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How the Amalfi Coast is Like Trading Options

I finally took a break from the stock market on a recent trip to the Amalfi Coast. But there were parallels to be drawn between my trip and trading options.

Jacob-wife

In mid-May, my wife and I spent 10 days in Italy for our 10th anniversary. I left Cabot’s VP of Investments Mike Cintolo with instructions on how to manage our options positions, and spent the next week and a half not worrying about every uptick and downtick in our Visa (V), Oracle (ORCL) and Anheuser-Busch Inbev (BUD) Call positions. For the first time since my honeymoon, I totally pulled myself away from the stock market and trading options. It was glorious!

What was the best part about our trip? My list could go on and on. The food at the farm/winery we stayed at in Tuscany was the best I’ve ever had. The seafood on the Amalfi Coast was the freshest I have had in years. And detaching ourselves from our work, emails, phones, soccer practices and kids, was the mental health break we needed (sorry kids, it’s true).

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And while the trip was mostly stress free, the drivers in Italy nearly gave me a heart attack. I’m considered a pretty fast driver in the states, but after we picked up our rental car in Rome, I quickly learned that Italian drivers take speed and risk to a whole new level.

Here is a picture of me in our Fiat:

Driving a Fiat Chrysler in Italy is a lot like trading options on ... Fiat Chrysler.

And while the drivers on the roads from Rome to Tuscany were aggressive, it was the drive to the Amalfi Coast that still gives me nightmares. Imagine driving on the side of cliffs that spill over thousand-foot drops into the ocean, on roads that in some spots aren’t wide enough for two cars to pass. Oh, and did I mention that these drivers were taking hairpin turns at 60-plus miles per hour?!

And yet, even as I was on my vacation and not thinking about work, I couldn’t help but compare the perilous drive to trading options and stocks. The views once we got to Amalfi were breathtaking and worth the stress, but getting there took careful calculation and awareness of what might be coming.

The Fiat Parallel

Take, for example, Cabot Options Trader’s position in Fiat Chrysler (FCAU), which was a home run, but certainly had its ups and downs.

In late September, when FCAU was trading just below $7, my readers bought the FCAU March 7 Calls for $0.65. That was after my options scanner had picked up on a buyer of over 90,000 calls targeting a move higher in the stock. After holding for one month, we sold half the position for a profit of 38%, and went for the home run on the balance of the position.

Slowly but surely over the course of the next several months, FCAU climbed higher and higher. Along the way, I raised my mental stop on the position several times, which would prevent us from giving up our gains if the stock fell, while allowing us to let our calls to continue to ramp higher. By early January, the stock was trading above 11, and our calls were at a profit of approximately 500%. The position was a home run!

Then on January 12, Fiat Chrysler was accused of illegally using software to bypass emission controls. The stock instantly fell off a cliff, dropping from 11.3 to 8.3 in the blink of an eye. This was the worst-case scenario!! The home run was taken from us.

I didn’t immediately sell my position because the options markets and the stock were too wild to execute a trade at a good price. But once the stock settled down, I stuck to my mental stop and locked in a profit of 320%. It was without a question a great trade, but not the grand slam it once was. That said, I will never beat myself up for the way I managed this trade. No one could have predicted an emissions scandal.

Trading Options: Stick to a Plan

Whenever I’m trading options, I have the same plan. Take profits on half of the position at a 15% to 30% gain, and then go for the home run on the balance. And by raising stops along the way, we’re protected from giving up gains.

Like my perilous drive to the Amalfi Coast, my FCAU trade had plenty of twists and turns … plus a drop off a cliff. But the payoff in the end was spectacular!

To learn more about options, and how to profit from trading them, consider taking a trial subscription to Cabot Options Trader.

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Jacob Mintz is a professional options trader and editor of Cabot Options Trader. Using his proprietary options scans, Jacob creates and manages positions in equities based on unusual option activity and risk/reward.