As a trader, there are times when you can almost reach out and touch a trade, but where the market doesn’t allow that contact unless you over-reach. Once you stretch to get into a trade, you increase your potential for trouble.
The back story: On Monday afternoon, I had bids open for three call option trades to be treated as swing trades.I was looking at Sept. 15 at-the-money call options on Nvidia (NVDA), First Solar (FSLR) and Facebook (FB). With NVDA, I was trying to play a gap-down reversal after the company missed earnings; with FSLR and FB, I wanted to play flag breakouts out of consolidation after they gapped up on earnings. In each case, I felt there was a profit of 10 percent or more to be made so long as I got in at the right price.
That meant not paying too much for the options, and with the markets on a green tear Monday, all three got away from me. I did not chase them.
The lesson: It is always tempting to chase a good-looking trade, and you may even get away with it now and again. But do it enough times and you will learn the hard way that it’s a red routine.
In my trio of missed trades – where I simply canceled my orders – if I had paid up to get the options, I would have been red on two of them on Tuesday, and flat on the other. The higher price ruined the risk-reward proposition for me, trading my plan avoided any pain.
The lesson in action: I not only didn’t have any wounds to lick on Tuesday, I had gains on a trade I had waited all of last week to make. I watched the Dec. 15 $25 calls on the Financial Select Sector SPDR (XLF) waiting for them to hit the right entry point, which didn’t happen until Friday, August 11. By getting the right buy-in, I was able to close out that trade for a 17 percent profit on Tuesday.
Davis Martin is the head trader at Dailyprofitmachine.com. He trades SPY calls and puts and swing trades individual stocks and stock options. At the time this commentary was published on RagingBull.com, he had no shares, options or open orders in NVDA, FSLR or FB – though he was still watching them for a good entry point – and he had closed out his positions in the XLF.