data feels because so much of this is experiential. I can’t give you a straightforward rule that says, this trading rule, if you follow it, is going to alleviate this emotional situation in your world. So unique from me. I’m so unique from you. There’s not one rule, so experiment. There is a lot of science going on here. Experiment with your behavior, see what feels good.
Then at the end, you can go back over the course of the year and say, you had, okay, you had two dozen of these trades. I didn’t like how I handled them. I freaked out when I shouldn’t have. So now instead of having regret on one particular trade, you could look back and say, I don’t really have regrets, but I know I can improve my exits. You see, so don’t be fooled to think that there is one definitive answer for this. To me, I admit it’s probably the hardest trade, right? Because at least at the beginning you put your trade on, maybe you have a buy stop above the market, you get filled, you put in your protective stop. That’s so super easy. You can keep it as easy or you can overthink things.
Maybe it’s because you’re not in the situation where you have those gains all the time, so you kind of freak out because it’s so new to you. It’s like being naked in bed with somebody for the first time. You’ve seen it on tv, but what do you do that could be part of trading too. At any rate, I appreciate y’all being here. These are great questions. I promise to continue to evolve them. If I think of something that can help answer this question better, I certainly will add it in future episodes, but a lot of things that are around trading, you can sit and talk about the intellectual side till the cow comes home, but till the mad cow comes home. But really the thing is, is just put the trades on for size and see how it feels, and then go from there, evaluate, keep good notes, and just document everything. Okay? That’s all I got for you today. Have a great weekend and I’ll see you Monday.

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Taking profits. That’s the name of the game, right? I mean, sooner or later you have to take ’em. Although you can get a lot emotionally out of ramping and watching things rally up and then sitting there and watching the decline, that’ll certainly give you an emotional system that will jack up your system. Doesn’t really work for me, but I know there are some relatively well-known people who have been in those situations. When you talk about taking profits, the tactical parts are easy. You have protective stops in. The trickier part is how do you feel around putting those stops in and where you place them? How do you deal with regret?
Do you mourn the loss? Do you mourn your winning trades? So question came in. We get a lot of questions on this one, and I think it ties into a person’s inability to feel the uncertainty around trading. These are probabilistic outcomes. Probabilities could also change. We talked about this in terms of what is the math that you need. We talked about conditional probability, and most people aren’t really good at that because they’re looking at charts, they’re not looking at the numbers, so they can’t really see the percentages. So first thing is, again, the language that I use might be different from the language that you use. So let me define a term. When you say tighten your stop, that to me is a person putting a stop in that’s closer to the current market value than where they would normally put it. Adjusting your stop is kind of keeping it in lockstep.
Let’s say that you have a trailing ATR stop one ATR. Keep it super simple, so you move every time the security goes up, a certain percent. It could be half ATR, you could do it every 10 cents. That’s an awful lot of work. That turns, again, trading into retail, small-minded stuff, but say that every time it moved an ATR, you adjusted your protective stop up and A-T-R-A-T-R can be one R. It can be two Rs. It depends how you price your risk. You can figure that all out and then what are you comfortable with? You’re only going to get comfortable with it from doing it. Everyone thinks that there’s an intellectual answer to this that’s going to solve. The emotional part doesn’t work that way. I’ve mentioned that before. There are no external solutions to the internal things that you’re feeling around trading. You’ll have to find a way to get used to the uncertainty and the probabilistic outcome of trades, and only after doing it many, many, many, many, many times, dozens of times, maybe hundreds of times, can you get comfortable with a process that works for you? It’s not going to come from thinking about it and doing it two or three times.

