| From Keith Harwood of OptionHotline…
It’s often been said that it’s “better to be late than never”. But that belief certainly doesn’t apply in options. When betting on a directional move, it’s often best to remember that it’s actually better to be never than late! After all, when buying an option, there is a very finite amount of time for the trader to be right, and if it doesn’t happen, that trade can be catastrophic. On top of that, we should remember that if 50% of the move is already completed, then being “late” means I have only half of the upside (if not less due to other nuances of options).
I’ve spoken at length with many of my clients on the biggest mistakes that one can make in trading options. For someone looking to trade a leveraged move, it’s important to identify it early, get in just at the right time, and then, of course, exit. That’s what makes options so difficult. One needs to time entry and exit well – not just one or the other. The biggest mistakes can honestly be broken down to the simplest elements: poor timing on the entry, poor timing on the exit, and poor overall risk management.
Let’s focus today on timing on the entry, and think about what we just saw a little over a month ago. GameStop (GME) went absolutely insane. But I thought I missed it. My timing didn’t seem right, even though it turns out, in hindsight, that my timing could have been absolutely magnificent. So, given the odds, I did exactly what I should have when I saw the stock trading $40. I did nothing. I chose to be never rather than to be late.
And then GameStop went to an ultimate high of $483.
While that was an outlier move that was incredibly difficult to predict using traditional analytics, there are other trades out there for me to capture. There are many times a year that stocks move 20%, 50%, or even 200%. Those stocks like GameStop that went from $18 to $483 in a matter of 3 weeks? Well, they simply don’t happen that often. And I won’t bet on them happening, either. The odds are simply not in my favor to capture that kind of move, even with the leverage of options.
For me, trading is about finding patterns, and in particular finding predictable patterns. We can certainly trade off of outlier events, and we can certainly buy lottery tickets due to the potential magnitude of the returns even if the odds aren’t in our favor. But the key to note on lottery tickets, swing trades, investments, or any other element of our portfolios is that if time is not on our side (as is the case in options, which decay), then sometimes it’s better to let that leveraged trade that we missed go. There will be many more opportunities in the minutes, hours, days, weeks, months, years, and decades to come.
While missing a move like GameStop hurts, it hurts a lot more to buy in at $400+ thinking that it was better to be late than never.
Make sure you all take a chance to review how I apply technical signals to my options trades at https://optionhotline.com, and if you have any questions, never hesitate to e-mail me.
Keith Harwood
[email protected] |
