Gratitude (good) and Perfection (bad)

November 21, 2018

Happy Thanksgiving!

During our family’s feast this year I’ll be reflecting on my gratitude to each and every one of our subscribers, and to my team here at All Star Charts. I could not ask for a more engaged audience and a more top-notch group of analysts to work with. This year marks the maiden voyage of the All Star Options corner of the All Star Charts platform and the response from institutional and retail subscribers has exceeded my expectations and it makes me ever more motivated to continue crushing it for years to come for all of you.

Sincerely, thank you.

Now let’s talk business…

This week we put an options spread trade on in Goldman Sachs $GS and it serves as a vivid reminder that we’re not looking for perfection here. We’re looking to follow a process.

I published the trade plan for $GS on Sunday night ahead of Monday’s opening of trading. Going off of Friday’s closing prices, the credit that was available for the bear call spread we were looking to initiate went out a $2.35. The credit I published we’d be trying to get was $2.30.

Well, on Monday morning, $GS quickly traded down a couple bucks from Friday’s close at the open. Not a big deal for a $200+ stock, but it made it a challenge nonetheless for us to get $2.30 for our spread. In my case, I had a resting order out before the market opened to try to get a fill at $2.35. It never filled. When I peeked at my open orders about 30 minutes after the market opened, I noticed I hadn’t been filled yet and the spread was now trading around $2.20. I therefore lowered my limit order to $2.20 in an attempt to get filled there. I didn’t. I ended up having to lower my price by a nickel two more times before I finally got filled at $2.10.

I share this anecdote with you because I want to drive home the point that we’re not striving for perfection here. We’re not looking for precision entries and exits. We’re more focused on getting the trade structure right and letting the edges as we see them play out. Unless a stock has a significant gap away from the previous day’s closing prices (or if you don’t get to the trade until later in the day or week and prices have moved significantly), then it is ok to work an order to get a fill and a slightly inferior price. Or, maybe you adjust the strikes up or down as necessary to better position to take advantage of our thesis.

For example, maybe we’re looking to purchase a 105/110 call vertical spread in a stock trading at $100. This means we’re looking to buy the 105 call and sell the 110 call. Well, perhaps at tomorrow’s open the stock that previously closed at $100 is now gapping up to $106? Are you still bullish on the idea, but don’t want to pay $6.00 for a spread that you were hoping to get for $3.00? In this case, you might consider moving the strikes up and instead purchasing the 110/115 call vertical for around $3.00. As long as you’re still bullish on the name and the upside potential still looks good, there’s nothing wrong with doing this.

We all have different time and resource constraints. We don’t expect you to get into our trades at precisely the price we publish, at exactly the open of the next trading day, or even the exact strikes we suggest. The more important takeaways from each trade plan is the thesis, the trade structure (Iron Condor? Bear Call spread? Calendar spread?) and under what conditions we’d make any adjustments, exit the trade, or take profits.

Going back to Monday’s $GS trade, the story has a happy ending. As discussed, I chased my fill from $2.35 down to $2.10 and I’m glad I did. Because approximately 24 hours later, we were able to close the spread for $1.05 — half of the initial credit we received in accordance with our trade plan. We don’t always book profits in one or two days on trades, but it certainly feels nice when we do! This wouldn’t have been possible if we were looking for perfection on our entry.

And finally… remember, as long as we continue to remain in this choppy and/or corrective market, be aggressive taking profits. Reversals in this tape can and will be nasty. Stay nimble and stay aggressive. Happy Thanksgiving everyone!

~ @chicagosean

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