June 2020 – Enlightenment Investing

Why you need to get better at taking losses

If you have any dreams of becoming a trader, one of the most important things you can do is take losses.

Taking losses is admitting defeat.

Taking losses is means you analysis was wrong.

Taking losses is unacceptable.

These are myths that we tell ourselves about taking losses.

The three most costly trading errors you can make

According to Mark Douglas, author of Trading in the Zone (book notes here) the three most costly trading mistakes you can make are:

Not predefining your risk
Not cutting your losses
Not systematically taking profits

Taking losses hurts. But why does it hurt so much?

On a psychological level, you don’t want to be wrong. Being wrong means losing money, and you don’t want to lose money. Losing money is painful.

Being wrong is a hit to your ego. It means your analysis failed.

Too often traders allow themselves to sit on a losing position, waiting for it to come around in their favor. I can speak from personal experience regarding this.

For about my first year of trading, it was so difficult for me to cut losing trades early on.

I didn’t know when to cut a trade. I thought to myself “if I just wait a little longer, the trade will come back my way. I just know I’m right.”

Frame losses differently: the cost of doing business

Losing trades are a business expense.

They are the cost of doing business as a trader. Don’t look at them as anything else. They are not a reflection on your analysis. They are not a reflection of you as a person.

Losses are merely the cost of doing business in an uncertain environment with uncertain outcomes.

Dave Portnoy is playing the media like a fiddle

For those of you who don’t know, Dave Portnoy is the CEO of Barstool Sports, and has taken on the persona of Davey Day Trader since sports were cancelled in March due to coronavirus.

Dave’s an avid sports fan and sports gambler, and trading stocks have given him and many others an outlet as the sports world is put on hold.

Now that Dave has gone on a winning streak, he’s called out the likes of those in the FinTwit community, including calling Ross Gerber a “SIMP” and Warren Buffett “washed up” and an “idiot”.

At first, financial media thought what Dave was doing was pretty cute. Fast Money would have him on their program and their panel of experts would give Dave advice on stocks.

But now they’re fed up with him. Interviewers appear to be defensive. Portnoy continues to remain brash as long as he continues to make money in the market.

What the media doesn’t realize is that they are being PLAYED by Portnoy for millions of dollars in free publicity.

And you know the sad thing?

This is the same playbook that Trump used to get free publicity through his 2016 campaign. The media believed there was no chance Trump could beat Hillary, so they built up Trump as the candidate so they could rag on him every time he said something stupid. Then he won the election and it wasn’t quite so funny.

This was the same playbook used by Lavar Ball to get free publicity when his son Lonzo Ball was at UCLA and getting drafted by the Lakers. Lavar was building up his own brand, Big Baller Brands, and leveraged media attention to try to monetize this idea.

He used his son’s hard work and accomplishments to push his own thing. It only ended once Lonzo Ball rolled his ankles multiple time in Ball Baller Brand shoes causing him to switch over to Nike, and suing a former brand partner.

The media gets played so hard. They fall for these electric, brash, loud personalities who say whatever is on their mind. Then they get defensive and attack when those loud people don’t do what they want them to do.

That’s what’s happening with Portnoy. As he continues to brag about his stock market gains, financial media and those in the financial space grow more and more resentful of the man.

Thing is, Dave doesn’t care about making money in the market. Once the world goes back to normal, and sports come back into our lives, Dave will go right on back to running Barstool sports. Except now the Barstool sports brand has been exposed to tens of millions of people who may not have otherwise heard of them.

So, financial media, you are being played. You fed the beast, the beast has become bigger. Now you are upset that Portnoy is making a joke out of the financial industry.

To the mainstream media in general: you get played so hard repeatedly, and you don’t even realize what is going on. While your attention is on Dave’s trades, he’s busying enjoying all this free publicity at the benefit his brand.

Don’t like it? Stop giving him attention. That’s it.

I’m sorry for anybody shorting this market

This is a difficult market to get a read on, that’s for sure.

Shorting the market right now is a fool’s errand. Whether you believe liquidity from the Fed is driving the market higher or not doesn’t matter.

The market wants to go higher. That’s where the path of least resistance continues to be at the moment.

Selloffs are very few and far between. You have to be tactical and quick with any shorts in this market. They can payoff, as they did for me on Thursday and part of Friday. But they stop working very quickly.

We are all waiting for the next big selloff. It may come. It may not. For that reason you have to be careful until we get there.

I learned my lesson last year

I got burned time after time shorting the market for the larger part of 2019.

I was focused on fundamentals, trade war headlines, and a seemingly deteriorating market.

