Here’s something special. I recorded a long video on asset allocation for the members over at Op..
Discussed in this article: Boeing Co. ( $BA )
I want to talk about rotating your money around, about having intent on each position. In other words know why you’re in something. I know the deal is, “I’m in it to make money,” well me too. If you’re not in a trade to make money then you really need to get out of that trade, because you’re working something else out.
Specifically what I’m talking about is, if you’ve got a limited amount of capital, and most people do, just pick your number, in options it’s important to keep the money working, because time is money. I know when you’re trading anything you want to be long stocks that are moving up, and over time your going to make money if you’re buying low and selling high, Gary keeps reminding me, he’s the super trader, he always just says, “Dan, just buy low, sell high,” that’s his advice to me.
When you’re trading options you’re going to have one of two ideas. First of all on a stock like Boeing ( NYSE:BA ), this was not our idea, I mean it was our theory, the stocks done exactly what we expected it to do. If you go back and look at the history of that trade, you will know that we actually opened that trade based on the weekly chart, when the stock was like this. As it started to move higher we decided to buy these out-of-the-money calls, those were the 85.00 calls. We bought those calls under the theory that over the next several months the stock would move higher and ultimately be much higher than it was when we entered the trade and those options expire; that’s the operative term, by the time those options expire. We went clear out to January, because we had a long-term thesis based on this price movement. So we took a position and that’s worked out really well.
Now, just keep this in mind, right now we’ve closed out virtually all of our Boeing ( NYSE:BA ) trades. The only one we’ve got left is the half a position on the January 85.00 calls. We took the other half off; we just about top ticked this one, at least for now. The reason we did that is because the company announced strong earnings, the stock gapped up, and then it started to rollover.
When the catalyst is behind you then the pricing that’s related to that catalyst, is already into the stock, in other words, once the stock opened up above 108.00, or wherever it opened up, that was the market saying, “Okay, thanks for the new information on earnings, we appreciate that. Now let’s figure out what the new multiple is on that.” That was immediately factored in, it probably took about 5 minutes, maybe 10 minutes for opening rotation to take place, and then, at that point, the market starts doing what it does, which is start looking ahead over the next six months and saying, “Well where’s the next catalyst that’s going to push this stock higher?” The answer, I don’t know. Well in that case, you know what? Let’s take our profits now, because we don’t really have anything to anticipate. And because we don’t have anything to anticipate we might as well put our money to work elsewhere.
All of these things that I’m mentioning to you now are concepts that are going to come back in a second. So we don’t have any near-term catalyst, and so we’re going to take profits; that’s what’s happened with this stock. Now the uptrend remains intact, we have half a position on now, it is up 375 percent. We closed out the other half at 444.00, I believe. Wouldn’t it have been nice if it were 666? So now you’ve got a half a position on at 374 percent profit; you only make that money when you actually take it off the table.
Now I’m back to do you have an unlimited amount of funds? The answer is, no. So what you’re doing when you’re looking at this trade, you’re saying, “Yeah I know it’s profitable, might be even more profitable, which is why I’m staying in the trade. But what I’m not concerned about is the contract price of my position. What I’m concerned about is the dollars that are tied up in that position, and can I get those dollars to grow, to multiply? Can I get those dollars to grow most by keeping those dollars invested in Boeing ( NYSE:BA ) or going elsewhere?”
Now, a certain amount of your portfolio you’re going to want in these longer-term positions, and that’s fine. But a certain amount of your portfolio, for a lot of folks, is trading these short-term swings. The idea is, you want to keep your money moving, it’s fine to have a profitable position, but it’s a little bit like Janet Jackson’s song, “What Have You Done For Me Lately?” Even more importantly, what are you going to do for me next?
So you have to look at all of your open positions. It’s fine, it’s fine to be going, “Golly gee, all of my positions are doing great, I love it.” I’m looking at all the open positions we have in our Option Market Mentor open trades; they’re all profitable except Tesla ( NASDAQ:TSLA ), which is down 35 percent, which I’ll get to in a second; Valero ( NYSE:VLO ), which is down 10 percent and Broadcom ( NASDAQ:BRCM ), which is down 1 percent; all of the other trades are up.
