By: Steve Smith
We’ve been talking about meme stocks a lot, on and off, for the last few months.
Let’s face it, the topic is dominating financial headlines and you can’t be a financial journalist without talking about it.
That said – and I know I sound like a broken record about this sometimes – you can’t forget to always protect yourself in these trades.
Remember Buffet’s 2 rules of investing…
- Don’t lose money, and
- Don’t forget rule number 1
That’s just a cute way of saying not to take undue risk. Everyone, even the Oracle of Omaha, loses money.
So when I told you earlier this week how I am structuring some trades on the meme stocks, I was very careful to point out that even my speculations are hedged to ensure any losses are limited.
I learned my lesson about this early on in 1989.
I was a young fresh-faced trader who had been on the floor of the CBOE for a week or two when I saw an incredible trade sitting in front of my eyes.
I had scrimped and saved $100K to start trading with, and I was about to put some of it to work.
United Airlines (UAL) was set to merge with Northwestern for around $200 per share. (I don’t recall the exact price and it’s not critical to the story.)
UAL had been trading for around $190 per share for over a month. I noticed that 150 puts, set to expire the next day, were selling for $1 per share, $100 per contract.
I couldn’t believe my luck, this was going to be a cakewalk…
I sold 10 contacts and collected $1000 in premium. All I had to do was sit back and wait until close the next day and I made the easiest $1000 of my lift.
Before market close the next day the merger was called off and UAL plummeted to $100. Just like that, I lost $50,000 on a naked “sure thing” bet.
I learned right then and there NEVER, no matter how good it seems, NEVER put on a naked position.
Thankfully I was young and had time to recoup the loss…
But that’s where I learned the difference between gambling and trading.
Remember, Never lose money. And when in doubt, remember to never lose money!
To Your Success,
PS. Options360 subscribers benefit from my painful lesson all those years ago. While not every trade is a winner, keeping the risk/reward in line has helped us smash the S&P every year since we launched in 2015. You can grab your $19 trial subscription here.
PPS. Just in case it wasn’t clear, the best way to realize profits in your trading is to NOT lose money…or more specifically don’t take undue risk.