First lesson learned: The Importance of Management

Previously on Environmental Hedging… we set the goals for the rest of the year and I shared some thoughts about the current market condition and its volatility. As every week, we went over some ongoing and potential trades, and set-ups from the Dirty and Clean lists. And we talked about how to scale up/down trades and gardening to avoid getting whacked with the current volatility.

As you might remember, one of the goals of this blog was to share lessons learned from trading the system. Well, it took me only one month to mess something up that we can learn from…So today’s blog will reinforce the importance of a topic that we all talk about often, but only a few excel at (definitely not me…yet). And that is trade management. But before jumping into it, let’s see what Mr. Market is doing lately.

General thoughts about the market

The market is still crazy. Remember the time when the only volatile thing was Chipotle Mexican Grill (CMG) and Bitcoin? Well, that time is over…everything is moving up and down with an energy that is way above anything we’ve seen in 2017. Just look at ATRs for any of the stocks on your watch list and compare them to what they were last year. If we take SPY, for example, I can count with one hand the number of times that it moved over 1% in one day during 2017. And this year is crayzeeee…Additionally, as master ShiFu shared in his last blog, the market is flattering with the 200 MA and if it decides to go all in, we better be ready to ride down.

But, this is how I personally approach the current situation…Is the volatility over? I don’t think so…am I bullish? No…am I gonna sit and wait for pure and clean bullishness to trade? Heck to the no!! Haters are gonna hate, and traders are gonna trade…wait, what?…ok, you got the point. We can’t just wait for all the indicators to be in our favor, so we need to keep applying the system. System means we need to sis-te-ma-ti-ca-lly apply the rules to get consistent results, to achieve our goals and hit that expectancy. Just position size accordingly, mix bull and bear trades, and master profit-taking. So let’s get to it.

AMD

It gapped up post-earnings, showing some strength in their business lines that are not crypto-dependent so people liked that. Since then, it came back a bit and bounced a couple of times around $10.7 and then it took off. After 5 consecutive green candles, I’ll wait for a small retracement and then I probably like the idea of naked-puts around $10 or $10.5, right below the previous gap.

X

Premium is the way risk is priced in. And premium on X was absurdly high before earnings, after which it got destroyed. Last week it formed a nice base set-up around $31.5 — $32. While tariffs on steel and aluminum are still under discussion and it could move this puppy, if it keeps showing strength I might issue naked-puts (very small position) next week. Maybe wait for retracement + confirmation before jumping in.

FCX

Showing strength after getting destroyed post-earnings, I like the strong base at $15. It has rallied since then, a little too much in my opinion, and is now approaching another strong zone around $17. I’ll wait and see how it looks next week.

TSLA

Playing around $300, me no like it right now. Once it makes its mind directionally, I will trade it again. Ideally, I would love to see it going north of that $300 resistance zone, and then issue a 280/270 bull-put spread right below that as I’ve done in the past, with a stop loss in that sweet spot below $300 but slightly above my strike price.

FSLR

After moving down post-earnings, it pivoted around 65 and started going north, pumped by an upgrade from JP Morgan and also a new Law in the state of California for solar energy usage in residential homes. I believe this will give solar companies a bust in general, and fundamentals on FSLR are good. However, looking at the chart it is a little bit overextended in my opinion since it has run up from $65 up to $72.5 (about 11.5%) without taking a breather. I’ll keep an eye on it next week and if it keeps showing strength, I like 65-ish naked puts. If I owned FSLR, I would cover part of my position as it approaches resistance.

SPWR (lesson of the day)

As much as I love SPWR, it is giving me a hard time to manage it. And this is what today’s lesson learned is about, as detailed below.

The importance of Management

A few news and announcements, on top of general market volatility, has turned this baby into a cyclothymic. In the last 30 days, SPWR went over all these things: Acquisition of one of their competitors, analyst downgrade, positive earnings but lower than expected Q2 projection, and the new lay in California. So during the last 30 days it broke resistance (I got called-out), then went back down to support (my puts went ITM), then I strangled them and right after I did that the stock moved from -4.5% to +6% in the same day (now my short calls went ITM…again!!) Long story short, I gave away half of the potential profits from the original trade due to a poor management. Purely my fault, not the news. It could have been worst…but it sure taught me a lesson.

See, most of us fall into the trap of spending an excessive amount of time thinking and planning the entry-points. But not enough time on how to manage the trade in different scenarios. Should I have planned this better, not only I would have done much better on the trade, but also I would have avoided “day-trading” my ongoing trades and get stressed unnecessarily. Sometimes the issue with trade management, is over-management instead of lack-f. The better you plane your trade and what to do if it goes against you, the easier the management should be. We should not be making decisions once we are in the trade already, but we should only execute the decisions we made in the planning phase. Why? Simply because in the planning phase the emotions are as low as the 2017 VIX. However, if we try to make management decisions when you are 10% ITM with a naked put, your emotions are like Feb 7th 2018 VIX. No Bueno…

And, once again my friends, since gardening is pretty much like trading I am going to illustrate this with a real-life example. My little garden will give us a good analogy as I have also showed poor-management of my kales during the last two weeks. Such a bad dad…

COMPOUNDING: Go Big or Go Home

I still own SPWR and exited last month’s covered calls with 85% profits. I will re-issue next week and keep naked-putting until I get assigned and buy more shares.

Regarding our little garden, I have (please read with Trump’s voice) HUUGHE plans for it, starting next month. I was actually going to start this month but, well, I messed it up and end up capping my profits this month. Assuming that May finishes positive with the system, you will see big changes in the garden.

Unfortunately, you will have to wait for the upcoming blogs to find out. The only thing I will tell is this: Look at this picture now and remember it until the end of the year.

By the way that one on the right is not a dragon, is Lupita. And although she looks like a killer, she’s friendly. I’m safe. The ones that are not safe are my kales since she likes to chew them so I have to be always alert… part of the garden management I guess.

Cheers,

Franco

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