Seeing The Forest Through The Trees In Trading

Seeing The Forest Through The Trees In Trading

Posted On September 1, 2022 3:12 pm

The other day on Twitter someone posed the question whether trading/investing should be fun? I thought it was a sneakily subtle question.

First of all, I love trading. When I first became a member of the Chicago Board of Options Exchange I was in my 20s and I never wanted to leave the trading pit. It was a big boisterous party where you could make (or lose) more money in a day than most of my friends with office jobs made in a month.

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As I aged, got married, had kids, and trading moved off the floor, it became much more of a serious business. I needed to figure out a new style that would produce a consistent income, which also afforded me time, not just to spend with my family, but the freedom to pursue other interests.

It’s an approach I’ve been sharing with Options360 members for over seven years during which we’ve averaged 56% annual return over that period. For most members it’s been a great way to increase their income without being tied to a desk.

The key to the Options360 success is what I call taking an “unconstrained approach.” This means I will keep a flexible frame of mind, mixing both bullish and bearish positions and apply a variety of strategies that I think gives us the best probability of realizing a profit, based on market conditions.

This is where I come back to the question as to whether trading is fun. It may seem weird, but I can still get caught up in watching every tick, especially when we have volatile markets as we do now, and find it fun.

But I always remind myself not to lose sight of the forest while bushwhacking day trades through the trees. This has been crucial in managing risk over the past few weeks. Since mid-July, there has been a raging debate as to whether we had put in bottom or the recent run up was a bear market rally.

Even as the rally gained momentum and at 16% off the June lows, if it did in fact turn out to be a bear market rally, it would be one of the largest ever. However, during this rally one had to keep an eye on the big picture.

A quick glance with a longer term view of SPDR S&P 500 (SPY) would show the major downtrend line was still in place and resistance at the $430 level was perfectly aligned with the 200 day moving average (red line). Among the bullish trees the bear was still lurking in the forest.

At that point, I decided a bearish stance offered a more attractive risk/reward. I took some defensive action in bullish positions Options360 had in DataDog (DDOG) and Advanced Micro Devices (AMD) by rolling down short calls to vastly reduce our cost basis; those two will probably end up with losses of only around $100 or just 25% of the initial risk.

Those losses were more than made up for by the bearish trades in Nasdaq 100 (QQQ) and Roku (ROKU) helping to push Options360 up by 23.7% for the year to date.

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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.