Profits Only, Please!!!

I have spent the last 2 years trying to figure this day trading with options thing out. I hit an ultimate low this past Tuesday and felt lost. With options, there are opportunities to make money on upward and downward movement. The 2 biggest problems is timing and expectation. You can be a little off with timing and may still be alright if your anticipation of the movement is correct.

Timing

How long will a move last? When will there be a change in direction? The key is going in direction of strength. There are upward and downward movements all day everyday. The overall market is inclined to move upward, but not every stock is going to move in that direction at the same time. Therefore it is best to look for the right times to buy calls and do not buy puts until there is a fundamental change. Many stocks look like they are changing direction when they are just gearing up to make a stronger move in the same direction. JP Morgan is a perfect example of this over the past month.

There are times of a bear market or recession. During that time, call options will not make sense and you should only buy put options. This occurs when there is a fundamental change in the market such as bank failure, rise in interest rates, decline in earnings, disaster, war...

Expectations

Most of the time, it is not realistic to expect a higher high. Many times a new high is not that much higher than the previous high. Many times a stock is approaching a new high but fails to reach it. I could keep going because there are so many reasons why a stock might change direction. There are times when a new trading range is established and that is when the new high is not only past, but blown away. This happened this year with Disney, Microsoft, Walmart and Home Depot.

How do you get timing and expectation right?

As I have mentioned many times, you do not want to buy options in the morning when the market opens. It is important to wait and recognize what direction the market is going and what direction the stocks you are watching are going. There are really 2 types of movement: Bounce and Breakout.

Bounce

Stocks will bounce off of a resistance level either on the upside to signal a move downward or on the downside to signal a move upward. Some days, mainly on Tuesday's, there is a V movement. It might happen early or midday, but either way is the harder one to trade because it doesn't double test the spot it moved off like a typical day. Sometimes this bounce doesn't happen until late in the day and sets you up for the remainder of the week. Boeing is great for having limited downward movement and making a clear bottom before moving upwards for most of the day.

Breakout

A stock breaks out when it has a sharp movement followed by additional green candles in the same direction. When there is a breakout, it is important to wait for a movement in the opposite direction before trading in the direction the stock wants to go. You should expect 2 more sharp upward movement with minor pullbacks after you enter.

Whether you are trading calls or puts, on stocks or ETFs, it is important to get the direction correct. One stock is independent of others and just because one goes up in a sector, doesn't mean they all will. The opposite is true about downward movement.

Do not get greedy!!!

Take your profits, but don't be alarmed if there is a retest when you see your option prices go back to where you bought it. If you picked the wrong direction, get out quickly to trade another day. Do not trade too many different contracts that make it difficult to keep tabs on and end of losing more money. Practice the KISS method. Keep It Super Simple. It's OK to go small until you are comfortable with your decisions. Small wins are always better than a loss. Huge losses will have you finding another career quickly.

Let Do This!!!