You might have an inkling about something that feels good, but it’s only going to be through massive repetition. The good news is you’re making money, so that should help. I am not one to necessarily trim, right? I don’t scale out. I figure the moves have economic powers that I can maybe understand, but I might not even know all the reasons why a trade’s working out. All I can see is the price is going up. If you sit there and say, oh yeah, it’s of course because this AI thing is booming and this and that, you’re just parroting shit. You heard other people say, you don’t have any damn clue, and so I don’t even bullshit myself and start talking. I know what’s going on. All I know is I put the risk on if it goes up, I’m going to adjust my protective stop, try to stay out of my own way and let the thing go.
Why does it go and move or trend? I don’t care. I don’t care. I don’t need the emotional feedback on that. All I care about is the price. That’s how I manage the risk. I can always learn why the move happened after the fact when I’m not in the risk and I don’t have to worry about it and be like, oh, yeah, that’s kind of interesting to read that, but who cares? Because again, I’m not trying to be right. I’m trying to make money. You need to know what you’re doing it for. Sometimes you look at a winning trade and you’re like, I was right, so now I’m validated on a few fronts. To me, that’s the wrong way to do it. Don’t worry about being right. You have to be relatively right. If you’re right, 40%, you’re doing pretty damn well. The key is keep your losses small.
I don’t know that the winners take care of themselves as evidenced by the fact that we even have to talk about this, but again, what you can do is say, what other criteria that you would exit the trade after you just put it on, what’s your risk? Are you trading structure or are you trailing with some number as a percent, right? If it’s can slim, what do they give you? Seven, 8% of the price of the security is the pullback, and then somehow you can position size on that. Take a half a percent and then figure out what the price is of the instrument. You can tell by looking at it and then say, okay, I’m going to give this thing whatever the canceling method is. Then you could trail with one ATR. You could trail with a half an ATR. If there’s some tight consolidation or a base inside of a stage two breakout, maybe you put your protective stop and you price your risk when it trades through support. There’s a whole bunch of ways to do it, but knowing your goal is like what is it that you want your money to do for you versus what are you willing to do for your money? To me, it’s adjusting stops. It’s kind of easy, really. It’s not that terribly difficult for the love of God. Entering

An order is a lot easier than even trying to put in an email. You get the sender’s address, you get the subject, you got the body. Boom. Putting in an order for trading is kind of the same. What’s the ticker? What’s the quantity and what’s the price? When you adjust stops, obviously make sure you remember to cancel the previous one. Sometimes you could do cancel and replace because you don’t want two sell orders on the same inventory, but me, myself, I don’t typically trim. You can wait for the market to turn and learn to see the signs. Are the tops failing? That might be a sign, but I think a lot of you come to this with a greater sense of urgency than you need the market. If you just sit and live and breathe, the market will tell you when the move is ending.
There are signs, right? And again, I don’t want to get into trading lessons here. That’s not what we’re here for. Go look it up. If it’s important to you, you’ll find the answers. Look for market turns, look for reversals and just realize that there’s going to be volatility. There’s going to be noise perhaps, and again, there is. You’re always going to have the uncertainty. It’s never going to go away. The only thing that you can do is figure out what it is that you are going to do under those circumstances. Now, if you’re afraid to be proactive, sure you can have something that’s ar, but to me, if you’re at eight R in unrealized gains, again, you can emotionally determine ahead of time what you’re willing to walk away from, or excuse me, walk away with. How much of your unrealized gains are you willing to risk?
Think of it maybe in terms of units of R, right? If you’re really willing to risk one R on the trade with your initial protective stop when you get in, maybe that’s where you start and you trail with one R so that this way if it does eventually by luck or by randomness or by skill, go to eight R, then you’ll get stopped at seven. Seven is still better than three, so you can think about that ahead of time and say that no matter what, these are the rules that I’m going to follow, and if it goes to 10 R, I’ll stop at nine. If I’m lucky enough to be at 20, I’ll stop at 19. Also to consider, are you adding to your winners or are these just trades that you’re putting on for the sake of putting it on? Because when you say things like it sucks watching it come all the way back, well, what’s the cause of that? That to me is the runny nose of the cold. It’s a symptom of not

