3 Tips to Ease the Portfolio Pain

If you’re anything like me, your portfolio is in the toilet.

Mine is very heavily biased toward small-cap stocks and cryptocurrencies right now — the absolute worst-performing securities of the past few months.

My portfolio is down over six figures…

It hurts. But I haven’t lost my cool. I’ve been through this before. And I have a plan for how I’m going to make the money back.

I take some solace in the fact that this is nowhere near as bad as two years ago.

In March 2020, my six-figure portfolio dropped all the way to $28,000. But a year later I was back up over half a million.

I’ve done it before and I know I can do it again.

So today, I’m going to share a couple of tricks I’ve learned over the years that work for me.

Every trader is different. So, these secrets may not be right for you. But if they don’t resonate with you, maybe they’ll spark an idea…

Know Thy Strategy

I graduated from the College of Charleston. In the archway above the Cistern Yard — our park in the center of campus — is a Greek phrase that translates to “Know Thyself.”

Some people walk through life never figuring out who they are — their character, their strengths, and their weaknesses.

You MUST know yourself if you’re ever going to succeed as a trader.

And after many years of trading and a lot of trial and error, I’ve discovered I’m very good at rebound trading.

A rebound is when a stock bounces back after an aggressive sell-off. It’s essentially a mean reversion strategy — what goes up must come down and vice versa.

I’ve gotten absolutely crushed the last few weeks trying to time the bottom. As Mike Merson discussed in Monday’s Chart of the Day, this is the sharpest sell-off since the original Covid Crash and with fewer relief bounces.

But the worst thing I could do at this point is bury my head in the sand just because I’ve lost a lot of money.

I’m recalibrating my portfolio to free up cash so I can use the volatility in very short-term options. I’m trading options that expire a week out at most.

That brings me to the second thing I’ve learned.

Trade What You Know

I’m really only trading one security right now.

I’m trying not to stretch my focus too thin. I don’t trade full time. I still work for a living. So I have to be able to step in and out of work to keep tabs. Day trading is difficult when you’re not 100% focused on it because markets can move in a flash, especially in environments like this where volatility is high.

This is why I’m mostly focusing on one security right now, and that’s the iShares Russell 2000 ETF (IWM) — the small-cap ETF.

I’m trading IWM because I own a ton of small caps. So, I know this group of stocks well. I’m familiar with the types of movements it can see.

Index-based ETFs are also much better suited to short-term trading than individual stocks. It’s why Mike Carr does it in One Trade. Yes, individual stocks can see wild swings. But they’re less predictable.

And I’m trading IWM because the options premiums are significantly cheaper than SPY and QQQ right now — the ETFs that track the S&P 500 and the Nasdaq. I can buy an in-the-money option on IWM for about $3.00, whereas it’ll cost me $8.00 on the other two.

The correction we’re seeing also isn’t isolated to any one sector of the market. So I might as well just trade a cheaper index.

As I’ve said many times before, I don’t like thinking too hard or too much. I like to work smarter, not harder.

Last tip for today…

Don’t Fire Your Whole Salvo at Once

Trade in slugs.

If I have $10,000 in cash to play with, I’ll do my first buy at $1,000.

That way if the market moves against me, I can throw in another $1,000 and dollar-cost average.

I try to keep my average price at no more than a 10-20% loss if the market is moving against me. That way the option doesn’t have to go that much higher for me to see an overall profit.

I did this on Monday and absolutely cleaned up on IWM. I was down another $15,000 on Monday around noon. By 4pm I had made close to $30,000.

I bought calls … then puts … then calls again … then puts … and calls one more time and made money on every trade.

I can only do this by knowing who I am as a trader. I have a favorite strategy and a favorite security I practice it on — and I use sound money management so I never trade too much at once.

Let’s recap…

1. Know your strategy. You don’t have to be good at everything. You have a mental disposition and your trading strategy should reflect that. If you’re a bit crazy like me, you might day trade short-term options. I’ve had days where I’ve lost tens of thousands and days where I’ve made them. I’m comfortable with wild price swings like this, but you may not be.
   
   
2. Study a small list of stocks. I recommend picking a few stocks you own and studying their price movements closely. Each stock trades differently. And there are thousands of them. So if you can achieve an above-average competency on one or two stocks… you can make more money trading them than the next guy.
   
   
3. Never go in all at once. I’ve made this mistake before. It was dumb. And it took months to recover. That’s why I never trade more than 1/10th of my available cash at once so I can buy lower and dollar-cost average if it comes to that.

I realize you’re probably hurting right now like I am. That’s why I wanted to spend a few minutes today sharing what I’m doing. We’re in this together. If you make money, I’m happy.

Write in with your strategy for trading this environment (if you have one) at TrueOptions@BanyanHill.com. I’d love to hear from you. Truly.

Ciao,

Chris Cimorelli
Chief Editor, True Options Masters

Chart of the Day:
How Does This Ark Get Back Above Water?

(Click here to view larger image.)

Oh how the mighty have fallen.

The ARK Innovation ETF was one of the best post-pandemic performers in the stock market.

From its pandemic bottom, which tagged the 200-week MA (more on that later), the fund returned over 320% at the peak. That’s in less than one year.

Not huge — the fund prides itself on investing mainly in forward-looking tech companies like Tesla, Teledoc, Zoom, and Coinbase. Stocks of this nature killed it in 2020.

But fast forward to today, and ARKK is now down more than 50% from its peak — faring worse than even bitcoin amid the recent volatility.

Last week, for the first time ever, ARKK closed below its 200-week MA — a hugely bearish sign. So far this week it’s tried to get back above it, but the price rejected off the green line in yesterday’s trading.

What gets this ark out from under the global flood of volatility? Well, for Cathie Wood’s sake, you have to pray for a positive reaction to today’s FOMC press conference. Because if assets are going to go risk-on, battered ETFs like ARKK will likely be one of the top targets.

Regards,

Mike Merson
Managing Editor, True Options Masters