What is one rule that every trader knows but, not every investor understands?
Volatility is your friend!
Now you’ll see soon why I decided to use the specific terms “trader” and “investor.”
It can cause major market moves. If you are quick on your feet you can capture profits on both the upside and downside of volatility.
Inversely as an investor, you’re in positions long term and you only have so many options when it comes to rapid markets and heavy volatility. You can price average your way down if you have the capital to support it. Let’s be honest though, how many times are you going to be willing to cut your losses on a stock that is seemingly falling on its face before you hit that sell all button out of panic?
You could just walk away and let the markets pull you in every direction until ether it stabilizes or you get torn to shreds. Now a days my stomach is a bit too week for such a reckless way of investing.
Or you move to cash for a while and ‘weather the storm’ while inflation causes your dollar to rot away.
Trading on a day to day basis can be both stressful and fun. Heck, just look at Kenny. He ends every day in cash but is out running the markets every single day.
I am done with the stress, but, I am not going to sit and watch my portfolio do what the markets bidding.
We have been working on blurring the lines between investors and traders by trading options but slowing things down by doing so in an investor’s time frame.
How can this be possible, you may ask?
You know exactly how to do it (if you have been following my teachings). We have been breaking down the expected performance of each sector based off historical data.
Once we know the direction of the sector we break it down even further to the top 5 stocks in that sector. Those as Ive said before, are one third of the weight that affect the price of the Larger ETF. That means the ETF performance should be close enough to the performance of these 5 stocks to score a point in a game of corn hole.
The last thing we do once we have deconstructed the markets down to its smallest parts? We look at the charts and use our handy dandy technical tool box to break down the individual stock, read between the lines, and find out where the stock is going to be finishing its run at.
Once we have finished that process our first instinct as a trader is to go for the closest options expiration and find a trade that fits the bill. This is where the paradigm shift has to happen. We shift from a traders mindset to an investors mind set and learn to trade this information in time and space.
Sure! You could chose a close expiration pay that $7 premium on the put and get out before time decay sets in for a 5% gain, but why would you do that? When trading this way you have a ton of capital tied up in a trade that has a much higher risk and will put you in a heightened state of stress and anxiety, of which I’m sure we all have too much of in today’s world.
Instead of doing that we slow things down by looking out further sometimes even as far out as a few months. This does several things for us. It reduces the risk of a quick bounce scaring the s#!+ out of you and turning your portfolio red. It also gives the market the time it needs to produce the fruits of our labor earlier and come to us.
I know we have been pounding this idea for weeks now so let’s take a look at a chart and dig into that technical tool box again so I can show you a special and often forgotten signal for volatility!
Brandon didn’t quite catch this one until I started telling a story to give him a little hint.
On this chart we see a touch and go first in April and again today. When we see the 20 and 50-day moving average come together. As a trader this is a love story for the ages, the two lines come together and give a gentile kiss. This tells us that volatility is coming in and in this case it will break the stock down even further.
This isn’t something that is just happening as a one off coincidence. Here is another instance of it taking place that shows this happens everywhere!
Heck! We even use this in my Penny Nation room. Looks at JETS for example.
Now this one isn’t quite where I want it to be to be tradeable in the Penny Nation room but if my suspicions are correct, it will be joining the stocks under $10 club soon and give us even more to sink our teeth into.
If you don’t want to miss the possible trade on JETS or any of my other profitable trades from that private room, check out my latest offer to join the Penny Nation family here!
Happy Independence Day! Tomorrow we can work on declaring our financial independence!
Quantitative Specialist, Penny Hawk
July 01 2022