3 Practices That Form the Bedrock of My Trading Discipline

3 Practices That Form the Bedrock of My Trading Discipline

Posted On May 25, 2021 2:38 pm

To the point of others’ annoyance, I often repeat the three simple steps to my trading discipline: 1)Identify an attractive entry point 2) Define your risk, and 3) Have a reasonable profit target. 

Some may say the above practices are mere generalizations with significant overlap and therefore don’t help in becoming a profitable trader on a consistent basis.  

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To you, good Sir or Madame, I say you’re missing the point and probably aren’t applying each (or any) of these criteria prior to establishing a trade. 

Due to the nature of options, each of these three items may have wiggle room or move as a function of price and time. Options360 Concierge Trading Service members have come to learn that they’re invaluable for long-term profitability.  They basically supply a map of the trade so that there are no hidden traps, which result in outsized losses or create unrealistic profit expectations — sorry to all those hoping they’d retire on their DOGE Coin holding after Musk’s SNL appearance last week. 

On yesterday’s weekly Monday Option Academy Call, I introduced an Options360 trade I made earlier in the day;  a Boeing (BA) calendar spread, stating I expected a 50% profit by the week’s end.  Yes, 58% in 4 days not a guarantee but as a very reasonable expectation. A member rightfully asked how to arrive at the expectation for 58% in such a short time by employing a seemingly conservative options strategy.  

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Cutting to the chase, the position I set up in BA yesterday was based on the chart, and some fundamentals, as well as option pricing. 

The reader’s digest version of the Alert reads like this: 

“The chart shows a break above resistance around the $230 level which also snaps the downtrend… This stock looks ready for take-off.”

boeing ba stock chart\

The trade recommendation was: 

Let’s start with a fairly conservative call calendar and then look to open the upside exposure within the next week.


-Buy to Open 1 contract BA June (6/18) 240 Call

-Sell to Open 1 contract BA May (5/28) 240 Call

For a Net Debit $4.30 (+/-0.15)

ba snapshot analysis

As you can see one later, the stock moved up over $5 and the position is worth $5.10, or about 15%, in one day.  

The best part is that I can now expect the spread value to expand by another $2.10, or to around $7.20 by the end of the week, which would deliver a 58% gain.   The big caveat for this is BA stays above $240 by Friday. 

How do I arrive at this? 

As the option chain below indicates, this week’s 240 call that I sold short, still has some $2.30 of time premium or extrinsic value.  As the week moves along, theta (or time decay) will take its toll, right now theta’s $0.48 a day.  Meanwhile, the June (6/18) call I own has a theta of just $0.17 a day. 

ba theta chart

I’d be perfectly happy closing the position for a 50% plus gain by Friday.  But, what’s really nice about this position is that if BA shares drop back towards the $235 support, I still have the option (pun intended) to roll the short call out to June 4 expiration as a means of collecting more premium and further reducing cost basis. 

To circle back to my first of my three basic rules, what is my risk?  In this case, the initial cost would only be incurred if BA dropped towards zero by the end of the week. I don’t think that’ll happen. But, by using a proper position allocation portfolio, you could withstand such a black swan disaster. 

To repeat, find a good entry point, define your risk, and have realistic profit expectations. 

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About author

Steve Smith

Steve Smith have been involved in all facets of the investment industry in a variety of roles ranging from speculator, educator, manager and advisor. This has taken him from the trading floors of Chicago to hedge funds on Wall Street to the world online. From 1987 to 1996, he served as a market maker at the Chicago Board of Options Exchange (CBOE) and Chicago Board of Trade (CBOT). From 1997 to 2007, he was a Senior Columnist and Managing Editor for TheStreet.com, handling their Option Alert and Short Report newsletters. The Option Alert was awarded the MIN “best business newsletter” in 2006. From 2009 to 2013, Smith was a Senior Columnist and Managing Editor for Minyanville’s OptionSmith newsletter, as well as a Risk Manager Consultant for New Vernon Capital LLC. Smith acted as an advisor to build models and option strategies to reduce portfolio exposure and enhance returns for the four main funds. Since 2015, he has worked for Adam Mesh Trading Group. There, he has managed Options360 and Earning 360, been co-leader of Option Academy, and contributed to The Option Specialist website.