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There’s an old saying on Wall Street that you may have heard before: “The trend is your friend.” While some people like to add “until it ends,” there’s actually a lot of wisdom in that cliché when it comes to trading. It’s also an accurate description of our strategy in the current environment.
While the biggest multi–month moves might seem obvious in retrospect, on a day–to–day basis, sentiment has been a lot more hesitant and prone to reverse on the slightest shift in the market wind. One morning, stocks open down and traders dump all positions, blaming China or the Fed or whatever other fear factor they’re focused on that day. It’s a “risk off” day. The next morning, the world looks a little brighter and the same traders wake up willing to take “risk on,” so they buy back into the same positions.
The trend, in other words, hasn’t been clear enough for stock or index fund traders to make a lot of friends before everything shifts into reverse again. It’s possible to make money in this kind of market, but it’s usually either a grind or a test of long–term conviction resulting in a few percentage points a week at best. That’s just not fast enough to keep me interested.
And That’s Why We Trade Options Here.
As long as the trend is clear for a few days or even hours, options move fast enough to turn into real money. That 0.6% daily random walk on the S&P 500 can easily turn into 7–10% when short–dated puts and calls near the money only cost $1 or less.
That’s the 2–Day Trader system in a nutshell. It only takes a few days, so we don’t need to buy options with a lot of time to run. And that close to expiration, we don’t have to pay a lot of money in premiums. Low premiums lower the amount of capital we need to deploy on every trade and also multiply the percentage impact of even small moves on the underlying securities.
There isn’t anything magical here. It’s just math. If the benchmark S&P 500 index fund swings 1%, that’s roughly a $3 move. Suddenly options that were $3 out of the money are valuable. People will pay a few cents or even a few dollars more for those contracts and still come out ahead when it’s time to exercise. When we only paid a few cents or dollars to buy in, that upside turns into huge percentages.
We aren’t here to hang on through expiration so we can exercise those rights. We’re just trying to squeeze extra percentages out of small market trends, day after day, week after week. On those terms, all we need is to hit more often than we miss and make sure the wins stay bigger than the losses. The math will take care of itself.
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