Action. It’s of having regret. It’s of like, I don’t want to get stopped because then if it rallies back in my face, I feel like an idiot, but you don’t really know any of that stuff at the beginning. This is why people trim or only take part, right? They have regrets and they don’t want to have them, so I’m going to get, keep a piece on, and so I mean, that’s not my style. My style is more to get out when the risk is going the other way and the momentum turns, and I wouldn’t say I’m a momentum trader, so don’t infer anything. You need that to be happening in the direction, but momentum kind of can move in ebbs and flows. It moves and fits and starts, so you want to just be trading along with the direction of the overall move. Some of you can look at moving averages, right? Have a shorter one. Some of you on the completely short end are looking at intraday timeframes and divergences. Again, in the short term, I’m not even going to talk about it. I just think, again, it’s more about the feel at that point than it is about a technical indicator. So anything in and around trading, it’s very frustrating for all of you because there is no definitive answer for most of these things. You really need to try it on and see how it fits.
You really have to try it on to see how it fits and just realize that when you trade long enough, you will find yourself in those situations where you have those big gains and then have those rules set aside. So if something does go parabolic, you know how to read the market and know how to adjust your protective stops. A good place to start, like I said, is if you’re willing to risk one R, then you can keep that constant just to start and then develop it from there so that in those instances when you do have your asymmetric setup that you follow where you can express a trading edge, you don’t want to trade when you don’t have an edge watch the thing take off, gets to three R, stop it at two. If it gets to four, stop it at three and just see how that feels because the math is easy. Your goal here is to be a scientist and to uncover the data and see how the data feels because so much of this is experiential. I can’t give you a straightforward rule that says, this trading rule, if you follow it, is going to alleviate this emotional situation in your world. So unique from me. I’m so unique from you. There’s not one rule, so experiment. There is a lot of science going on here. Experiment with your behavior, see what feels good.

Then at the end, you can go back over the course of the year and say, you had, okay, you had two dozen of these trades. I didn’t like how I handled them. I freaked out when I shouldn’t have. So now instead of having regret on one particular trade, you could look back and say, I don’t really have regrets, but I know I can improve my exits. You see, so don’t be fooled to think that there is one definitive answer for this. To me, I admit it’s probably the hardest trade, right? Because at least at the beginning you put your trade on, maybe you have a buy stop above the market, you get filled, you put in your protective stop. That’s so super easy. You can keep it as easy or you can overthink things.
Maybe it’s because you’re not in the situation where you have those gains all the time, so you kind of freak out because it’s so new to you. It’s like being naked in bed with somebody for the first time. You’ve seen it on tv, but what do you do that could be part of trading too. At any rate, I appreciate y’all being here. These are great questions. I promise to continue to evolve them. If I think of something that can help answer this question better, I certainly will add it in future episodes, but a lot of things that are around trading, you can sit and talk about the intellectual side till the cow comes home, but till the mad cow comes home. But really the thing is, is just put the trades on for size and see how it feels, and then go from there, evaluate, keep good notes, and just document everything. Okay? That’s all I got for you today. Have a great weekend and I’ll see you Monday.