So I shorted consistently all of last year. I came very close to blowing up actually. I was down 80% at one point.

It wasn’t until March of this year that my short positions paid of very handsomely and actually got me back to even despite the horrible 2019 year.

In recent weeks my trading has improved

I’m more focused on what VVIX and VIX are telling me in terms of volatility. If I believe these are trending higher, then I’m going to be biased to mix in long and short trades to capitalize on a move in either direction.

However, if VVIX and VIX are trending lower, them I’m biased to hold a majority of my positions long in the market, depending on what is moving on that given day. In recent weeks, I’ve been able to make good plays on the likes of XLF, GS, JPM, BA, UAL, RCL, CCL, F, TSLA, XOM, AMD, NVDA, VIAC just to name a few.

Take profits and cut losers

I like to play options that are 2-4 weeks away from their expiration date. Weekly options (5 or less days to expiration) are too risky for my style right now. I like to give my options a little breathing room.

I watch my positions like a hawk. When I begin getting down 20% I seriously have to consider cutting this position and taking a loss. Once I’m down 40% I cut it no questions asked.

I also try to take profits on 50% of the position around a 10% gain (or more if it’s there). Then I take off another 25% around a 20% gain (or more). The I leave the final 25% of my position to run to see how far it can go.

Last week I had a SPY put option that I let run, that went from $90 to $630 in a matter of days. In the past, I would have never let it go that far because I would’ve booked all of my profits too soon. But because I had already closed out 80% of the position at a gain, that last contract I was holding was essentially risk-free and I had no problems holding it for a little longer.

If you want to learn more about trading psychology, I highly recommend you check out my notes on Trading in the Zone by Mark Douglas.

Been playing lotto calls on big movers…

This market is insane. For that reason, I’ve been playing short-term call options on those names getting bid the most recently.

Banks, airlines, cruise lines, oil, casinos, retailers, are all industries I’ve dipped into and out of recently. I’ve traded it on short-term call options about 3-7 weeks out.

My main focus is to take of 1/4 of a position at 10% profits, another 2/4 position at 20-30% profits, and then let the remainder of the position run. Taking profits is critical to setting up risk-free trades.

That’s the way it has to be played right now.

It’s very very very easy to adopt a bearish mindset right now.

The market is going insane.

But I’m thinking about it like the tech bubble.

My main focus is to keep my holdings short. I never held any of my lotto positions past 2 days unless it was the 1/4 winning position remaining.

It’s much much easier to let winners run when you booked 3/4 of your position at a profit. Those runners have ended up making up my big home runs in recent days.

My best trade was UAL last Friday, which I booked at 361% profit. F also netted me 192% profit.

I cut losers at around 20-40% drawdown on these positions without any regrets. It’s worked out well so far. But that can change very quickly.

I was wrong

A few weeks back I was dumb enough to think selling would return to this ridiculous stock market.

I want to catch the next downturn. I think we all do.

Downturns provide opportunities for large profits.

Volatility events have been some of my most profitable times. The hardest part with shorting any market is being patient and strategic.

My gauge to short flashed

I have a few different metrics I monitor to gauge when are better times to short than others.

They began flashing on May 11 and 12, and sirens were going off on the 13th and 14th.

On the morning of the 14th, the market miraculously recovered. I felt like OPEX and VIX expiration would loosen up this market. Alast I was wrong. But, I ended up minimizing my losses from this due to position management.

Position sizing and profit taking

This is why position sizing and profit taking are key to succeeding in overcoming your emotions in the face of an uncertain future.

On May 12, I put on 100 SPY July 17 puts at the $110 strike for $0.03 per contract, totaling $300 (small bet).

On May 13, I took off 20 contracts at $0.06, for a total of $120. That was a 100% profit from the previous days price. Now, my cost minus proceeds received from this sale is $180 ($300-$120).

On May 14, I took off 20 more contracts at $0.10, for a total of $200. That was a 233% profit from the previous days price. Now, if I take the $180 above, and take off the $200 here, my cost minus proceeds now equals -$20 ($300-$120-$200). This means my remaining position is risk-free.

Risk-free? No way…

Yes way. I had 60 contracts left that could literally expire worthless, and I would have still made a profit on the entire trade. This is why it’s important to take profits along the way on any position you’re playing

Turned out I was wrong. But I played my signals, managed around the situation, and came out with a small profit (which actually turned into a small loss because I later added to it…).

But…I ended up with a smaller loss because I managed around an unknown future. At times in the past, I would’ve ridden the entire trade from top to bottom and loss damn near my full investment.