Investors got hit with a bucket full of cold water.
The week started with broad markets rallying after opening lower than Friday’s previous close, which is as a gap lower.
On Tuesday, the rally continued fueled by an emergency rate cut by the Federal Reserve.
Many investors assumed this was the v bottom pattern and was safe to jump back in.
Investors continue the trend of taking risk-off ahead of the weekend because of the coronavirus.
The fear gauge for the S&P 500, known as the CBOE Market Volatility Index (VIX), at 46, which continues to be elevated above our key level of 15.
As volatility increases, so does the speed of the market.
That means we’re going to see markets whipsaw back and forth 3x the size than we did three weeks ago.
When markets are buzzing, it creates opportunities for repeatable quicks profits, but it’s easy to get on the wrong side and panic.
Imagine you’re a hitter and a new pitcher came into the game. A good hitter will lay off the first few pitches to get a feel for how the ball is coming out of the pitcher’s hand.
It’s what we did this week, but It’s important we continue to be engaged.
In this type of environment, I’ve had success with playing a little loose to avoid getting whipsawed.
I do that by scaling back the position size so I feel comfortable and avoid making a poor decision.
This will help us save our emotional capital because it’s what will hold us back from taking opportunities.
Since options we trade have a built-in stop loss, it’s best to risk the whole amount and let things play out.
At Hot Money Trader, I promise to navigate you through any type of market and come out on top.
Patience, persistence, and consistency are key.
- On Monday, sell-to-close Twitter, Inc. (NYSE: TWTR) Mar. 6, 2020, $36.50 call (TWTR200306C00036000) at the market.
We didn’t open a new trade this week as we let things shake out a bit before putting on any new risk.
Right now, our open positions are:
- Vistra Energy Corp. (NYSE: VST) April 17, 2020, $25 call (VST200417C00025000)
- Glu Mobile Inc. (NASDAQ: GLUU) June 19, 2020, $7 call (GLUU200619C00007000)
- Twitter, Inc. (NYSE: TWTR) Mar. 6, 2020, $36.50 call
Date: Feb. 25, 2020
Outcome: 36% loss.
Notes: Our Hot Money signal was correct that shares would spike higher. On that spike higher our calls were in the green. With the market rally on Monday, I thought we could closeout higher in the afternoon session. Once I saw shares turn lower, I sent out the alert to exit. Unfortunately, we didn’t get that continuation and let a winner turn into a lower. This loss is on me, but you did the right thing exiting the position once that happened.
Your Questions, Answered!
It seems the overall market has not been kind to our current open trades. Does this strategy work well in current market conditions (more sideways and volatile)?
Yes, it does. That’s the beauty of Hot Money! In my 15-plus years of experience — following the Hot Money makes money whether the market is going up, down or sideways. This sell-off has put us behind on our current positions, but we have a lot of time for things to play out. Just two weeks ago, the broad markets were at all-time highs.
What are your thoughts on selling a call to hedge against loss on recent trades? I'm getting a little nervous, is there any negative on it?
- Tim K.
There're more benefits than negatives. If you sold a higher strike call against a current position, you'd create a spread. The perceived negatives are that you limit your upside and it's an extra leg.
In a market environment with volatility elevated, it is ideal to sell an option because the cost of those contacts is so elevated. Typically, a spread is opened when the position is first entered. Selling a call against a position after it's down will not hedge against a loss. It would lower your cost basis.
Despite this pull-back, our accounts are still higher for 2020 with 5 winners and 4 losses.
As always, keep sending your questions and feedback to [email protected]
My team and I will have a new trade for you on Monday morning.
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