All right, baby, let’s rock and roll. You’re rock stars. You almost be in Cleveland at the Rock and Roll Hall of Fame. You’re such rock stars. So today and tomorrow I want to talk a little bit about tactical stuff, although I’m not going to show charts. I can do that eventually in the future, but I mean, let’s face it, watching some jack ass go over charts such a snooze. I know you know that inherently you think you like it, but you really don’t. So someone talked about, can you talk about your options trading? Again, what I do, I don’t know how it would be relevant for you.
When I look at options trades, so let’s say that you’re bullish on something. What is it that you’re supposed to look at? Some of you probably first thing you look at is the premium. How much is the premium? Because your account balance is only a certain size, so can you afford it? Right? How much of your capital you going to put to work do you take say one half of 1%. Say you have a hundred K, you have $500 as one half of 1%. Do you try to buy as many contracts as you can within that $500 number and then let the thing go to zero? Or do you put say 2% of your capital, buy $2,000 worth of options, as many contracts as $2,000 would allow you to buy and then risk 75% of that, I mean one fourth of that, 25% being the $500.
That’s all a field play. You’re only going to know the math works out the same, which is better. You’re only going to know by doing it. Just like I said in so many other things too. If you look at how options are priced, the lower strike prices go in the money first obviously. So therefore you have to look at delta may be gamma. You can go to town on the Greeks, but typically what happens is when you look to see what options you can afford, I don’t like using cheap and expensive and what you can afford, but if you look at something that’s in the money, those are going to have higher premium. You have intrinsic value.
So then you look at something that’s maybe out of the money, those are going to have smaller deltas. So for what you can anticipate, I particularly don’t use price targets. Maybe you do. You have to figure for if you buy an at the money option that has say a delta of 50 for every dollar move, right? The theory is that the option price is only going to move 50 cents. Then what’s the spread? So what’s your holding period? How can you avoid or not neutralize, but how can you minimize to the best of your ability, the decay part? So all of that becomes a function of what it is that you’re able to tolerate based on your account. And to me, I’ve seen people do it so many different ways that I can’t say that there’s one best way.
I typically don’t buy things that are way out of the money and look for these fantastic situations to come up and to endow me. I might’ve done that once thinking I had the inside line on a company 35 years ago, and if the thing moved 20%, all these options that were very cheap, low price, I don’t want to say cheap again because cheap speaks to value. You buy a bunch of low priced options and then have the thing surge. Maybe there’s a takeover candidate. Maybe there’s people do this around earning surprises. They want a big payday. To me, that’s a real gamble because you really don’t know what the odds are. Odds are probabilities, and so then you don’t really know how to handicap the trade or figure out the bet size. You could have always just pick a number, but you need to figure out for the risk that you’re willing to take, what kind of rate of return that you want to make both on the trade and then what is that going to do to move the needle of your account balance? So the first thing to look at then is what can you afford from an option premium standpoint? And then if you look at the delta, how much do you think you want to participate? It’s not always an exact science, but it’s pretty reliable. So if something moves $10, right? Because the delta of any underlying security is one.
So if you’re looking at doing options, you know that you’re not going to participate a hundred percent in that move, even though the derivative is based on the underlying that is actually making the move. Why wouldn’t you just own the underlying? Is it the leverage? Can you figure out based on the number of shares you could afford to buy with a delta of one versus the number of contracts, right? What’s your rule of thumb? Because again, I’ve seen it if I have 20 people who are really good at options trading, there’s 20 different ways they position size. I gave you one at the top of the show. Do you invest more money into taking on more contracts and risk 25% of your two K, or do you just buy the 500 and say if it goes to zero, I know my max loss.
Sometimes the underlying can move so sharply that the option prices get smashed and there’s not an opportunity for you to get out at where you would have your stop, nevermind the bid ask spread. So I don’t know that there’s an exact science on how to do that other than to go and experiment with what you think is best for you. I have mixed emotions about stuff, but I’ve really learned to kind of culture my own system around it over the years, over long periods of time. There was a time when I used them as a surrogate because I was looking at shares that if I bought as much as I needed from an outright standpoint,
