Buy the Dip
Year one of trading was rough for me like many. Filled with a combination of wins and losses, in other words inconsistency. On my best day I’ve made over 10K on my worst I’ve lost nearly as much. Over the last 4–5 months of the year my trading has become much more consistent, far more wins than losses and it’s been fueled by the simple strategy I’ve outlined below. Forewarning I am not reinventing the wheel.
1. I never by any stock at a new high, or close to a high. Why? In most instances’ gravity is simply working against your trade. Smart money is starting to exit while retail flows are pouring in. It is better to exercise strategic patience and wait for a correction. Is this always true, of course not! However, it suits my risk profile and it makes me comfortable.
2. I love bad news! Particularly bad news that does not change a company’s long-term fundamentals. My favorite bad news play is on missed earning’s. In the last couple of months, I was able to make decent returns by going long on both Splunk (SPLNK) and Beyond Meet (BYND) after they missed street expectations. I typically buy a call or a couple of calls with a 3–4 months out expiration to hedge. These are great discount opportunities, that retail investors with smaller accounts can afford. Make sure you do your homework before purchasing. I like to take an academic approach to investing and I love reading annual reports and investor presentations.
3. Hedge, most if not all my early losses were due to making unhedged, directional bets. In other words, I put myself in position to get blown out. Never do this! Use a stop loss, protective puts or time as a hedge. For example, avoid weekly and biweekly options as they are akin to gambling. If your going to buy naked options at least go out a couple of months to half a year and bet on good companies with strong fundamentals. If costs permit buy LEAPS (Long Term Equity Anticipation Securities). This suspends time decay (Theta) on your contracts. These can be relatively inexpensive for small caps and in some cases for less volatile large caps with upside, I would look at AAPL as an example.
Quick Lesson on Why I went long on Splunk.
Splunk is a SaaS (software as a service) Company. The key data point I picked up on while reading their press release was the ARR (Annual Reoccurring Revenue) The lifeline and key metric of a SaaS company.
As you can see:
Cloud ARR was up 71% year-over-year
Total ARR was up 44% year-over-year
Based on this I decided to go long.
Trade Structure:
(1) 160 C (2/19) Exp
Cost $12.20
Sold $18.70
In this trade I only used time as a hedge. Largely in part because of how badly beaten down the stock was, I felt it had to recover. I also checked the RSI (Relative Strength Index) on a yearly timeline, which confirmed my opinion that it was badly oversold. While I don’t trade solely on technical indicators, they can be great for adding context and helping you to understand the larger picture.
The underlying’s price was hovering around 155 when I bought the 160 call, I sold when the stock reached around $177.00. Had I held one day longer I could have made a little over 1K as the stock rallied into the 180’s however that is the nature of investing. Take profits, fine tune strategy and live to trade another day. I am writing to show small plays that retail investors can employ at a relatively low-cost basis, with the goal of capital appreciation to grow their accounts.
Until Next Time!
