This week I want to look at a variety of sample positions and discuss how I think through building a trading plan. The two fundamental questions to consider are:

What do I do if I’m right?

What do I do if I’m wrong?

Let’s take a closer look:

AMD Naked Put

Suppose we used last week’s bull retracement pattern in AMD to sell June $44 puts for around $1.00. I think about this in one of two ways. First, it’s a bet that AMD will sit above $44 on June expiration. Second, I’m obligating myself to buy 100 shares of the stock at a cost basis of $43.

What if I’m right? I’ll buy back the put around 20 cents to capture 80% of max profit ASAP.

What if I’m wrong? I’ll sell a 2nd and potentially 3rd contract around $1.50 to $2.00. Three contracts is a full position. I’ll place a target on each tier to exit once I’ve captured 80 cents. If the stock never recovers, then I’ll buy up to 300 shares at a cost basis around $42.50 and sell covered calls until made whole.

QQQ Bear Call

It’s April 14th and QQQ is getting overbought. Let’s say we want to start leaning bearish, so we sell a May $224/$227 bear call spread for 70 cents. The intent is to add a second tier around $1.05 and potentially a third tier at $1.40.

What if I’m right? The plan was to take profits on each tier once I captured 50 cents.

What if I’m wrong? QQQ ended up pushing higher, and I was filled on April 17th on the 2nd tier at $1.04. During the selloff, I hit the target at 52 cents on April 21st. Because QQQ has rallied back, the first tier is still on and currently losing slightly. If it keeps pushing higher, I’ll get stopped out at the short call strike of $224.

NFLX Bull Put

NFLX had a lovely little pullback to the rising 20-day moving average and formed a bullish reversal candle on April 29th. Let’s say we sold the June $345/$340 bull put spread for around 70 cents.

What if I’m right? Buy to close the spread at 20 cents ASAP to capture a 50 cent profit.

What if I’m wrong? Scale into a second and potentially third tier at $1.05 and $1.40 if the pullback deepens.

NFLX didn’t move against us at all, so at this point, you’d be sitting in the first tier with a 30 cent profit.

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