Tough Trading, CCL Puts Print Money
SPY and TSLA were in focus but it was a bonus trade with CCL puts that cashed in.
What did we learn this week? Trading is hard and requires discipline. That’s what I learned anyway. After banking absolutely huge profits AGAIN with CCL puts (that’s two weeks in a row!) I turned around and broke one of my own rules, giving it all back like it was my first day trading. More on that later.
The chop. The back and forth, reversal after reversal, fake out after fake out. The chop was why the trading was so difficult this week whether you were trading the 1 and 5-minute candles to make 30-minute trades or you were using the daily candles and levels to trade all week, there were few clean setups.
There is always money to be made though and sometimes the setup is right in front of you. Even the trades that seem the most obvious can end up being the best and most profitable.
Sometimes It Really Is What It Seems - CCL Puts
I am a technical trader, meaning I use charts for most of my information and decision making when taking trades. However, it is wise to pay attention to the news and what is going on with specific companies. This is how I got into the CCL puts the past two weeks.
CCL announced they would report earnings before the 9/30/22 market open. They also have massive amounts of debt due to the pandemic, customers facing inflation pressures, fuel prices rising, fears of recession, and a stock price that is arguably too high.
Given all of this information, I was looking for an opportunity to get into puts at good prices. That being said, I wasn’t just blinding buying puts on any green candle. I was focused on the right set up, which we got Thursday as the candles showed hard resistance at 9.83 and the overall market turned sour.
Link to Tweet from @CandlesAndCash
I loaded up on puts and was able to cash in for up to 296% gains Friday after the huge earnings miss and overall report from CCL. Great way to close out the week after a lot of chop and very tough trading overall.
I should mention here that the puts I utilized were the $10 strike puts expiring today, 9/30/22.
Why is this important? It is all about risk management and you’re going to lose money until you understand it. The options in this example expire the same day as the target selling date which means if they are out of the money, meaning they are outside of price you need the stock to be at, they are worthless.
I chose ITM (in-the-money) puts because had earnings been positive and the stock moved up or even had it remained flat, I was not going to lose everything I put into the trade. Had the price gone up to 9.50 I still had $0.50 of intrinsic value in the option because the puts had a $10 strike, meaning they were worth AT LEAST the difference between the strike price and stock price. I would have only lost .10 to .15 per option purchased.
Had the same scenario played out and the puts bought were the 9.50 strike, with the stock at $9.50 the put options are worthless. The same $1300 would have gone to zero instead of $750.
So, $750 was essentially what I was willing to risk and was targeting a drop of 10% for the stock which would have put it near $8.10 and the options a solid double. As we saw today, they did even better than that.
The last sale at $2.58 per contract…
This is a great example of combining the power of using technical analysis with the power of fundamental analysis AND the knowledge of using the right options contract to manage risk. Even for very short-term trades, maybe ESPECIALLY for short-term trades, there is merit to doing the research and ensuring you take high quality trades.
Here’s a look at the CCL trade, a picture does say a thousand words…give or take a few bucks.
SPY Showed Spirit for Halloween, but Too Soon
Monday started with a head fake for SPY, then reversed and sold off all day getting some support above the 362.17 level at the end of the day. This support included a bit of a bounce setting up an entry for calls heading into Tuesday. Great! Not great.
Tuesday started off gapping up (opened higher than the prior day’s close) but then quickly sold off. If you took the trade at the close Monday, you needed to take profits almost immediately Tuesday morning. It’s more likely for traders to have gotten back to even at this point at best.
After a failed attempt at making a new high on Tuesday, taking puts was the play but again strong support shows up at 362.17. And again, a bounce setting up an entry for buying calls near the close. After what happened the night before, how many traders are fired up about trying again? It takes experience. Let’s talk about that.
Trade like a Market Maker NOT a Retail Trader
After going long Monday and getting washed out immediately to start the day Tuesday, most retail traders have the mindset of staying in puts through the following day for potentially big gains. This would be ignoring the support level drawn and the fact that the candles are respecting this level.
At the very least, scaling out should be considered. This means selling pieces of your position, taking profits in your puts as the candles sold off throughout the day. This takes risk off of the table.
Yes, it is true this strategy will reduce your overall gains IF the run continues. That is a big “if” and more importantly could be a costly if. Take risk off when you’re in a winning trade. This is what professional traders do and why they remain traders over the long term. Here’s some math to show you why this is a smart move.
This example highlights the fact that once you’ve taken 20% profit on three of the five call option contracts, you’re in a position to take a larger decline on the remaining two options before hitting a break-even point overall. This reduces not only risk but also stress in trading and is highly recommended!
So, back to the chart and the action at Tuesday’s close. The answer to “calls again?” is a confident YES when the candles are showing some strength after selling off all day. If you were experienced enough to understand this, Wednesday was a great day.
You could have taken profits after the first big shove to the upside Wednesday and rode the rest of the day out stress free in your remaining calls. This is why I emphasize and truly believe in the above example regarding scaling. Ok, I think that is enough on SPY.
TSLA Lower Lows and Headfirst Towards a Gap
Wednesday gave us all hope with a close above what has been incredibly tough resistance at 286.67 but the bears came out Thursday with their big sticks and beat the snot out of the stock to the tune of a 14-point single day drop.
Give the Tesla crowd some credit as the push Friday was impressive at the start. This cost me a pretty penny. I got in too early and sized too big. Why? Honestly, I think I was excited about the CCL big win.
Remember this, you’re going to take losses. If you want to trade you have to accept this. You hear about not taking too large of a trade? The reason is, if you’re wrong your losses are bigger than the wins you stacked all week.
Couple taking a less than quality, aggressive entry with too large of sizing and the result is more often than not a heavy loss. And there is always another trade right around the corner so there is no point in going crazy on any one trade like this.
The reversal at 274.80 proved yet again the importance of identifying trading levels and following your plan. The candles sold off hard but it was AFTER I cut my losses.
Lesson learned, after a big win take a minute to reiterate trading rules and be extra certain to stick to them with a heightened focus on discipline. Don’t give back your profits!
Heading into next week there is very little for the TSLA candles to get excited about. Rates continue to rise and TSLA has a high valuation while the stock made a lower low this week relative to August. Oh, and the 20-day SMA (simple moving average) crossed back below the 50-day SMA which is a short-term bearish indicator.
I have very little faith in the 260.80 support level and see a gap to fill down to 250.66 being more likely if the selling continues…which I see no reason why it wouldn’t as RSI (relative strength index, measuring relative performance) has room to move lower. That being said, typically gap fills are followed by a bounce.
I’ll be preparing for next week’s trading, identifying which stocks have the right set up for trades with a higher probability of success, and posting this weekend. Just like I do every weekend. Without the discipline, there are no profits.
If you enjoy the content, please consider sharing and subscribing to the Newsletter and follow @tradernatehere on Twitter.