The Summer Grind on Patience and New All-Time Highs

August 19, 2020

As I expected, we’ve continued to drift higher on this August options expiration week.

The S&P 500 finally inched into uncharted territory.

But then prices pulled back after comments from the FOMC.

The slow summer grind has brought the S&P 500 above pre-pandemic levels.

When the Nasdaq 100 rebounded, we saw money flow into the breakout.

It’s surprising not to see a similar thrust higher into these new all-time highs.

Unfortunately, this has been a day traders market with specific stocks in focus.

In the last several days, Tesla shares have been the soup de jure.

But Robinhooders and prop trading desks were finally able to push Apple’s market cap to 2 trillion.

The fear gauge for the S&P 500, known as the CBOE Market Volatility Index (VIX) is holding at 22.

This means that volatility continues to be elevated.

That means we can see these quick moves lower and then snap back higher.

Portfolio Update

On Monday, we added our newest position:

  • Buy-To-Open the Intel Corp. (NASDAQ: INTC) Aug 21, 2020, $50.50 call (INTC200821C00050500) up to $0.19 per contract or better, for the day

Right now, we’re holding:

  • Nordic Amer Tankers (NYSE: NAT) Oct. 16, 2020, $5 call (NAT201016C00005000)
  • China Mobile LTD ADR (NYSE: CHL) Aug. 21, 2020, $40 call (CHL200821C00040000)
  • Box Inc. (NYSE: BOX) Aug. 21, 2020, $20 call (BOX200821C00020000)
  • Cameco Corp. (NYSE: CCJ) Sept. 18, 2020, $12 call (CCJ200918C00012000)
  • Snap Inc. COM (NYSE: SNAP) Aug 28, 2020, $23.50 call (SNAP200828C00023500)
  • Intel Corp. (NASDAQ: INTC) Aug 21, 2020, $50.50 call (INTC200821C00050500)

This pinball action in the market is frustrating because we just want to lock in profits.

Despite our big hot-streak from May into July…

We’re going to have to stomach a few losers on Friday that have fallen short.

While this is something I don’t like to see, it’s the not-fun part of trading that we deal with.

The good news is that I know from experience, that the next trade will put you back on the winning column.

Let’s keep focused and let the market come to us.

And I’ll be keeping you updated every step of the way.

Your Questions, Answered!

The mailbag is full, so let’s get to your most pressing questions.

“Our August options are expiring this week — can you explain what would happen if we held them past expiration? Jeffery H.”

In the last weeks, we've been talking about the difference between in-the-money and out-of-the-money options.

A lot of our trades start out-of-the-money and can quickly become in-the-money.

In that event, we've already closed our position for a big gain.

Here’s why…

If you were to hold a position until expiration, one of two things can happen.

The determining factor is whether the underlying stock is trading above or below our specified strike price at the time of expiration.

If you recall, when the stock is trading higher than the strike price, it’s considered “in-the-money” (or ITM).

When an option expires ITM, it will automatically be exercised by your broker.

For each contract you hold, your broker will automatically purchase 100 shares of the company at the option’s strike price.

Owning shares of stock isn’t part of our trading strategy.

Stocks tie up large sums of money and are slow-moving, which is the exact opposite of what we want.

Short-term options allow us to capture explosive stock movements without the hassle of owning shares.

So, I will always recommend selling positions with any value left on them a week before they expire.

Now let’s look at the other possibility at the time of expiration.

If an option expires “out-of-the-money” (OTM), that means the stock is trading lower than our strike price.

In this case, the option will expire and will be removed automatically from your trading account, so there’s no further action required on your part.

If our out-of-the-money has a good amount of premium to salvage a week before its expiration, I will most likely exit or roll it forward for more time.

But most of the time, we are making very small limited risk bets that have a huge upside.

That being said…

We still have a few August options still left on the table. As of right now, none of our expiring August options have any value to salvage.

We still have a few days, but it's most likely they will expire worthlessly.

But I'll keep you updated.

Here’s the next question in the queue:

“Our recent positions are in the red and has me a little uneasy. If they all lose, that would be a big hit. Can I use an alternative option trading strategy to manage the risk? Kevin C.”

I know exactly that feeling you’re having.

Losing trades can be frustrating and deflating.

It's easy to let it get you down and took me time to learn the trick to keep my mind at ease and sleep at night.

I can’t blame you for wanting the extra protection.

In investing and trading we often bounce between percentages and dollars.

But dollars are the only thing the bank accepts and that our minds focus on.

Now I recommend no more than 2% per position.

But everyone's risk tolerance, account size, and reaction to losses are different.

It sounds like your position size is too big for your comfort level.

So, the first thing you can do is to reduce your position size.

Now, you can also look at using a stop loss.

But 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.

That happened to us in June with Tyson Food calls.

We exited, but the next day those calls exploded higher for a triple-digit gain.

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.

Remember, we must play to win, not play to not lose.

That’s it for me today, be on the lookout for our next profit alert!

If you want your questions answered next week, make sure you email it in today at [email protected]

Talk with you on Friday.


Joshua M. Belanger

Joshua M. Belanger
Joshua Belanger is founder of CounterVest and the editor of Hot Money Trader. He has been providing ordinary investors blockbuster returns since 2008. In 2018, the average return of Hot Money Trader beat the markets by over 15%