It would tie up a lot of buying power, you see? And so I used the options, not leaps, but I used the options as a surrogate to have the exposure. So you might consider the same thing, but again, if you’re doing it because your account is small, I’d say save your money and contribute to your account from your savings and build up your corpus pros. Typically like the leverage and the loss limiting aspect of it too. Oftentimes you can find something, you can create spreads, you can get very creative, excuse me, with options because you can buy and sell different expirations and different strike prices against, but spread trading is a whole other beast, so I don’t want to get into that and spread trading in options is very different from spread trading in futures kind of cover that in the mastermind because it’s just too much to do here and I don’t feel like doing three hour videos for free, so you can go study that on your own and figure out, but I would definitely look at how do you want to manage the risk?
Do you want to put more money to work and then have a protective stop where you would offset the options trade and retain some of that money? Right? In the example at the top of the show, I talked about investing as much as say 2% of a hundred thousand dollars account. Not looking for that to go to zero I, but risking only one fourth of that position, $500, which would be one half or 1% of the overall account. You’d have to figure out if that’s a good fit for you or would that make you nervous having that much exposure knowing that if the name tanked because of earnings or because of whatever, you might not be able to get out, you might take a thousand dollars hit. Would that be okay? How do you know it’s hopefully hard to back test with options? Or are you better off just buying whatever it is your R and just putting that amount to work and if it goes to zero, it can’t get any worse. That only comes from trial and error. It’s the only way to do it.
I know some options guys who are really good and so I’m just thinking about actually for this thing, maybe have them on as guests and do a deeper dive in getting their insight. I’ll see about doing that. They’re easy enough. I don’t want to put the message out there. Then you have every jackass sending, you’re like, so-and-so is an expert and has these strong opinions and they’d love to help your audience this way and that way, and I’m not interested. That’s why I feel, look at the contact page. It says very clearly, I’m not interested in interviewing people.
It’s not that kind of show. I do have friends, people that I’ve known for 20 years. It’s a different type of guest. They’re not strangers to me. We’re friends. They’re pros. They have a long track record, so they also have my trust if I was affiliate sales or if I had some other type of marketing thing or I did like there’s some podcast, there’s the guy from Australia, I think you got to pay to be on that show. That’s a different business model right here. I fund everything. I do this all largely myself. I pay for some post production. I’m trying to work better on getting thumbnails that actually mean something to you. So it’s evolving, but I largely do it myself and I’d get a lot of help obviously from ganja. So that’s going to evolve. So maybe I’ll have some guests on the way.
I had Brian Shannon on for example. It wasn’t just like a random, Hey, I know you’ve watched your show. I have all your books. I really like your message. Would you please consider? That’s not the kind of outreach that I do. I can call my friends who are all kind of branded brand names. They’re all excellent people, and so I can do that in the option space. Maybe I’ll reach out and I’ll do something along those lines for you, but I’m hesitant to turn this into an interview style show. I’ll rethink it. I’ll have all of December to meditate on that, but it would have to kind of be conjugated with all the spiritual stuff, the emotional intelligence, the traitor psychology. Otherwise, we get more of these people talking about the economy, and you can get a bunch of that for free on tv. I don’t need to do that.
It’s kind of a gigantic snooze to be frank, because no matter what’s going on in the world, no matter what’s going on in the economy, if you’re doing enough research, you should be able to find four or five names a year that meet your criteria, and that’s really all you need. You see? You don’t need to find something every day. You just need to catch what are the biggest moves and be there options can certainly help you do that because of the loss limiting methodology that’s built in, especially if you have debits, right? We’re talking about if you have a debit balance or a net debit balance in the case that you’re doing bull call spreads or bare put spreads, just to keep it super simple. There’s all kinds of broken wind strategies. Don’t want to get into it and go from there. But anyway, those are some things to ponder. We’ll go from there. Maybe I’ll have a guest on whatever. Thanks for being here, and I will see you tomorrow with another episode where we’re going to talk about how do you handle taking profits. It’s an interesting concept. Thanks for being here, folks. I’ll see you tomorrow.