Now am I just looking at Tesla ( NASDAQ:TSLA ), Valero ( NYSE:VLO ), and Broadcom ( NASDAQ:BRCM ) because those are losing money? No, I’m looking at all the others as well, because in every single one of these trades I could leave that money where it is, or I could have it elsewhere. When you’re looking at all of your positions, and you’ve got to be looking at the profitable ones too, you want to be looking and saying, “Okay, is my money better left in this trade, or should it just be money, should just be cash, or should I allocate it elsewhere? Do I put it in another option trade?”
This is not a simple answer, because it depends on your intent for the trade. If you’ve got a stock like Boeing ( NYSE:BA ) your intention was always to leave that money in for a long-term trade. Now, if it’s too much of your portfolio then go ahead and take that out, but your reason, your rationale for being in the trade was that you were going to let that money be tied up for a long period of time. The same thing with ConocoPhillips ( NYSE:COP ), you’re going to let that money be tied up for a long period of time.
Now, we’ll go back to Boeing ( NYSE:BA, ), let’s say you’ve got Boeing ( NYSE:BA, ), and you’ve got 350 percent in the stock and you’re saying, “I don’t want to leave all that money in there because I want to buy some options on Facebook ( NASDAQ:FB ).” You don’t have to close the whole trade out, but you should close some of it out, and it’s not just “quote” to protect profits; it’s because you want that money working elsewhere. If you think that your trade, that’s up 350 percent, is going be up 700 percent in a week, then of course let that money work.
But if you think that the trade that’s up 350 percent is probably going to be got be up 350 percent next week, or the week after that, or maybe up only 340 percent or 30 percent, and you have another trade that you think has good profit generating possibilities right now, but you don’t have money to put into that trade. Then you go ahead and take some of this money in Boeing ( NYSE:BA ) off at the table and rotate it in there. Do you see what I mean?
This is intuitively obvious, but for a lot of people its only after its pointed out to you; because for a lot of you, you’re pretty new to trading options, and so you’re trying to just figure out this whole implied volatility thing, and what’s the deal with these Greeks, the Alpha Theta Gamma, and the Sigma Nu, and the Lambda Chi Alpha, and all that. What’s with all these Greeks, what’s with implied volatility?
So you’re looking at that thing, you’ve got profitable trades, and you’re just so happy that you have profitable trades. What you’re not doing is, you’re not thinking about the money, you’re thinking about the green on your screen as opposed to the red. What I’m saying is the power of money is the power of profits; this is where you make your profits.
At some point the trade peters out, it’s massively profitable like Boeing ( NYSE:BA ), but you say, “I have a place to use this money.” That’s when you should go ahead and take some profits, or take it all off and put it into another trade. This is transitioning your money from a long-term trade like Boeing ( NYSE:BA ), to a short-term trade, or maybe you just have another potential long-term trade you like, that you want to start working on. So you take the money out of this mature trade and put it in to a new trading idea, that’s one concept.
Now, the other that I wanted to mention is this, two names, and I mentioned this yesterday, two names that I’ve really been looking at as momentum trades are Tesla ( NASDAQ:TSLA ), because this stock is defying gravity a bit, options are grossly expensive, they announce earnings in eight-days, towards the end of next week. This is one trade that I’ve been watching, and note the reversal here, that I’ve already mentioned, and then Facebook ( NASDAQ:FB ) is the other trade that I’ve been watching.
Facebook ( NASDAQ:FB ) is up 5 percent today; Tesla is down 4 percent. So if you’ve got an equal amount of money in each of these positions, you’ve got 10,000, 1,000, 100,000, we’ll say you’ve got $10,000 in Tesla ( NASDAQ:TSLA ), $10,000 in Facebook ( NASDAQ:FB ), both of them are bullish because you’ve got calls in both of them, because you think that the stock is going to go higher.
Now you bought Tesla ( NASDAQ:TSLA ) a couple days ago so you’re still profitable in Tesla ( NASDAQ:TSLA ). You bought Facebook ( NASDAQ:FB ) a couple days ago when Dan said, “Hey, you’ve got to buy this thing because it’s not coming back.” So in Tesla ( NASDAQ:TSLA ) you’re still profitable, this is the daily chart, and in Facebook ( NASDAQ:FB ) you’re still profitable. But the Tesla ( NASDAQ:TSLA ) trade really isn’t working today, is it?
You see this intraday reversal, we’re seeing that right now, but if we go down here, we’ll start here with the 15-minute chart. If we look at the 15-minute chart this was working just fine this morning, this is a Bollinger Band complex, the widest bands are three standard deviations, and the ones on the inside are just the regular standard two standard deviations.
