It’s Mailbag Friday.
Or, perhaps as we’ll call it today, Missed Opportunity Friday.
Before we get to it, though, let me first thank you – my dear readers – for all the terrific feedback you’ve sent in over the past few weeks.
I love trading the market and sharing my thoughts on it. But sometimes, it’s a really tough job.
Getting positive comments from you is one of the greatest perks – especially when I take a contrarian stance like being bearish on the broad stock market this month or buying retail stocks.
Those positions were tough for anyone to stomach. But they’ve been profitable. And I truly appreciate the stories you’ve shared with me.
Please continue to let me know how you’re doing. I can’t publish all of the comments. But I promise, I read every single one.
For me… it’s terrific motivation.
On a somewhat less terrific angle… not everyone is entirely happy with me. You know that, of course, because I publish a whole bunch of negative commentary.
Some of it is unwarranted, because the subscribers don’t always follow the instructions in my recommendations. But it’s the negative commentary that provides the opportunity for education. So, that’s where I often focus the efforts of the Friday Mailbag.
Please, please, please, keep telling me if you’re profiting off of my advice. I love hearing that. It inspires me.
And, if you’re struggling with my recommendations, then please tell me that as well. Your comments give me a chance to clarify my trading strategies to all of our subscribers.
With that in mind… here’s today’s mailbag…
Surprised that the weakness did NOT trigger a trade for us in HYG or JNK. This has always been a benchmark that you love to be short or outright purchase puts.
That is what a very strong market that “never” goes down does to even experienced traders. Hard to pull the trigger for fear of a reversal.
– Jeff J.
Thanks for writing in, Jeff. You’re right. I did not recommend shorting the junk bond market despite my obvious bearishness towards the sector.
But that’s not because I was afraid of being wrong. Heck, I didn’t have any problem recommending a couple of long trades in the retail sector recently. So, I don’t fear taking a contrarian stance. My problem with buying puts on HYG was that they did not offer a strong risk/reward setup.
Believe me… in early November I was dying to recommend a put option trade on HYG. I was bearish on junk bonds. I wrote numerous posts about my bearishness in the Delta Direct blog. And it certainly wasn’t a secret to anyone who reads the Market Minute on a daily basis.
The problem was, the put options on HYG were just too darn expensive to offer a good risk/reward setup.
In early November, when HYG was still trading above $88 per share, the November $88 put options were trading for more than $1.00. So, HYG needed to trade below $87 per share by option expiration day in November – that’s today – for this option to be profitable.
Since HYG doesn’t move all that much, the $1.00 premium for the put option seemed expensive to me. So, I couldn’t recommend the trade.
On Wednesday, even with the steep selloff in junk bond prices, HYG closed at $86.68. The put options I referenced closed at $1.28.
That’s a good 28% return on the puts. But that’s hardly worth risking the 100% loss on the trade.
So, instead of recommending buying HYG puts, I told subscribers to buy put options in the S&P 500 ETF (SPY). My thinking was that weakness in junk bonds is a leading indicator for weakness in the stock market. So, as junk bonds sold off, stocks would follow suit.
That’s what happened – and we sold the SPY put options for a 42% profit. That’s better than we would have done with the HYG puts.
Here’s my point…
It doesn’t matter if you’re right about being bullish or bearish on a sector. If the projected move isn’t enough to overcome the premium paid for the option, then you have a poor risk/reward setup. You won’t make money over time buying into those situations. It’s better to find an alternative trade.
We found an alternative trade and profited well off of it.
I’ve pointed out the bearish pattern in the high-yield bond market for quite some time. But, I couldn’t recommend a good bearish trade in the sector because the option premiums were too high to offer a good risk/reward setup. So, I suggested puts on the S&P 500 instead.
Frankly, I think the 42% return in less than one week was a pretty good result for that trade. But… oh my goodness… here’s what I got in my email on Wednesday…
We jumped out of SPY puts and now we’ve got nothing.
– Andy V.
Folks, I laughed when I got this. I really thought the subscriber was joking.
The puts I recommended buying on November 3, and recommended selling for a 42% profit six days later, closed yesterday for less than the original purchase price. In other words, if you were still holding the put options I recommended, then you would be losing money on the trade today. You can’t possibly be disappointed that we sold them for a profit.
So… I’m guessing this person is “punking” me. It has to be a joke.
But, even in humor, there is a lesson here…
When you are buying options, you must be diligent about locking in profits. Options are decaying assets. They lose value over time. So, if you want to be successful trading them, then you have to consistently take profits as they occur.
Holding out for the highest profitable profit on an option trade is a losing strategy.
Yes… my goodness… I have often looked back at some of my option trades and wished I had held them a while longer. But nobody has ever gone broke taking a profit.
So, if you’re looking to trade options for profits over the long term, you are going to do SO MUCH BETTER simply by taking consistent profits on option positions than by holding each trade for the maximum possible profit.
My recommendations will always be focused on long-term success in the options market. You’re not going to get rich overnight by trading options. That’s a terrific dream. But it’s not going to come true.
I want you to be successful and to make money over time. In order to do that, we have to look for low-risk/high-probability setups. And we have to diligently take profits as they occur.
Believe me… I heard from plenty of folks who were underwater on my recent recommendations on bullish trades for Dick’s Sporting Goods (DKS), Macy’s (M), and Brinker International (EATS). But all of those trades are solidly profitable today.
That’s the result of trading low-risk/high-probability setups. And that’s how you’re going to make money trading this market over the long term.
Best regards and good trading,
Jeff Clark
P.S. These strategies are what make the Delta Report so profitable for my readers, week in and week out. They’re the product of over 30 years of option-trading experience.
But there was one day… March 2, 2000… where I learned the secret that’s at the core of the Delta Report philosophy. Click here to hear my story.
Reader Mailbag
In today’s mailbag, readers give their thoughts on yesterday’s Minute, “How Other Newsletters Steer You Wrong”…
This is a no-brainer. Was an NAZ market maker and you are 100% correct!
– Jeff W.
Thanks, Jeff, for the explanation of this week’s recommendation, I always imagine something like that as I was cut out on so many opportunities of a lower entry point.
I find that you are one of the 5% that know something about what you say, and not one of the 95% of the parrots that reread others’ work just to make a buck. Thanks again.
– Curtis J.
And a couple updates from Delta Report subscribers…
Way to go on the DKS put trade, Jeff. I was holding my breath on that one.
Don’t let the complainers get you down. I consider every trade a chance for me to accept or not, so I don’t blame you on anything. But overall, I value your service more than other long-term focused letters simply because so much can happen in the long term that I don’t trust anything long-term right now.
– Gary W.
Jeff, FYI. Sold puts on BBBY, M, TEVA, and DKS yesterday. All are profitable. Covered the DKS as you recommended – but this may be a real bottom for DKS heading into the end of the year. All holding up well, despite TGT.
– John W.
As always, you can send in your thoughts… and any other questions or suggestions… right here.