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This is an automated transcript

All right, baby, let’s rock and roll. You’re rock stars. You almost be in Cleveland at the Rock and Roll Hall of Fame. You’re such rock stars. So today and tomorrow I want to talk a little bit about tactical stuff, although I’m not going to show charts. I can do that eventually in the future, but I mean, let’s face it, watching some jack ass go over charts such a snooze. I know you know that inherently you think you like it, but you really don’t. So someone talked about, can you talk about your options trading? Again, what I do, I don’t know how it would be relevant for you.
When I look at options trades, so let’s say that you’re bullish on something. What is it that you’re supposed to look at? Some of you probably first thing you look at is the premium. How much is the premium? Because your account balance is only a certain size, so can you afford it? Right? How much of your capital you going to put to work do you take say one half of 1%. Say you have a hundred K, you have $500 as one half of 1%. Do you try to buy as many contracts as you can within that $500 number and then let the thing go to zero? Or do you put say 2% of your capital, buy $2,000 worth of options, as many contracts as $2,000 would allow you to buy and then risk 75% of that, I mean one fourth of that, 25% being the $500.
That’s all a field play. You’re only going to know the math works out the same, which is better. You’re only going to know by doing it. Just like I said in so many other things too. If you look at how options are priced, the lower strike prices go in the money first obviously. So therefore you have to look at delta may be gamma. You can go to town on the Greeks, but typically what happens is when you look to see what options you can afford, I don’t like using cheap and expensive and what you can afford, but if you look at something that’s in the money, those are going to have higher premium. You have intrinsic value.
So then you look at something that’s maybe out of the money, those are going to have smaller deltas. So for what you can anticipate, I particularly don’t use price targets. Maybe you do. You have to figure for if you buy an at the money option that has say a delta of 50 for every dollar move, right? The theory is that the option price is only going to move 50 cents. Then what’s the spread? So what’s your holding period? How can you avoid or not neutralize, but how can you minimize to the best of your ability, the decay part? So all of that becomes a function of what it is that you’re able to tolerate based on your account. And to me, I’ve seen people do it so many different ways that I can’t say that there’s one best way.

I typically don’t buy things that are way out of the money and look for these fantastic situations to come up and to endow me. I might’ve done that once thinking I had the inside line on a company 35 years ago, and if the thing moved 20%, all these options that were very cheap, low price, I don’t want to say cheap again because cheap speaks to value. You buy a bunch of low priced options and then have the thing surge. Maybe there’s a takeover candidate. Maybe there’s people do this around earning surprises. They want a big payday. To me, that’s a real gamble because you really don’t know what the odds are. Odds are probabilities, and so then you don’t really know how to handicap the trade or figure out the bet size. You could have always just pick a number, but you need to figure out for the risk that you’re willing to take, what kind of rate of return that you want to make both on the trade and then what is that going to do to move the needle of your account balance? So the first thing to look at then is what can you afford from an option premium standpoint? And then if you look at the delta, how much do you think you want to participate? It’s not always an exact science, but it’s pretty reliable. So if something moves $10, right? Because the delta of any underlying security is one.
So if you’re looking at doing options, you know that you’re not going to participate a hundred percent in that move, even though the derivative is based on the underlying that is actually making the move. Why wouldn’t you just own the underlying? Is it the leverage? Can you figure out based on the number of shares you could afford to buy with a delta of one versus the number of contracts, right? What’s your rule of thumb? Because again, I’ve seen it if I have 20 people who are really good at options trading, there’s 20 different ways they position size. I gave you one at the top of the show. Do you invest more money into taking on more contracts and risk 25% of your two K, or do you just buy the 500 and say if it goes to zero, I know my max loss.
Sometimes the underlying can move so sharply that the option prices get smashed and there’s not an opportunity for you to get out at where you would have your stop, nevermind the bid ask spread. So I don’t know that there’s an exact science on how to do that other than to go and experiment with what you think is best for you. I have mixed emotions about stuff, but I’ve really learned to kind of culture my own system around it over the years, over long periods of time. There was a time when I used them as a surrogate because I was looking at shares that if I bought as much as I needed from an outright standpoint,

