RadioActiveTrading Blog

So I just finished watching a “chick flick” with my lovely wife… sigh. GOTTA do that sometimes …but I actually got something out of it beside brownie points! I actually got a recap on three of the most important decisions a trader MUST make. Intrigued? Here we go… The show was called Julie and Julia. It’s a true story about a modern woman that makes a decision to follow Julia Childs’ 524 recipes and do it in a year. Every day, she posts to a blog about her experiences, her successes, her challenges, and her failures.

Now, I KNOW I’m writing to you about trading married puts, covered calls, and spread trades. But the first thing I want you to get out of this little anecdote is the first, very important decision that I had to make as a trader - to BE CONSISTENT.

See, whether Julie’s cake fell, her eggs burned or her water boiled over… she had the character to write down everything and share it with her growing following.

Come to think of it, that’s EXACTLY how RadioActive Trading got started: in October 2002 I began recording what I was learning about trading married puts. Along the way I learned four different ways to make adjustments to my trades that I nicknamed “Income Methods”… and the rest is history.

I was asked to write a book. Now, over the last seven years and with numerous collaborations with Subscribers from dozens of countries, the Income Methods have grown to TEN.

Wouldn’t have happened without consistency. I made a commitment to write a blog entry every day back then, just like the heroine in Julie and Julia… and boy has it ever paid off! Not only have I sold books on five continents, I’ve gotten a lifetime’s worth of trading education from associates from all over. I’ve learned a huge amount more than I set out to teach, and I’m very grateful.

Of course, consistency is very important to trading… not just to selling books

…and here’s why: accurate testing and evaluating your trading cannot be done unless you have first been consistent in your methods for a respectable period of time.

This is especially true if you don’t already have the capital to trade. I challenge anyone reading these words to do what I did: set up dozens of real time “paper” trades for a period of YEARS, plural. Way, way before I started trading six figure accounts for real, I was doing it on paper and tracking the results. I got an education, all right… and one that didn’t have near as high tuition as it costs to “play” the market.

Okay, second big decision that a trader has to make:

To sit.

That’s right, just sit on a position that’s doing what you wanted it to.

I recently had a fella write in and ask me why I haven’t sold calls on CREE, a position that I opened a few weeks ago and that has advanced about 13%.

My reply? I asked him WHY would I do a bearish move like selling covered calls… when this married put position that I’m holding is hitting a new 52 week high every other day or so?

See, the temptation is to POUNCE on a gain sometimes… when the best thing to do may just be to sit. Just sit tight for a while.

I tell you what, I think some of the folks that follow me on my live trade tracking subscription, Fission’… think that watching me is about as exciting as watching paint dry. Why? Because once I’m in a position and think I’m right, I don’t move very quickly.

Yes, I bought 300 shares of CREE five weeks ago at $51.73. Yes, she touched $60 today.

NO, I’m not doing any Income Methods like selling covered calls or doing credit spreads just yet.

Oh, I DID… with the Fission’ gang looking over my shoulder I sold to open Jan $60 calls at .80 cents, and bought ‘em back the next day at .50 cents… but that hardly counts. It only captured a premium of $90 (.30 cents a contract times 3 contracts)…

But, hey. I think that the most difficult…. and most PROFITABLE trading decision one can make is the decision NOT to act. Not to soon, not for too little. Earnings are coming up for CREE, and my “bulletproofing” opportunity hasn’t come yet. So I am sitting tight, on a stock that may or may not reverse.

I happen to like CREE. If I’m wrong and she tanks soon, I lose 4.8% of my capital. But if I sell calls or do something rash… like CLOSE the trade (I could profitably right now)… then I won’t catch the best part of this ride if she does go up like I think.

Difficult? Yes. Is it correct to sit on a trade? YES, if that trade is showing you what you want. If the stock is tanking, stubbornness is not a good quality. But right now, I’m a holder with CREE.

So there’s the first trader decision and the second: CONSISTENCY in your trading, and SITTING when it’s right to do so. Here’s the third decision, and perhaps the hardest of them all:

PULLING the TRIGGER.

That’s interesting because the first two decisions I told you about are about staying the course. The third is about changing everything.

When you make the decision to trade a married put, you take on a certain amount of risk for a certain amount of time, believing in a good outcome but preparing yourself responsibly in case you are wrong.

When you SIT and STAY ( …but don’t play dead ), you are sticking to your original, preferably WRITTEN plan of trading. You expect your underlying stock to rise, and therefore the net value of your married put will rise as well.

When you decide to sell the position, or to do one or more of the Income Methods however, you are changing your stated position. That either takes guts or foolishness. My job is to see to it that I make more decisions based on the first and not the second.

But once the numbers make sense, PULLING the TRIGGER is the important thing to do.

This mean placing the trade! Either your run is over… or you are ready to change from low risk to NO risk… or you are finally ready to admit that you were WRONG and that you’re throwing in the towel.

For this last decision, the decision to pull the trigger, let me give you a few tips:

FIRST, no one can pull the trigger for you. Look, if you make a mistake it was probably in the setup. That means there is nothing you can do about it now. But if you put this decision in someone else’s hands, you will not feel the conviction to make difficult decisions in the future when you need to, or you will blame the person you put in charge for blowing it.

SECOND, limit your risks in the first place. Have a married put in place: you know, when you buy a stock get a put ( 1 contract per 100 shares of stock ) for an insurance policy. Have a written exit plan.

FINALLY, when all is said and done, use the Catastrophe Report. This is something that I personally use with ALL major decisions, as well as some minor ones: imagine that it’s tomorrow and the WORST POSSIBLE THING that could have happened, HAS happened. Are you okay with that? If so, that really frees you up and helps you to think clearly. Now you can weigh the consequences of your decision and not get hung up on all the “what ifs”.

Okay gang, I’ll keep you posted on CREE. Right now I’m endeavoring to be CONSISTENT, SIT for a while… and I’ll PULL the TRIGGER on selling covered calls, selling the position itself, or doing a spread trade to lock in a more desired “worst case” result while leaving the upside open. I’ll let you know when that happens.

This entry was posted on Monday, January 11th, 2010 at 3:26 pm and is filed under Married Put Trading. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.