You can see first thing in the morning Tesla ( NASDAQ:TSLA ) was moving just fine. Facebook ( NASDAQ:FB ), also moving just fine. But at some point, Tesla ( NASDAQ:TSLA ) started rolling over and you can see it here, in the 5-minute chart. About eleven o’clock I saw it, the stock just really started getting pounded. Now during that same period time Facebook ( NASDAQ:FB ) just kept chugging along. This is a short-term trade, right? You’re trading at pre-earnings.
This was a short-term trade that you’re putting on, just like Facebook ( NASDAQ:FB ), the trades working just like Facebook ( NASDAQ:FB ), up until this time. When you see this, and you should be getting a price alert or something like that, but when you see one trade stop working, and remember this is a short-term trade. If you’re going to get jigged out of Boeing ( NYSE:BA ) on this kind of thing, you shouldn’t, because we’ve got January options on Boeing ( NYSE:BA ), it is a long-term, mega trend weekly chart kind of deal. We don’t really care if it goes from 105.50 down to 105.00 or 104.00 or 103.00, we don’t care long-term.
But Tesla ( NASDAQ:TSLA ), we care, why? Well, because we risk losing money? Sure, but there’s one other thing that’s more important to me, because our other short-term trade is working nicely. So what we do is, we don’t admit defeat and say, “Oh my gosh, I was sure wrong on Tesla ( NASDAQ:TSLA ), I’ve got to get out. No, you can think that way, but that’s a defeatist attitude, you took your chance, you made trade, it either worked or it didn’t.
So what you’re doing instead is you’re making an asset allocation, you’re making a position allocation, a money allocation decision. You’re saying, “Where can my money best be put to work, Tesla ( NASDAQ:TSLA ) or Facebook ( NASDAQ:FB )?” Let’s look on the daily chart again, Facebook ( NASDAQ:FB ), Tesla ( NASDAQ:TSLA ). They’re both momentum trades, one of them is not working today. One of them is definitely working today.
If you don’t have an unlimited amount of money you’ve got to allocate your money so it keeps working for you. You go ahead and close down your Tesla ( NASDAQ:TSLA ) position, and get into Facebook ( NASDAQ:FB ) more. You take a bigger position in Facebook ( NASDAQ:FB ), you are now underweight Tesla ( NASDAQ:TSLA ), you are overweight Tesla ( NASDAQ:TSLA ). What have you done? You have been your own market analyst. You’ve raised Facebook’s( NASDAQ:FB ) rating to an outperform, and you’ve lowered Tesla’s ( NASDAQ:TSLA ) rating to a market underperform, maybe even a sell rating based on technical considerations.
So you’ve got an overweight position in Facebook ( NASDAQ:FB ) now, bigger than average, maybe it’s your biggest position. Why? Because it’s working, I’ll get back to that in a second. Then, on Tesla ( NASDAQ:TSLA ), maybe you’re out of it completely. Why? Because the only reason you were into it because you thought the stock was going to continue going. It was up above 137.00 at one point today, now it’s down nine points from the high; and so you’ll set price alert at say $137.00, maybe one 137.50. Maybe you’ll set a series of price alerts at 130.00, 132.00, 135.00. Because you’re only interested in making a bullish trade on Tesla ( NASDAQ:TSLA ), but the trade that you have not did not work. The trade that you had going on Tesla ( NASDAQ:TSLA ), short-term trade, didn’t work, you’ve closed it out.
This is now a new trade possibility, you set your price alerts according to the suggestions that I just gave you, and then you forget about this stock. You don’t care if it goes down to 126.00 or 125.00 because you’re not interested in shorting the stock. Maybe you set a lower price alert because then you’d be interested in buying it again because you saw what it did here. The point is, you’re not interested in Tesla ( NASDAQ:TSLA ) now.
You have an asset allocation issue, you are taking this out, you’re putting it in. You’re putting it in to Facebook ( NASDAQ:FB ), you’re overweight Facebook ( NASDAQ:FB ). Then what do you do? You go back to the intraday charts and you start looking at them, you make your decisions, “Okay I’m seeing Facebook ( NASDAQ:FB ), it looks like it’s starting to roll over. The stocks down 60 or 70 cents, looks like maybe it’s going lower.
So what are you going to do? Maybe you’re going to close out that position completely and say, “You know what? I had some good money on this and what I don’t want to see happen, what I’ll be bummed about is, if I see this box ultimately transition to this, where the stock rallied up during the day and then fell back down to its opening print, which generally indicates that the next move is going to be back down.
