Being BetterDate Published: 2017-02-08
Written by Ophir Gottlieb
Being Better is Possible
Being a better trader, a more profitable one, is possible. If you're methodical, and patient there's a good chance you will find opportunities that others will not.
For those that are bullish on Facebook Inc, a reasonable approach would be to buy the at the money (50 delta) calls. Here's how that trade has done over the last two-years, using weekly options:
The set-up takes two mouse clicks:
And then the results:
Given the reality that Facebook Inc (NASDAQ:FB) stock is up 80% in the last two-years, this long call strategy, which is certainly riskier than just owning stock, has failed. This is where most traders stop -- they either employed a strategy with a ton of risk for far worse returns than the stock and simply turned away from the trade.
If we take that exact same strategy but now put a stop loss on the long calls at 70%, then all of a sudden a terrible approach turns into a great one.
The set up takes the click of one button:
And the results:
Yes -- taking less risk by limiting our loss to 70% in any given week has turned a 28% return into a 145% return. With a Facebook Inc stock rise of 80%, we have literally gone from an obviously bad strategy to an obviously good one.
But, now we have to look at the shorter-term. Let's examine this approach, side-by-side, for the last six-months in Facebook Inc. The left side shows the results of buying weekly calls with no limit, and the right hand side shows the results if a 70% stop loss was employed:
In the last six-months Facebook Inc stock is up 7%. The long calls were down 1%, but the long calls with a stop loss were up 23%, more than tripling the stock.
Now we can see that while 99% of traders likely did the poorer version of this trade or simply skipped it, they were wrong and you can be right. This is why:
We've just seen an explicit demonstration of the fact that there's a lot less 'luck' and a lot more planning in successful option trading than many people realize. Here is a quick 3-minute demonstration video that will change your option trading life forever: Tap here to see the demo movie
The author has no position in Facebook Inc (NASDAQ:FB) as of this writing.
Thanks for reading, friends.
Trading futures and options involves the risk of loss. Please consider carefully whether futures or options are appropriate to your financial situation. Only risk capital should be used when trading futures or options. Investors could lose more than their initial investment.
Past results are not necessarily indicative of future results. The risk of loss in trading can be substantial, carefully consider the inherent risks of such an investment in light of your financial condition.