Risk management, my favorite!

As a long time trader and investor, I have encountered numerous strategies over the years. If I had to guess, there probably are at least 10 new ‘gurus’ created on the internet everyday. These ‘gurus’ want to sell you “stuff” and tell you that there way is the best way to live the millionaire lifestyle. Their strategies can be an over-complication of simple concepts, or as convoluted and advanced as the meaning of life. What they will never say, is that they are largely penny stock pumpers and front runners. Pretty unethical in my opinion. But, newbie traders and experienced alike are looking for that quick buck. Who isn’t? And so, these gurus and their strategies propagate throughout the finance world. Few people, besides the successful traders truly understand what it means to eat what you catch. Having gone through all of the marketing and education overload when I first started out, I have learned some pretty important things, cons and frauds. I want to share one of those with you today. You may have heard about this before, but I want to share it again as it is the single most important factor in my own trading that has helped me turn the corner from the path to destruction and daily losses, and now helps keep me balanced and focused on trading the RIGHT way. Risk Management. The single most important concept a new trader needs to learn, love and live by. Just like the weather, the stock market can cast shadows and nasty storms onto our accounts, confidence and strategies. It is risk management that allows us to weather those storms and stay in the game long enough for the sunshine to return.

There are as many risk management strategies as there are gurus out there. I am going to share one of my favorites and tell you how I use it to manage my risk in trades and why. So, everyone in the trading world knows what options are. Most don’t truly understand them or how they work, but they do know that they provide leverage and can be used in both conservative and speculative trading strategies. I use them for hedging, speculating and during earnings season. I began trading using options, even before stocks. It was a backward and unnecessarily challenging approach, but I muddled my way through the learning curve. Basically, the purpose of using options in most trades is to capitalize on the leverage they provide while minimizing exposure or risk. When purchasing an options contract, your losses are limited to the premium price you paid at purchase. Recently, I alerted a couple of trades on GILD (Gilead Sciences), a fairly volatile, $100 stock. In recent weeks, the biotech sector suffered a huge hit and GILD did not escape unscathed. One day GILD closed around $108 and the next day it opened up at $96. Had I been trading this particular stock for a swing to the long side at that particular time, based on it’s price and my risk tolerances, I would ordinarily own between 500 and 1000 shares depending on my objectives and conviction in the trade. That gap down with the rest of the sector would have been quite a devastating loss to wake up to. I will let you do the math.

 As day and swing traders, we are not always privy to the most current and up to the tick information, but we are aware of things like I described above happening all the time. This knowledge gives us power. Both of my recent swing trade alerts on GILD were done using options. Both ended up being 100%+ winners. At no time while I was in either trade, did I have fear that I was going to lose thousands of dollars or wake up to a devastating loss. Thanks to options, my maximum risk was limited to the premium I paid and I didn’t have to worry about expensive nonsense. I will spare you the technical mumbo jumbo on how I chose the strikes I did and how I used options to capitalize on an increase in volatility/vega versus using long stock. If you really want to see what I did that worked so well, you can check out my starter video lesson on options HERE or take the full swing trade course HERE.


 Another example of how using options for risk management can save your bacon is my USO trade. I have been accumulating USO for a couple of months now. And while it is definitely cheap, oil still hasn’t seemed to stabilize. I am happy with my position, and am content holding it for a $20-40k winner. I am using options to lower my average cost, and hedge my long position. Every time USO pops up in price, the volatility and premium pricing in the USO calls go up. So, I sell the volatility of the spike up by writing covered calls against my long position. I collect the premium for the calls I write, and assuming that they are not in the money by expiration, I keep it. At the same time, I buy puts against my position to hedge. This protects my downside on USO for the time being and helps to keep my average cost of the trade well below what I actually paid for my shares.


Knowing different strategies has saved my bacon on multiple occasions, and let me tell you, I love my bacon. I have been fortunate enough to share my strategies and the educational tidbits that I have collected over the years to our community members here. My biggest goal is that through education and experienced voices, we can save the retail trader money. We all know as the “little guy,” that the advantages in the markets don’t lie with us. For me, the value of solid, quality risk management is much sexier than the sales pitch of the millionaire lifestyle.


For questions on options, swing trading or risk management, feel free to email me at [email protected]