Have you ever had an “Uh Oh” options trade? Come on, we all have them; even my almost 3 year old, Brinkley, knows this as seen in the above picture. The “Uh Oh” trade is the trade setup that looks so perfect when you enter the trade, and everything is going great… and then… Uh Oh. You turn on your computer, and something is wrong, you suddenly go from a nice profit to a loss! You do a double take, you restart your computer, you pound on the desk…but there it is…a big loss staring you in the face.
Again, if you have traded stocks or options for any time at all, you know this feeling. In fact, this is a “normal” part of trading and should be expected. In trading, there are any number of things that can go wrong that can be completely out of your control. In fact, there are so many things that can go wrong, I wanted to put together a series on “Trades Gone Wild”.
This is Part 1 of the series and today I simply want to start by looking at some of the bigger risk factors to think about ahead of entering an options trade. These are things to consider when evaluating options setups and looking at the time frame of your trade.
- Earnings – This is obviously the most important event to watch out for when you are considering entering a trade or are already in the trade.
- Dividends – This may not sound like it is that important, but always be aware of your dividend dates. Depending on your options trade, you may sometimes have a short option that could put you at risk of early assignment around dividend dates.
- News on the Stock you are trading – You MUST keep up to date on any news that may affect your position. It is not enough to only check news as you enter the trade as things change constantly. Stay on top of it.
- News on “competitor” stocks – This is similar to # 3, but most people overlook this one. For example, if you have a trade in Coke ($KO), you better know what is going on with Pepsi (PEP). Or as another example, competitors such as Home Depot ($HD) and Lowes ($LOW), etc.
- News on a Sector you are trading – Again, this is similar to # 3 and # 4, but most people overlook it. As an example, if you have an options trade in a bank stock, and there is a FED meeting to discuss an interest rates hike, you need to watch how the meeting may affect the sector. As another example, if you have a trade in any sector that could have a new law or regulation passed, it could wildly affect your position but not have anything directly to do with the specific company you are trading.
- Overall Market News – This goes without saying you should watch the news and know where the major indexes are trading. I also watch other markets such as Europe or China. I also watch the bond market, gold market, and the crude oil market.
- Economic News – You should have an economic calendar that will tell you upcoming economic data and reports. These are readily available on the internet, and you can look for major announcements. These type announcements, (FED meetings, non-farm payrolls, FOMC minutes, etc.) can really move the overall markets and your trades with them.
- World Event News – Unfortunately, we need to watch the global news these days as things going on in China, the UK, the Middle East, or anywhere for that matter can send shock waves through all the markets and again, affect your trade.
- Expiration Dates – Always be aware of the expiration date of the trade you’re in. This sounds straight forward, but the reason to watch this so closely is that options trades react differently over the life of the trade. The closer you get to expiration, the more erratic your trade will become so you should always know how long you have until expiration.
- Stock Buy Backs – Stock buy backs in the last several years have become a big driver of stocks. If you are on the wrong side of this when a buy back is announced or starts to actually kick in, you can get an unpleasant surprise out of the blue.
I will be following up soon with part 2 of this topic to take this “Trades Gone Bad” scenario and dig a little deeper. I will look at some basic steps to consider when entering a trade and ways to help avoid pain in your trades. Until then, good luck and good trading.
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