You’ve probably seen headlines similar to the ‘Coronavirus Trade’ or ‘These Companies Stand To Make Big Profits From The Pandemic.’
I continue to believe Netflix will do well in this market.
But do you know what?
Right now, there are plenty of publicly listed companies that may not exist next year. Everything from theme parks to airlines are on the chopping block.
That means the way you look at companies, stocks, and trading, in general, has to change.
I know it has for me, and as you’ll learn from this breakdown, it made me a better trader.
Everything starts at the highest level you can go that makes sense. You’re asking two critical questions – what is the problem, and what does it affect?
When you look at what’s out there today, we’ve got two main storylines: the pandemic and the oversupply of oil. Both happen to be interrelated. Oil’s oversupply comes from both a lack of demand caused by the pandemic and overproduction by key players.
Think about these two problems at a high level and consider what the immediate results have been.
We know that travel has all but vanished. Most luxury experience spending has fallen to a standstill, with the world hunkered down in their homes. They’re only avenues are the internet, television, and the occasional trip to the store.
Once you’ve got the overriding problem thesis developed, it’s time to start thinking about the main players.
We know that Royal Caribbean (RCL), Delta Airlines (DAL), and pretty much any other travel and leisure company are on the chopping block. Even businesses that rely on foot traffic such as The Cheesecake Factory (CAKE) are in serious trouble.
Of these stocks, think about the following:
You don’t just want to think about the companies that are getting hurt by the pandemic. There’s plenty that stands to gain. Grocery stores like Kroger (KR) and Costco (COST) have been slammed by folks shopping for essentials. Pharmacies like CVS (CVS) continue to operate at close to normal capacity.
There are also companies like Zoom Communications (ZM) and TeleDoc (TDOC) that are getting huge boosts from individuals and companies as remote workers use their products.
Once you’ve got the primary companies identified, it’s time to think about who supplies them. If Delta isn’t flying, then Boeing isn’t going to be making aircraft. Without restaurants open, Sysco (SSY) isn’t doing a whole lot of food deliveries. Factories being shut down means transportation companies like CSX and JB Hunt (JBHT) don’t have as much work.
The real danger comes to the suppliers that only have a few large clients. This is extremely common with highly specialized equipment such as automotive suppliers.
However, think about all the retailers with closed doors. They aren’t working, which means they’ll be lucky to pay their rent. Real estate companies like Tangiers will likely face massive shortfalls of cash in the coming months.
On the flip side, with everyone at home, you can bet that streaming and data service providers have a lot to work with. Internet service providers and communication companies like AT&T (T) will be plenty busy trying to keep up with overloaded networks.
The last level of analysis comes from ancillary services. These are the guys you don’t really think about but nonetheless suffer from lower economic activity.
IT infrastructure plays like IBM or Cisco grind to a halt as they wait on their big business customers to restart. True, they don’t fall apart as a cruise line would. However, they aren’t about to reach record highs again anytime soon.
Now that you’ve completed your analysis of the economic landscape, it’s time to start pulling together some trade ideas. One great way to do that is with Weekly Money Multiplier.
In my free upcoming webinar, I explain how I analyze and execute my trades in any market environment. Every day I scour the charts, looking for the best setups to bring to my traders. With the live teachings, I get a chance to discuss not only how I’m navigating these markets, but adjusting my strategy.
With most of us stuck at home, you don’t have an excuse not to attend my free webinar.
We’ve all been there before.
I’m talking about attaching reasons to why we lose trades.
You brush off the first loss as the cost of doing business.
The second loss is a statistical anomaly.
By the third loss, you tweak your strategy and are coming up with a radical new gameplan.
Somewhere around number ten, you question your sanity.
How do you snap out of an awful slump?
I do the following – stop trading, assess the situation, go back to basics, start small, and work with a partner.
In a moment I’ll show you exactly how this all works. And more importantly how it sets me up for future success.
I’m not going to belabor this point as it should be obvious. Humans can multi-task; we’re just not good at it. You’ll have a tough time focusing on how to correct your problems if you can’t stop losing.
Easiest way to stop losing? Stop Trading!
If you haven’t started one, don’t worry. Today is the day to change that. Start by pulling up your trade history and writing down as many as you can remember. Don’t be selective, just work with what you’ve got.
Trade journals should include most of the following in one way or another:
The free form notes play a critical role in your trade review. Use these boxes to write down anything that entered your mind during the trade, including your emotions.
Here’s an example of the one I created using Google Docs.
Once you have some data to work with, here are some questions you want to try to answer.
Try to do an honesty assessment of yourself in these areas. If you can’t, switch to a simulated account for the time being until you collect enough data. That way you can trade without pain.
Pro-Tip: One of the most common mistakes traders of any ilk make is ignoring their stops. They justify a reason to go past it. Do whatever it takes to make sure this isn’t you!
