Apr
27
Deliberate Practice with Options Trading
Filed Under Trading | Leave a Comment
Options trading is a way to generate incremental returns for one’s portfolio (via selling covered calls) and speculate on large moves (buying calls and puts). Options trading, when coupled with sensible charting and risk-taking, allow investors to profit in both up, down and sideways markets (if executed properly!). My goal is to develop this skill over the next ten years and see whether or not I can consistently make money over the course of my trades. Do not take my advice as anything other than one man’s attempt to educate himself by putting his own money on the line and documenting his lessons.
As I have written earlier, deliberate practice makes perfect. I do not want to place “gunslinger” trades based on tips and buy on impulse. When I propose a new trade, I will explain my logic and check against the eventual outcome to validate if my assumptions were correct. I am posting my open options contracts to maintain a form of discipline over myself and make sure I do not trade out of emotion. Please read my disclaimer below. For the time being, I am only going to purchase (go long) options. As a result, my potential losses will be limited to my initial investment.
First trade:
35 July PUT – Darden Restaurants Inc.
Rationale: I have a bearish outlook on the equity markets in general and I believe our current rally (March – April) is the result of speculative buying and/or short covering. I am not convinced that the rally in the price of Darden Restaurant from $15 to $40 has been driven by any tangible changes (higher sales, increased productivity, higher cash flow). As such, I find this rally to be a short-term, speculative rally. Does that mean that stocks cannot rise more? No. It simply means I believe the price is rallying for no intrinsic reason. Therefore, I do not believe this rally can carry on forever, especially when I see the chart (more on that later). With the price nearly tripling from its December lows (an almost 300% return!), I do not think the stock price can keep advancing for very long without a significant pullback.
The two strong reasons why I pulled the trigger:
1) Going long this put means I do not have to time a downturn perfectly. The stock can continue to rally, but as long as it finishes below $32.75, I will be profitable. 35 is the strike price, 2.25 is the price paid for the option.
When buying a Put Option, the following applies: Strike Price – Initial Investment = Breakeven Point 35 – 2.25 = 32.75
Once the stock drops below $32.75, I will make (in theory) $100 for each $1 decline in price.
2) There is a large gap from $28 to $36. Gaps are often retraced and filled and in a parabolic rally, like the one DRI is in, it is not unlikely the stock will fill these gaps.
There is also one weak reason I have for buying this option.
1) Consumer weakness will eventually manifest. This is a very weak reason since there is no telling when the consumer will truly slow down consumption. The save over-leveraged spending habits have been in place for years… assuming they will assert their presence in my limited time frame makes this the weakest of the three reasons.
Exit
I believe Darden will retrace to fill in the gaps around low 30’s. If I feel the market can plunge further, I will hold my position. If the market appears steady, I will book the profit. Since this option trade is small, I am comfortable holding this option until expiration (expiring worthless).
Comfort Level
Although I feel confident that Darden will pull back, I am not satisfied with the way I entered into it: with a hunch and with a “Oh well, it can’t go any higher” attitude. Calling tops and bottoms is not a strategy with a high-win ratio or a theory that can be executed with regularity.
Takeaway
I will post this trade in my Trading Log where I can track it daily. Please provide feedback for this trade and let me know if you find my analysis to be lacking in any way.
For more about deliberate practice, read here.
DISCLAIMER: All opinions expressed on this website are solely my own and do not reflect the opinions of anyone else. You should not treat any opinion expressed on this website as a specific inducement to make a particular investment or follow a particular strategy, but only as an expression of opinion. My opinions are based upon information I consider reliable, but I do not verify its completeness or accuracy, and it should not be relied upon as such. I am not under any obligation to update or correct any information provided on this website. My statements and opinions are subject to change without notice. Past performance is not indicative of future results. Risk of loss exists in futures, options, equities trading.
Apr
26
Being Grateful for Music
Filed Under Intellectual Honesty | Leave a Comment
I listened to George Gershwin’s Rhapsody in Blue on my iPhone today and I made a conscientious effort to listen as carefully as I could. As I listened, I couldn’t help but ask myself some questions:
- How did someone hold such a harmonious melody and accompaniment in their head? Was this whole production stored in the composer’s mind?
- How could anyone take such thoughts and translate them onto sheet music so that musicians could play it? Did the composer due this all at one time, or did he have to conceptualize each part separately? How did he know what it would sound like when finished? How was this even possible before computers?
- How much practicing and trial and error went into the final product? Months? Years? Decades?
Just listening to the first 30 seconds (click link above) is enough to impress upon you the amount of effort and soul that went into producing this work of art. You can hear it right from the beginning as the clarinetist manipulates the clarinet to produce the emotion that starts the song off on such a wonderful path.
There is so much richness to experience in a simple YouTube video it is truly remarkable. To be able to listen to the world’s finest musicians playing at their peak is something that we have the luxury of having at our fingertips.
The modern is world is filled to the brim with luxuries; if only we take the time to appreciate them.
Albert Einstein said it best when he said:
There are only two ways to live your life. One is as though nothing is a miracle. The other is as though everything is a miracle.
