After a little shakeout last week, stocks resumed its path higher.
Today’s buying was fueled by the change of power earlier, which will result in more spending that benefits Wall Street.
Now the focus will shift towards earnings season as things start to heat up.
Last night, Netflix beat expectations as shares soared through the options markets priced in move of $34.
This is a massive move that the options market got wrong and some market makers are feeling sick to their stomach.
That surprise from Netflix fueled the MAGA TF stock names higher, which have been lagging in recent weeks.
Now, The CBOE Volatility Index (VIX), aka the “fear” index, is still above our key 15 levels, trading at 21 — Despite hitting new all-time highs today, we still need to be cautious for a possible shakeout.
Big stock market moves like this can be frustrating when our positions don’t participate.
Even more unfortunate news is that it looks like we will have two more trades that will expire worthless this Friday.
Unfortunately, wins and losses come in cycles.
We’ll focus on the signals and ignore the noise.
Now let’s talk shop.
Markets were closed on Monday.
Buy-To-Open the Schlumberger Limited (NYSE: SLB) February 5, 2021, $26.50 call (SLB210205C00026500) up to $0.85 per contract or better, for the day.
Right now, we’re holding:
Let’s keep focused and let the market come to us.
And I’ll be keeping you updated every step of the way.
The mailbag is full, so let’s get to your most pressing questions.
What do you think about setting a stop loss (let’s say around 40-50%, for example) on your trade recommendations? - Phil C.
It comes down to risk tolerance and account size.
When entering a trade, we always want to know what's the most we can lose.
The best stop loss is knowing your full loss before putting on a position.
That’s what I mean when I say every trade is won before it’s ever put on.
We also want to know when to exit a winning trade for gains.
But we want to have a plan for the possible downside, too.
When using options, there’s a lot of choices with strikes and expirations.
That is why it’s essential to have the same approach for every trade.
Everyone's risk tolerance, account size, and reaction to losses are different.
With today’s volatility and getting whipped around at times, I can’t blame you for wanting the extra protection.
This could mean using a stop loss, but I often say reduce your position size.
There are some things worth considering before you use a stop loss when using options contracts.
Our shorter-term option contracts do oscillate quite a bit.
But they have limited downside risk — and unlimited upside potential.
Even if one of our positions is in the red by a fair amount, there’s often plenty of time for that to turn around.
If you use a stop loss, you may end up closing out too soon for a loss on a trade that has plenty of time to turn into a win.
This will create even more frustration, and not only does it drain your account, but also your emotional capital.
Often a trade doesn’t go our direction right away.
And even if a trade doesn’t go our way, you’re out less money than if you were to own shares.
That’s why you won’t see me offer any official stop loss recommendations.
Options allow us more massive profit opportunities with greater flexibility — and much higher potential gains than buying stocks outright.
And they’ve fared well for us, even in today’s conditions.
Every investors’ risk tolerance is different, and you must decide what’s best for you.
If you prefer setting a stop loss on these trades, you can.
Keep in mind your results will differ from what I’m tracking.
Now, I can’t give out personalized financial advice, so I can’t tell you exactly where to set your stop-loss if you decide to do so.
But, from my back-testing results, I can provide the optimal stop-loss amount.
My back-testing results measured against millions of situations found that a 60% stop-loss was the most optimal.
That means if you pay $1.00 per contract, then the stop-loss would be at $0.40 per contract.
If you plan on using stop losses, your results will differ from what we’re tracking.
That’s it for me today, be on the lookout for our next profit alert!
Joshua M. Belanger