You don’t want that to happen, so maybe you’re going to go ahead and take some profits or maybe what you’re going to do on this option position you’re long some calls that are 33’s, 35’s and you’re going to say, “You know what? I still like this because I’m not just in it for a short-term trade; I’m in it to win it, because I think Facebook’s ( NASDAQ:FB ) going to be added to the S&P 500. I think the market’s realizing that they’re starting to monetize their mobile stuff, they’re doing some other things with small gamers, you can look at that news online on they’re doing a lot of things. So I like Facebook ( NASDAQ:FB ) for the long-term, as well as the short-term. So maybe you’ve got some long-term options in there too. But maybe, on a short-term basis, you’re thinking that this has peaked.
So what are you going to do? Well maybe you haven’t allocated additional money into Facebook ( NASDAQ:FB ) from closing your Tesla ( NASDAQ:TSLA ) trade; maybe you have. But what you’re now doing is saying, “Okay, I’ve got an overweight position, I’ve got more money in Facebook ( NASDAQ:FB ) because I think it’s moving higher, and I don’t think Tesla ( NASDAQ:TSLA ) is, but I think I better hedge myself.”
So what are you going to do? Well the highest Tesla ( NASDAQ:TSLA ) traded was 37.66, so maybe what you do is, you hedge your bets by selling near-term options with a higher strike price. Maybe you’re going to sell the 37’s maybe you’re going to sell the $38.00 options that maybe expire in August, or maybe September, to generate a little cash if Facebook ( NASDAQ:FB ) continues lower.
But on the other hand, if Facebook ( NASDAQ:FB ) starts to move higher you’re still going to have a heck of a profit because the difference between the strike price on the options that you bought versus the strike price on the options that you sold. So what you’re doing is, you are absolutely hedging your trade against losses. At the same time if the stock does move the way you thought it would, you are still locking in a really nice profit. I want you to think about this.
The bottom line is, with options as with stock, but with options you have options, and you’ve got a lot of them. I want you to be thinking about what those options are. Don’t just sit there passively on your portfolio when some of your trades are really working well and look like they’re going to continue to work well, and other trades are not really working well and you’re sitting there thinking, “Well, I guess I just have to be patient with this one, maybe that’s the deal, maybe I just need to be patient with it and we’ll see what happens.”
If you want to put more money into another trade then close the one that’s not working, and go in to the one that is working, overweight it, and then either hedge it or watch it very closely. Remember, you’re speculating, so there are no guarantees that you’re going to make money. But if you’re sticking on the right side of the trend then you have a better chance of being overweight in the one that continues to work really well. You may wind up being overweight in the one that looked like it was going to work really well, but then ultimately rolled over and moved against you and you had to close out for maybe not as much money as you thought you would.
You’ve got a better chance of being in the trade that continues to work in a big way if you take your money out of trades that aren’t working very well and go into the ones that are. Put another way, you’re going to be right on some trades, you going to be wrong on other trades. Let’s just strive to have less money in the trades that aren’t working, the ones that we’re wrong on, and more money in the trades that we’re right on. We can’t do that from the outset, we have to wait for the stocks to confirm that we’re either right or wrong and then we take action.
That’s how you keep your money working to the maximum, and that is how you blow up the value, and I mean that in a good way, of your portfolio using options, by being in the right positions, at the right time, with the right weighting. You have to remember about the weight, always look and see, in your portfolio, and any trading software will show you this, what is the dollar amount that I have in any particular position or in multiple positions on any particular stock? Then you look at the chart of that stock. Is it warranted that I have my biggest position in Amazon ( NASDAQ:AMZN ) right now, or should I have my biggest position in GameStop ( NYSE:GME ) or Facebook ( NASDAQ:FB )? All of these are trades that we have going on.
So look here at these two, I want to be overweight in Facebook ( NASDAQ:FB ), which I am. I want to be overweight in GameStop ( NYSE:GME ), GameStop ( NYSE:GME ), which sadly I’m not overweight, I should be but I’ve been working today, not just trading. Amazon ( NASDAQ:AMZN ), very much underweight in Amazon ( NASDAQ:AMZN ), very much underweight. Right now the trade isn’t working, once it starts moving higher again then I’ll get back there.
I hope this makes sense to you. It’s very, very important for you to keep your money working. You’ve got to keep your money working and that means in the places where it’s not working, fire that position and put it into somewhere else.