Last Update: August 2021

Hola amigos!

Fall is finally here and I am very excited for three reasons. First, it’s veggie season and I will be able to plant a bunch of greens without burning them. Second, fall in Texas is like spring in any other state so I will enjoy the weather and do some outdoor activities without the risk of dehydration or first-degree burning. Third, the market usually goes a little coo-coo around this time of the year, and we all know that coo-coo means volatility, which means higher premiums, which is a great thing for an options seller…as long as we follow the rules and hedge ourselves…And the latter, folks, is the topic of the day. 

I am not saying anything new if I say that following the rules is key to trading, but what we sometimes struggle to understand is that we MUST follow ALL the rules, 100% of them. We can’t just follow most of the rules and maybe break the position size one, or the earnings one, or the delta one. No…It’s either black or white, 0 or 1, in or out. One broken rule can cost you everything, no matter how good you followed the rest of them. We have tons of material around rules so we can learn how to apply them, but there is one more piece of the puzzle required to go from a “good amateur trader” to a professional one. And that is hedging. Hedging is KEY and it is one of those things that you hope you don’t have to use it, but when you do, you better be good at it and have a good plan in place. And in my opinion, rules and hedging go hand-to-hand. Why? well, let’s put it this way: the better you are at planning and following the rules, the “less-good” you have to be at hedging. Capisce? No? Ok, let me expand on this. 

If you misbehave in your trading and a trade goes against you, then you will most likely have to outperform at managing and hedging that trade. Let me give you real examples: more than once at the beginning I over-position sized (rule broken) or sold puts with an expiration after earnings announcement (rule broken). Also more than once I enjoyed the inflated profits from those trades as they did what I thought they would do. But it took only ONCE and only ONE of those trades to go against me, and I was in trouble. Oh boy, no bueno. I called Matt, Bob, Tim, posted in the Club-house, prayed to the trading God…I got nervous. Why? well first, I didn’t know how to hedge. Second, I needed to do some sort of hedging magic to avoid losing my entire account. Luckily we have a great team and with their help I managed to loose “only” a big portion of my account, let’s say 20%, in one trade. But I could have lost 80% easily. I didn’t follow the rules, and I didn’t know how to hedge. 

The main goal of hedging is to minimize loses. But there is another advantage of mastering the art of hedging. It could allow you to completely neutralize, and maybe even profit from, a temporary move against you. Even when you followed the rules properly. Let’s say you have a naked-put that is close to be ATM and, following your rules, you are ready to get assigned. Last week before expiration it goes ITM and moves south with some passion. No changes in the action plan, you will get assigned as the rules dictate. But you could also, for example, sell some calls against it that will then mutate into covered calls once you buy the shares. That way you would start cashflowing earlier. Or you could strangle it. Or collar it, or buy a protective put. See? There are hundreds of ways to make a single working trade more efficient and less risky by knowing how to hedge. So go spend some time learning how to do it, there are a trizillion videos and blogs in Tackle about it that will teach you how to use hedging to achieve the following two goals: first and foremost, reduce the losses. Second reason, dynamic hedging to neutralize and/or profit from short-term moves against you. 

Oh, yeah, I almost forgot. All this also applies to the garden by the way. Especially the breaking rules and not-knowing-how-to-hedge thing. It has been raining for a week in Houston, and back when I put my tomatoes and squashes outside I didn’t really think about this situation. And here I am, trying to do some hedging magic to avoid losing them all. Lesson learned. 

Now, let’s trade… 

WARNING: We are between 40-60 days from earnings in most of these picks, so by suggestion would be to be careful with the expiration selected, make sure you understand how volatility build-up could affect this trade, and plan accordingly.

The Clean Stock List

SunPower Corporation $SPWR

Last time I talked about it in the blog it was closing below support, breaking some levels, touching $6.36. Since I didn’t like that move, I covered my shares with a $6.5 strike-price calls. Well, a few days after I did that it skyrocketed like 18% in two days. So if you own SPWR, you are welcome!! As Bobby would say, #moneyprision. But the good news is that the reason why we saw that move is that apparently SPWR is except form the steel tariffs so Wall Street liked that a lot. I am still covered and following the rules, I will sell them if assigned and re-issue naked puts to buy again. I will wait for a break-out above $8ish or a retracement down to $7. 

Tesla Inc $TSLA

I will give you my thoughts from two sides: the technical and the fundamental. I just can’t use only one to trade, even if I’m trading a short-term strategy. From the technical stand point, I love the premium and I like the repeated bounces around $280. So we could trade a bull-put with 0.20 delta (probably around $250) with a stop loss if it goes below $280. From the fundamental stand point, I’ll just say this…there is a reason why TSLA is offering us 19.7% ROI with a 0.20 and 30-days out bull put spread. There ain’t such a thing as free lunch. Much less in the financial markets. So be aware of that, and trade accordingly. I will probably stay out for some time, let’s see. 

Exelon Corporation $EXC

Is there anything prettier than a combination of a long-term bullish trade with a retracement, and a double-bottom at previous support level? I like this set-up a lot and I bought calls on Friday. I usually don’t do directional debit trades because I’m just not good at it. But premium and options are not very good on this one, and I didn’t want to lose this set-up. Stop-loss right below $43. You could wait for it to break $45 if you want more confirmation.

NRG Energy Inc $NRG

Similar set-up than EXC. Retracement to previous broken support. I would like to see a retracement down to $35 and then s confirmation before jumping in with naked-puts. But I like set-up and the company. Take a look at the 3yr weekly charts, it looks like a solid trend to me. 

Renewable Energy Group Inc $REGI

I am keeping a close eye on Renewable Energy Group Inc. The last few times it showed some consolidation period, then it broke with conviction. It is now in a very clear high-base and I will wait for a break-out above $28.2 to buy calls or shares. Again on this one, not great options premiums, but I like the chart. That’s the beauty of options, you have many ways to play the same trade.

The Dirty Stock List

Advanced Micro Devices, Inc. $AMD

Attention. Nice little retracement bull-flag forming. Above $34.15 I’m in. Premium is always great for its price so naked-puts below $30 would do it, only upon confirmation. I don’t like Friday’s candle much, so patience on this one. But it has a lot of potential for this week. 

United States Steel Corporation $X

Kind of funky lateley and in my opinion neutral/bearish. But it looks like it found some support at $28. I would like to see it going down one more day, touch that $28 level and then go back up. At that point, I will probaly issue a naked-puts around $26 or so. Be careful, the trade war is still ongoing and a Trump tweet would send this anywere. Also, earnings is 37 days away.

Freeport-McMoRan Inc $FCX

Sitting at an old and very well-known support/resistance level. If it manages to break that $15 level, I might trade it again after a long time with naked-puts. Only upon a solid confirmation.

American International Group Inc $AIG

Nice channel for swing trading. I traded once with long calls and sucked a little bit of cash. I am deviating from the system a little bit here by suggesting a swing-trade, but with the same concept: Sucking out money from the dirty list to then pour it into the clean one. So if AIG is giving me lemons, I will buy those lemons down at $52 and sell them at $55. Right now is in the middle of the channel, so no plays for me until it touches one of the bands. 

Quick update on the garden: I know I promised to keep building the garden this week, but the weather didn’t let me. Hopefully back at it with more updates next week. Happy trading week! 

Cheers, 

Franco. 

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