How is Tennis Like Trading?
High-Conviction Trades
Trading Volatility ---
Like many children, I grew up playing sports. My summer was filled with time split between swimming, tennis and soccer. Then as fall began to turn into winter, my two brothers and I would begin construction of our hockey rink in our side yard. For years, my parents encouraged us to play as many sports as possible. As we got older, we narrowed our sports to one sport a season, as the travel teams and practice commitments grew.
As a child and teenager, I had no idea of the time commitment my parents made to support our various sports teams. For example, there was one winter where my two brothers and I were on three hockey teams … EACH. That meant virtually every morning there was 6 a.m. ice time, and almost certainly 8 p.m. games. The weekends were even tougher, as one of us would travel to Chicago to play a tournament, and another to the upper peninsula of Michigan.
Now I have children of my own, and as they get into more and more sports, I recognize the sacrifices my parents made. I coach my daughter’s tennis and soccer teams, and my son’s soccer team—a total of four days a week of commitments. While I wish I could sip coffee in my comfortable chair on Saturday mornings, watching the games and idly messing with my phone, I know how important a good coach and sports are to a kid’s development. The lessons learned on the sports fields about winning and losing are lessons I still use in trading today.
I retired from my hockey and soccer “careers,” but not before I met my wife on a co-ed soccer team in Chicago many years ago. Once we began to have kids, I decided not to risk a torn ACL or damaged Achilles in my hectic life. That said, I still play competitive tennis, and on occasion I still travel for tournaments.
Playing a competitive tennis match or tournament is a great deal like trading and investing these days. Going into a match, I rarely know the player, his style of play, or how I will approach the match. Similarly, these days in the market, every day is totally new, filled with unexpected swings. But as in tennis, in trading/investing you hit your best shots and put on your highest conviction trades—and over time, you will win out.
I recently recommended a high-conviction trade for subscribers of Cabot Options Trader and Cabot Options Trader Pro after my scanner picked up on highly unusual call buying.
Here is an excerpt from my trade alert:
Buy-Write: Buy Ascena Retail Group (ASNA) Stock and Sell October 14 Calls for a net price of $13.40 or better.
To execute this trade, you need to: Buy ASNA Stock, and Sell to Open the October 14 Calls.
As always, you can sell one call for every 100 shares you purchase, or five calls for every 500 shares you purchase.
For example, you could buy the stock at 13.95, and sell the October 14 Calls for 0.55.
If ASNA closes at 14 or above on October expiration, or a week and a half from today, we will have created a quick yield of 4.4%.
If ASNA is unchanged on October expiration, we will have created a yield of 4.10%.
Our breakeven on this position is 13.40.
After each trade alert, I send a follow-up email going into much greater detail on the reasoning behind each trade.
Here’s an excerpt from the follow-up email:
This morning, we initiated a buy-write in ASNA. When I looked at the price of the volatility/price of options compared to the past two years, I found that volatility is at a two-year high.
Here’s the graph of ASNA option volatility:
What’s so interesting about this graph is that this current volatility exceeds the volatility for earnings that were recently reported—by a significant amount. It certainly feels like something is coming in the next week. I researched and reached out to my associates in the trading world, but was unable to find a potential catalyst.
I fully expect some sort of news to come in the next week and a half because the call buying and option volatility is telling me so.
After the close of trade the next day, private equity firm Golden Gate Capital disclosed that it owned a 9% stake in ASNA, and that the firm had initiated talks with the company’s management.
When I saw the news, I was thrilled! My order flow reading had struck gold as the stock was indicated one dollar higher in pre-market trade on Friday morning. Then, as the market opened, ASNA started to drift lower, and later finished the day down by $0.60 on the day. Needless to say, my thrill was gone.
However, as I step back from this trade, which is still in decent shape, though not yet a full profit success, I’m more OK with how it played out. As in tennis or any sport, I read the game/option action perfectly, and took my best swing/trade. However, in the end, the trade turned out to be a swing and a miss. Over time though, I know that if I continue to stay within my game, both on the tennis court and in trading, I’ll hit more aces than double faults.
Your guide to successful options trading,
Jacob Mintz
Chief Analyst, Cabot Options Trader and Cabot Options Trader Pro
P.S. At Cabot Options Trader, I offer a complete options education, and only recommend trades in which the odds are clearly in our favor. When I buy options, I risk pennies to make dollars. When I sell options, I never expose my subscribers to any catastrophic risks. Sometimes I go for singles; other times I’ll try to hit home runs. My options trading strategies are varied enough to cater to all investors depending on their investment objectives, risk tolerance and available assets.
With a little education, options trading can be simple, low-risk, fun and most importantly, profitable.
Click here to learn how you can benefit from trading options.
