The Calm Before The Next Big Breakout!

If you're new to the New Money Club or have any questions about how to allocate positions or how to execute  trades, watch this video first.

Dear New Money Club Trader,

It’s another busy week of earnings. And tech’s “big boys” -- Apple, Google and Amazon -- report theirs today and tomorrow. Nearly 80% of the S&P companies that have reported earnings have beat expectations. 

But that’s only because expectations have been severely lowered. This has lifted the S&P 500, while the Nasdaq continues to trade flat.

But that can change after the big three reports. And perhaps fuel another buying frenzy, taking things higher.

Volatility continues to be elevated with the fear gauge for the S&P 500, known as the CBOE Market Volatility Index (VIX), holding at 25.

On Monday, we added our newest position:

  • Buy-To-Open the iQIYI INC ADR (NasdaqGS: IQ) Aug. 28, 2020, $22 call (IQ200828C00022000) up to $0.98 per contract or better, for the day.

Right now, we’re holding:

  • Nordic Amer Tankers (NYSE:NAT) Oct. 16, 2020, $5 call (NAT201016C00005000).
  • China Mobile LTD ADR (NYSE:CHL) Aug. 21, 2020, $40 call (CHL200821C00040000).
  • Box Inc. (NYSE:BOX) Aug. 21, 2020, $20 call (BOX200821C00020000).
  • iQIYI, Inc. (NasdaqGS: IQ) Aug. 28, 2020, $22 call (IQ200828C00022000).

Now we wait and let the market come to us. And I’ll be keeping you updated every step of the way.

Your Questions, Answered!

The mailbag is full, so let’s get to your most pressing questions.

Hi Joshua,

“Some of your recent recommendations are in the red, what do you think about setting a stop loss on your trade recommendations?” ~ Adam P.

Hey Adam!

It comes down to risk tolerance and account size. When entering a trade, we always want to know what's the most we can lose. The best stop loss is knowing your full loss before putting on a position.

That’s what I mean when I say every trade is won before it’s ever put on. We want to know when to exit a winning trade for gains. But we also want to have a plan for the possible downside, too.

When using options, there’s a lot of choices with strikes and expirations. That is why it’s essential to have the same approach for every trade.

Everyone's risk tolerance, account size and reaction to losses are different. With today’s volatility whipping us around at times, I can’t blame you for wanting the extra protection.

This could mean using a stop loss, but I often say reduce your position size. There are some things worth considering before you use a stop loss with options contracts.

Our shorter-term option contracts do oscillate quite a bit. But they have limited downside risk — and unlimited upside potential. Even if one of our positions is in the red by a fair amount, there’s often plenty of time for that to turn around.

If you use a stop loss, you may end up closing out too soon for a loss on a trade that has plenty of time to turn into a win. This will create even more frustration. And not only does it drain your account, but also your emotional capital.

Often a trade doesn’t go our direction right away. And even if a trade doesn’t go our way, you’re out less money than if you were to own shares. That’s why you won’t see me offer any official stop loss recommendations.

Options allow us more massive profit opportunities with greater flexibility — and much higher potential gains than buying stocks outright. And they’ve fared well for us, even in today’s conditions.

Every investor’s risk tolerance is different, and you must decide what’s best for you. If you prefer setting a stop loss on these trades, you can. Keep in mind your results will differ from what I’m tracking.

I can’t give out personalized financial advice, so I can’t tell you exactly where to set your stop-loss if you decide to do so. But, from my back-testing results, I can provide the optimal stop-loss amount.

When measured against millions of situations, my back-testing results found that a 60% stop-loss was the most optimal.

That means if you pay $1.00 per contract, then the stop-loss would be at $0.40 per contract. And again… if you plan on using stop losses, your results will differ from what we’re tracking.

. . . 

Here’s the next question in the queue:

Joshua,

“Why do you recommend selling half of our positions instead of selling them all at once?” ~ Jack W.

Like the question above, there's more than one way to skin a cat. I love to take big, fast profits when we can on our winning option trades. But when I was a professional, that’s not how we managed our positions.

Why?

It can be frustrating to lock in gains then see the prices of those contracts go higher the next day. But, if the prices drop the next day, you feel like a genius.

To create consistency in the financial market, you must have a consistent process. These types of targets seem to be a common practice with other services. Every investor’s risk tolerance is different, and you must decide what’s best for you.

If you're worried about missing out on more potential profits, you can sell half of your position. That way, you can take profits and reduce risk.

But they could also drop in value before hitting your next target. Once the profit target hits, no matter what happens, you’ll make gains on at least half of the trade.

I found success in keeping things simple and that’s why we don't do anything too fancy.

Great questions this week! I look forward to answering more next week.

If you want yours answered, email it to questions@newmoneycrew.com.

I’ll keep you updated if any of our positions swing higher and it’s time to lock in our profits.

Talk with you on Friday.

As always, you can track our portfolio here.

To your wealth, freedom and options!

Joshua Belanger
New Money Club