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.