Hello my friends, long time no see/read…I trust you’ve been doing great, enjoying the nice weather and making some money on the markets. I am doing well, although trading has been not so good the last two months. Specifically, I got hit with two consecutive RUT condors (Cashflow Condor system), and a couple of “fake break-outs”, one of them with FSLR. That, and I got some naked-puts on VIPS (Tackle 25 system) that went ITM and got them assigned to me. That is not a lost trade, but indeed tied a lot of capital for the next couple of months, so let’s say that this month has been a quiet one on the P&L, mostly on the P side. Specifically on EH I have done a little better, with covered calls on my SPWR shares, bull puts on TSLA and some ongoing-promising trades on X and FRSL that I will detail below. 

Speaking of loses, this one below is the one that hurt the most. Caterpillar, I don’t know who you are, or where you live, but if you are reading this blog I promise that I will find you and you will not become a butterfly... 

 

No big deal, just a bad month… But today I would like to elaborate around losses because I am feeling reflexive, I am not sure why. Maybe is that my Argentina is almost eliminated from the World Cup, or maybe is that I am still a little drunk from last night’s birthday party. Who knows…Anyways, I want to share some thoughts around something I think it’s very important as a trader, and that is to understand that there will be months that are average, months that are very good (Jan–Mar for me), and months that are below expectations like this one. The difference between an amateur and a professional trader, I think, is what do we do with the loses.  

See, there are only a handful of things that are absolutely certain in the market: one is volatility (vega), another one is time (theta). We know for sure that these two will sooner or later happen…but there is a third one that a lot of us ignore, and that is the fact that you will have lost trades. You would be a fool to think that you will win all of your trades…and the thing is, that’s not even the goal. That’s definitely not what separates successful traders and non-successful ones anyways. The difference is in what to do with the loses, what do we learn from them and what do we do to avoid or minimize their effect in the future, knowing that they will happen again eventually. That’s the key!! We are very well aware of Vega and Theta, and we design rules and strategies around them, right? So why can’t we do the same around the loses, if we are aware of them, If we know that they will absolutely happen? Don’t you agree? 

That is, in my opinion, the biggest step we must take towards trading greatness. Once we know the strategies, rules, systems, software, etc…we need to master the art of controlling our loses. And that is the step I am on right now. Last year I had 69% of winning trades, yet I lost money. This year I am still above 65% and I am doing much better, but I am not still where I want to be, where I need to. So this month, and every time I have lost trades, I try to ask myself the following questions that help me understand what to (or not to) do next time.  

1) Was it avoidable? If it gapped down and stopped you out, ok…nothing to do. But most of the times, there’s something else. 

2) Did you break any rules? Unfortunately, my answer is still YES many times 

3) Did you learn something new?  

When the answers are YES, YES, NO… then, I get really pissed and stop trading for a few days/weeks. Because it simply means I was either greedy or distracted, and that I cannot afford. So spend some time understanding you loses, and try to be as consistent as possible with the rules around them. Specially in a market like the one we have right now. 

General Thoughts about the market & Trades Set-ups for this week 

I will not go over the Dirty and Clean lists today, since Bob a lot of time on them during his last blog, and frankly I don’t have much to add today. Go check it out if you haven’t and review all his thoughts on these stocks plus the new additions. At the end of the day, the man is sharing with us how he travelled the world for free with that list…can’t beat that.  

My bias on the market has not changed since my last blog. It is still pretty neutral (except RUT…duh) and although it has attempted a few break-outs it has not happened yet. It looks like bulls have a little more energy than bears, especially in a few sectors, but overall the market is probably a 0, +1. One could say, well, “0, +1” is perfect for a naked-put based system, isn’t it? Not necessarily. There is one key aspect to consider here, and it’s volatility. The ATR of most, if not all, the stocks we usually review in this blog are way higher now that what they were last year. So let’s say that the sea level is the same, but the waves are much higher and the boat moves up and down more aggressively than last year. Which means that if you enter a directional trade as a naked put, and you have a few consecutive waves against you…you can be, at a minimum, stopped out. That is what happened to me with FSLR last month. On the left, the day I placed a bull-put after what it seemed as a nice swing-low on the bottom of the channel. In the middle, three days after I got stopped out (luckily). On the right, FSLR one week after placing the trader. Pretty wild, huh? 

 

 

Trades gotta trade…so what can we do if we don’t want to go directional this month? Well, while I am still milking SPWR with covered calls, I have just placed a couple of interesting trades last week. Since, again, we know volatility happens, I will try to take advantage of it with a LONG STRANGLE/STRADDLE. I back-tested and paper-traded this strategy for a while, and this month I’m playing it in X and FSLR. Basically, we’re buying an ATM put and an ATM call at the same time. So we will profit either with big price moves or with volatility build-up…or both. As we get closer to earnings and with the current volatility, I am hoping to collect some profits in the next couple of weeks. Let’s see how it plays. There are a few cool videos in Tackle for a detailed explanation of this strategy, and I strongly suggest to paper-trade it before live-trading. A good analysis of the risk-graph is particularly key for this type of trade. 

 

Now, my friends, let’s talk business and gardens…before starting, a quick update on my little garden: Is doing great. I collected profits (salads) from it a couple of times and as you can see, my tomatoes are coming in hot and growing fast. I still remember when they were seeds, time flies…It looks like I will need a bigger house for them very soon. So why don’t we work on that then… 

 

Operation Market Garden: Phase 1 

Phase-1 of the project consists in defining the magnitude and cost of it. We have a preliminary design/sketch and now we need to put numbers to it. Although I am still hesitant on some of the materials and designs particularly for the pots, I did some research and have a pretty good estimation of what we will need to start. Below there is a “shopping -list” I built with the essentials for the garden. 

 

• Water tank for cattle or materials to build raised-bed garden pots (2)  
• Small round garden pots (4) 
• Soil Mix (a lot…) 
• Hose (1) 
• Gardening Tools (1 kit) 

• Wheels for the pots (8) 
• Garden Fabric (enough to partially cover the pots) 
• Seeds and plants (as per the book)  
• Planting schedule 
• Gardening Book (1) 

• Seeds and plants (as per the book) 

 

Now you might have some of these items, or maybe you can get it for free (soil maybe) but assuming the worst-case scenario in which you have to buy everything (like my case) this should cost around $600-800. Now, we don’t need to buy all of them at the same time but it is good to have a list and a cost to start working with and then start buying as trading profits come in. Now that we have a design idea, we know exactly what we need and how much it would cost. Now we need to do the easy (?) part…got get the money from Mr. Market.   

You might think getting $600 is not a big deal. Maybe a few calls on TSLA would do it? Well, it totally depends on the strategies you use, the time you have to trade, and most important, your account size. If you remember from my first blog, I am starting out with a small account that is used not only for EH but for a couple of different systems, so it’s actually about half of a small account designated to trade and generate the money we need for this. Let’s say that we have somewhere around 3-5K to generate those $600-800. Well, dang, now we are talking about generating 15-20% profits from that account…We need to be careful and plan very good our target trades and expected profits, always controlling the loses, so we can start compounding and building the garden.  

But that part, folks, constitutes Phase-2 of this project. And we will cover it during the next blog… 

 

Cheers,  

Franco.