I know from past experience it can be tough to remain objective. One of the hardest parts about trading is most of it is done by yourself. You’re stuck figuring out what to do, how to fix it, all without any clear cut guidance.
That’s why I recommend a mentor. I’ve had several over my career, most notably Jason Bond. A great mentor doesn’t force you into their way of trading. They help you learn to develop your own strategies and methods, supporting you along the way.
This is a large part of why I started Weekly Money Multiplier and LottoX. I found a relatively simple way to make money in the markets that I wanted to pass along to my members. From the daily email updates to the live chats, I get a chance to interact with folks and see the light in their eyes when they finally get it.
Do yourself a favor. Check out my free upcoming webinar where I describe the journey I took to become the trader I am today. This wasn’t some overnight success. It took me an 8-year slog to finally turn my $38,000 account into over $2,000,000 in two years.
How many puts and calls do you think I have in my Weekly Money Multiplier portfolio right now?
Every options trader needs to know how to determine the big D…I’m talking Delta.
Delta is an “option greek” traders use to describe how much an option contract moves for every $1 movement in the underlying stock.
Call options have positive deltas, while put options carry negative deltas.
You might be asking yourself – what do I care about this garbage?
Puts make money when a stock goes down; calls make money when a stock goes up.
Why do I need to learn about Deltas?
Deltas don’t just tell you the direction, they tell you the WEIGHT of a move.
Plus, it can help you understand how much directional risk you have on, and throw you hints on what it is you need to do to hedge your portfolio if you feel exposed.
By the time you finish reading this, you’ll know exactly what the circled term means in this P&L chart.
And you’ll be a much better trader for it.
Let’s start at the beginning. As I mentioned before, Delta measures how much an option’s price will change for every $1 movement in the underlying asset.
Assume I have a call and a put contract on stock ABC that each cost me $0.50. The call contract has a delta of +$0.10, while the put is -$0.10.
If stock ABC goes up by $1, the call contract will be worth $0.60, and the put contract will be worth $0.40.
Now, here’s the exciting part. Deltas change based on how far away you are from the current price as well as how long you have until expiration.
Here are some easy rules of thumb:
Now that you understand the basics, let’s talk about how this works at a portfolio level.
As you probably figured out reading the rules above, Delta isn’t static for options. In fact, Delta only remains the same for stock and futures. That means as stocks move around or time goes on, your Delta will change. That’s why option traders are continually making adjustments to their portfolio when they are trying to achieve a neutral Delta.
A neutral Delta means that your positive deltas and negative deltas offset one another. Effectively, you do not have a bias in the market. That means regardless of how the market moves, your positions live or die by trades ghd that you choose. This becomes especially relevant when you sell options.
Luckily, most broker platforms will tell you what your portfolio delta is. Going back to the graph we saw earlier, the circled portion indicates the portfolio’s overall Delta.
Now, I want to take this a step further. Notice how there is a script ‘B’ next to the Delta triangle. That ‘B’ stands for Beta.
Let’s take a step back for a moment and imagine a portfolio with a bunch of call options on the SPY and a bunch of call options on the VIX. If we just looked at the overall Delta, it would give us a large positive number.
Here’s the problem with that—the VIX and SPY trade in opposite directions most of the time. In reality, I want some apples to apples comparison that lets me see this in my portfolio.
Enter beta weighting.
Beta weighting takes the underlying stock and looks at its correlation to the SPY. Then, it right sizes all the deltas according to this correlation.
Remember, correlations go from -1 to positive 1. -1 means they trade in opposite directions, 1 means they trade in the same direction, and zero means they don’t have any connection.
So, if I beta weighted VIX call options to the SPY, they would turn negative. Why? Because the VIX trades in the opposite direction of the SPY most of the time.
Creating a beta-weighted view of your portfolio converts it all to a relationship to the SPY. Using the chart above, the -541 says that for every $1 change in the SPY, the portfolio will drop by $541 in value. On the flip side, if the SPY drops by $1, the portfolio gains $541 in value.
Take a look at this sample portfolio.
You can see how the various positions are weighted to the SPY. Most put credit spreads (slightly bullish bets) carry positive beta-weighted deltas, while call credit spreads (slightly bearish bets) carry negative beta-weighted deltas.
Check out how that is the exact opposite for the VXX ETF which tracks the VIX. That’s because it moves in the opposite direction of the market. So, slightly bearish bets on the VXX become slightly bullish bets when you weight them to the SPY!
There’s a lot of different ways to trade the market. Option sellers like to use this method to cut down on their risk. By keeping a neutral portfolio, they don’t have to worry about which way the market is headed. Instead, each trade has a chance to work out on its own.
Teaching folks how to understand and use these concepts is precisely why I created Weekly Money Multiplier. I love the opportunity to help people turn their trading around and become profitable traders.