The Measure of a Man

Good Morning!

This is the Jumping Cholla (CHOY-uh). The newsletter that turns options market insights into a fun, easy-to-read email that helps you reduce your chances of getting pricked while trading!

Quote of the day:

"The ultimate measure of a man is not where he stands in moments of comfort and convenience, but where he stands at times of challenge and controversy"

Most markets are closed today in honor of Martin Luther King Jr. You have probably learned about him plenty, but I wanted you to think about one of his quotes in the context of trading.

It's really easy to think you're good at trading when you're in a winning trade.

"Should I take some off, banks some profits, then let it run? should I exit now? etc." Those are optimizations of your "profitability" (and for some of you, lack thereof!)

But taking winners doesn't make a trader. Being able to take a loss, like the Jumping Cholla cactus, and continue trading is very difficult.

To become a good investor/trader, first you need to understand the risk side of the equation i.e. what do you do in "times of challenge"

Getting good at trading fundamentally requires challenging yourself.

• You can have biases, but you must be open to rejecting the bias (we call it price discovery for a reason!)

• Changing your mind is good, but doing it too often will lead to failure

• Greed is good, but too much leads to foolishness and profit evaporation (even worse, it can lead to an all-in, all-out mentality)

• You don't want to "miss out", but you also have to act without all the information

Goal: have no fear of entering, managing, and exiting a trade.

Some people have no fear because 1) they're already rich 2) they are full-blown psychopaths.

That's great...for them, but for the rest of us, we have to become so comfortable with managing a trade regardless of the outcome that entering and exiting the market is like crossing the street. 

Sure, you can get hit by a car, but if you look both ways, pick your head up from your phone, etc. it's nothing. And if a car does "come out of nowhere", you know you can spring out of the way (or tactically take the hit for that insurance payout!!)

Remember, challenging times and taking losses aren't failure; it defines the type of person you are.

BANG for Your Buck:

The market nearly pinned 4000 at the close on Friday! I don't usually advocate for playing the butterfly lotto ticket, but c'mon man, Friday was the perfect setup!

Things to look for this week

• Large shorter term option positioning at 4000 level in SPX

  • This creates larger impacts on dealers' (bookies) need to reposition in order to remain market neutral (also known as hedging)

  • Dealers seem to be net long the calls around here, meaning as the market rallies above 4000, they need to sell SPX underlying. As the market sells off below 4000, they need to buy SPX underlying

  • 4000 level should act as temporary oscillation point (this can change with a "re-pricing shock" such as news)

• VIX < 20 & implied volatility via options is less than realized volatility via underlying movement.

  • This has generally marked a short-term topping process, and the expectation of a move lower

  • Moves greater than BANG, in either direction, need a catalyst

• Reports / News

  • Couple of Federal Reserve talking heads spewing rhetoric

  • Manufacturing numbers, homebuilders, building permits, building starts, and jobless claims

  • Bunch of Q4 earnings reports

  • Remember, we don't care about what these numbers say, rather how the market reacts to them.

As always, pursue the process NOT the profits! See you tomorrow!