Thanks for reading.
For more on gratitude, click here.
Apr
23
Canine Partners for Life – On Demand
Filed Under Relationships | 1 Comment
I saw an incredible program about dogs today. The program showed some of the many ways dogs can assist humans from opening doors to predicting a seizure hours before it happens and alerting family members. It is really amazing that these creatures can bring so much comfort and relief to a human.
When raising dogs, just like raising children, it takes a disciplined, patient and loving master to nurture and guide the growth process to help the dog achieve its full potential.
It is easy to get the feeling there is a lack of love in this world. The next time you feel that way, or are having a particularly difficult day, try doing something, however small, to change that. The welfare state, WIC or Social Services simply cannot provide the discipline and love that a dedicated adult can.
If you’ve been fortunate enough to have parents that loved you and cared enough about you to discipline you and set a good example, be thankful.
To read more about loving relationships, click here.
Apr
20
In previous posts, I’ve written about being as open-minded as possible in order to build an Accurate Model of Reality. As readers of this site know, I am extremely pessimistic/skeptical about the future financial success and viability of the US. As such, does that fact automatically peg me as a “pessimist”? I don’t think so.
My worldview isn’t solely a function of the financial markets, it is a function of trying to understand the world around me, focus on the positive and, most importantly, be thankful that things could be much worse.
I think part of that mindset comes from determining what really matters in life. I’ve been around very rich and successful people and they did not seem satisfied in their lives. In fact, they consumed as much alcohol, rich food, and distracting “entertainment” as poorer people. The best things in life are good health and being able to share your love and talents with others.
I’ve come to realize that the ugly reality of the daily grind helps us appreciate the everyday happiness right in front of our face. Clean water, delicious and plentiful food, libraries full of books and constant entertainment/amusement/enlightenment from the Internet.
When you have a chance to truly slow down the “frames” in the movie of life and compare it to that of other people’s movies or other time periods in history, it is truly a privilege to be alive. The fact that you’re reading this article on a computer or phone(!) is proof enough that you have access to the greatest knowledge base in all of mankind. The richest people only 25 years ago could not access the very information you have available to you at your whim.
Gratitude, or “everyday happiness”, comes from slowing down. It also comes from being made aware of worse situations, either those you experienced firsthand, or that which you observe or conceptualize.
I struggled financially for quite a few years before slowly building some savings. I’ve eaten poorly and had periods of ill health before realizing how important good health is. I’ve been incredibly lonely before finding someone to share my life with. I’ve faked enjoying late nights at crowded, filthy bars before realizing I could enjoy the peace and comfort of my apartment reading thought-provoking books or articles.
I remember a few years back in Chicago, I bought an expensive piece of Gruyere cheese from Whole Foods. I took a very sharp paring knife and sliced a razor thin piece and let it melt and dissolve on my tongue. Even though I wasn’t able to save any money during that period, I really enjoyed and savored that piece of cheese. Nowadays, I wouldn’t think twice about buying a piece of expensive cheese, but I doubt I would enjoy it as much now as I did then. The difference? Enjoyment and gratitude.
Yes, the next few years will be incredibly difficult. The markets will suffer horribly, a currency crisis is not impossible and our standards of living will contract. Does that make me pessimistic? No. Life will still be wonderful as long as we have our health and our sense of gratitude.
To read more about creating an Accurate Model of Reality, click here.
Apr
19
I’ve enjoyed a very productive and enjoyable weekend. I’ve been refining a strategy on how to make the most of my time and I’d like to share it with you:
- Write down all the things you’d like to do this weekend so you don’t forget. On Thursday or Friday, I’ll start keeping a running list of all the things I need to get done.
- Late Thursday night I’ll try to prioritize which ones can get done when. Friday nights are good for replying to emails, Saturday mornings are good for quiet readings and Sunday nights are good for calling friends. I like to try and plan accordingly.
- The most important step: Determine what is really important to you. What will you look back on Sunday night with regret if you don’t accomplish? Highlight the “difficult” tasks, or the ones that you’ve been putting off. It’s easy for a toughie to blend in with the easy ones and you’ll never get it done.
- Keep your weekend tasks on something portable, like a 3×5 card, so you can always check your progress. It feels satisfying crossing out small tasks and problems.
- Take some time to appreciate the fact that you’ve accomplished things (however small) this weekend. This last step helps begin the week on a positive note.
The first lesson in economic theory is that we live in a world of scarcity. Scarcity is a situation whereby human wants exceed the means to satisfy those wants. Human wants are assumed to be limitless, or at least they don’t frequently reveal their bounds. People always want more of something, be it more cars, more food, more love, more happiness, more peace, more health care, more clean air, or more charity. Our ability and resources to satisfy all those wants are indeed limited. There’s only a finite amount of land, iron, workers, and years in a lifetime. – Walter Williams
I filed this post under “Economics” since economics is the study of how to most efficiently allocate our finite resources. Life is full of wonderful people to meet, books to read and laughs to be enjoyed. Make the most of it!
To read another helpful hint, click here.
