TickerTank

Losing is part of trading.  You can’t win them all unfortunately.  Taking a loss is never fun, but sometimes it is exactly what you need to get your mind back in the game. 

A losing position(s) can be quite a weight on your shoulders.  It’s always in the back of your mind when entering new positions. “I am losing my ass in XYZ. Do I really want to get in this new position and potentially lose more money?” or “Damn, this XYZ position just keeps getting worse and worse.  I don’t even want to trade anymore.” 

It happens to the best of us.  If this has happened to you and you felt like you were alone…you weren’t. 

This is precisely why taking a loss can be a win.  It frees you from the losing position that was bringing you down. It gives you a new psychological lease on trading, and allows you to be more comfortable and often times more confident about entering new positions. 

Don’t let your losers bring you down.  Establish mental stops and manually exit the position if the mental stop is reached.  If the position is bringing you down before it reaches the mental stop, get rid of it!  A negative psychological impact is more harmful than hanging on to a mental price point is beneficial.

Lastly, if a stock has moved through your mental stop price and for some reason you have just let it go…take action!  This stock is mentally defeating you and is poison to your trading psychology…close your eyes and get rid of that position!  Don’t think about how much you lost, just take a deep breath and bathe in the glory of being free from that pest of a position.  :)

The worst thing a Trader can do is expect immediate results after entering a position.  When trading Options in a primarily high probability of success manner, one must be patient. 

Remember, the beauty of most options strategies is the fact that your risk is defined.  If you risk only what you can afford to lose, you give yourself the ability to afford to wait.  This is an exceptional luxury, as time (duration) is a valuable asset when trading options.

Don’t expect your positions to be profitable the day after you enter.

As long as your position remains in a reasonable probability of being profitable, give it a chance.

Speaking of Calendar Spreads, USO presents a decent case.  40 has acted as a magnet for the ETF as of late, and has proven to be a level of interest in the past.

Buying the Apr/Jun 40 Put Calendar could be worthwhile. 

Our only complaint is the lack of volatility differential in Apr vs Jun.  Apr implied volatility is 30% and Jun is 31%. We would prefer it the other way around, and a bit of a wider differential. 

In trading you can’t always get what you want, so this trade is still worthy of consideration. That said, the point we intended to make with this article is that the price action in the USO chart is what we look for in order to make an assumption that a Calendar Spread may compliment.

With volatility low, it’s a good time to consider buying Calendar Spreads.  Calendar spreads allow you to profit off a range, where max profit resides at the strike price you choose. They are typically low capital intensive trade strategies.

There are a two key elements to these spreads that are not necessarily intuitive but seem obvious once you know them. 

Choose Put or Call based on where your chosen strike is in relation to current price.

Let’s say you’re buying a 95 Calendar on a stock trading at 97. You would buy the Put Calendar since the 95 strike is below the current price.

Look for higher volatility in front month vs back month. 

Ifyou’re buying the Apr/Jun Calendar for example, look for higher implied volatility in Apr options since it’s the month you will be selling short.  This results in the ability to buy the spread at a cheaper price. 

You may see us use the term “mental stop” when we talk about potential trades in futures or stocks that don’t have liquid options markets. 

What do we mean by mental stop?  It indicates a price point at which we fully intend to exit any given trade.

How do you set a mental stop? Use your broker software to set an alert at a price point you consider your mental stop.  If the alert goes off, manually exit the position immediately.

Doesn’t that take away the automation and bring human emotion back into play?  Yes, but trading is about discipline and this is a great way to train yourself to be a mechanical trader manually rather than relying on an automated order. Don’t second guess yourself. If the alert goes off, exit the trade.

Why not just use automated stops? The market is efficient, but manipulation still exists. We have been trading for a long time and have learned a very simple lesson about stops…they always hit. We have experienced much lower hit rates with mental stops vs hard stops. We can’t argue with results, so we keep things stop purely mental.

Is there anything else I should know about stops? Yes, regardless if you’re using a mental stop or a hard stop, you should understand that the market knows where the majority of the obvious stops will be placed.  Make sure you give your stop some breathing room in conjunction with the obvious level. That will help decrease your hit rate, just be sure the risk reward still makes sense.