It would tie up a lot of buying power, you see? And so I used the options, not leaps, but I used the options as a surrogate to have the exposure. So you might consider the same thing, but again, if you’re doing it because your account is small, I’d say save your money and contribute to your account from your savings and build up your corpus pros. Typically like the leverage and the loss limiting aspect of it too. Oftentimes you can find something, you can create spreads, you can get very creative, excuse me, with options because you can buy and sell different expirations and different strike prices against, but spread trading is a whole other beast, so I don’t want to get into that and spread trading in options is very different from spread trading in futures kind of cover that in the mastermind because it’s just too much to do here and I don’t feel like doing three hour videos for free, so you can go study that on your own and figure out, but I would definitely look at how do you want to manage the risk?
Do you want to put more money to work and then have a protective stop where you would offset the options trade and retain some of that money? Right? In the example at the top of the show, I talked about investing as much as say 2% of a hundred thousand dollars account. Not looking for that to go to zero I, but risking only one fourth of that position, $500, which would be one half or 1% of the overall account. You’d have to figure out if that’s a good fit for you or would that make you nervous having that much exposure knowing that if the name tanked because of earnings or because of whatever, you might not be able to get out, you might take a thousand dollars hit. Would that be okay? How do you know it’s hopefully hard to back test with options? Or are you better off just buying whatever it is your R and just putting that amount to work and if it goes to zero, it can’t get any worse. That only comes from trial and error. It’s the only way to do it.
I know some options guys who are really good and so I’m just thinking about actually for this thing, maybe have them on as guests and do a deeper dive in getting their insight. I’ll see about doing that. They’re easy enough. I don’t want to put the message out there. Then you have every jackass sending, you’re like, so-and-so is an expert and has these strong opinions and they’d love to help your audience this way and that way, and I’m not interested. That’s why I feel, look at the contact page. It says very clearly, I’m not interested in interviewing people.

It’s not that kind of show. I do have friends, people that I’ve known for 20 years. It’s a different type of guest. They’re not strangers to me. We’re friends. They’re pros. They have a long track record, so they also have my trust if I was affiliate sales or if I had some other type of marketing thing or I did like there’s some podcast, there’s the guy from Australia, I think you got to pay to be on that show. That’s a different business model right here. I fund everything. I do this all largely myself. I pay for some post production. I’m trying to work better on getting thumbnails that actually mean something to you. So it’s evolving, but I largely do it myself and I’d get a lot of help obviously from ganja. So that’s going to evolve. So maybe I’ll have some guests on the way.
I had Brian Shannon on for example. It wasn’t just like a random, Hey, I know you’ve watched your show. I have all your books. I really like your message. Would you please consider? That’s not the kind of outreach that I do. I can call my friends who are all kind of branded brand names. They’re all excellent people, and so I can do that in the option space. Maybe I’ll reach out and I’ll do something along those lines for you, but I’m hesitant to turn this into an interview style show. I’ll rethink it. I’ll have all of December to meditate on that, but it would have to kind of be conjugated with all the spiritual stuff, the emotional intelligence, the traitor psychology. Otherwise, we get more of these people talking about the economy, and you can get a bunch of that for free on tv. I don’t need to do that.
It’s kind of a gigantic snooze to be frank, because no matter what’s going on in the world, no matter what’s going on in the economy, if you’re doing enough research, you should be able to find four or five names a year that meet your criteria, and that’s really all you need. You see? You don’t need to find something every day. You just need to catch what are the biggest moves and be there options can certainly help you do that because of the loss limiting methodology that’s built in, especially if you have debits, right? We’re talking about if you have a debit balance or a net debit balance in the case that you’re doing bull call spreads or bare put spreads, just to keep it super simple. There’s all kinds of broken wind strategies. Don’t want to get into it and go from there. But anyway, those are some things to ponder. We’ll go from there. Maybe I’ll have a guest on whatever. Thanks for being here, and I will see you tomorrow with another episode where we’re going to talk about how do you handle taking profits. It’s an interesting concept. Thanks for being here, folks. I’ll see you tomorrow.

Subscribe to the show  

Click here to  get your free copy of The Inner Voice of Trading audiobook.