Jeff Kohler the Option Addict | Stock and Options Trading

This post is in relation to the conversation I had with Mike outside of the blog.

We analyzed his trading rules/approach over the blog since Mike had mentioned he is still waiting to find big bushels of cash in this market. He is a directional trader, trades breakouts, and follows some fairly decent rules to keep him disciplined. As I reviewed his system and rules, I e-mailed Mike for a list of his "picks" to see what he was trading. When stocks like GM, HD & CECO showed up on his radar, I figured that it wasn't really his approach or rules that were hindering his performance, it might have had something to do with the stocks he had selected.

I am not trying to pick on Mike, (Mike, hope it doesn't come off that way) but I think this is a great topic. How are you selecting your trades? I get this question at least a half dozen times a month and it can lead to a lot of trading without seeing significant profits.

For a lot of traders, everything else is processed before the trader really considers the underlying stock. For example, a newer trader will notice the green arrows before they get a feel for the underlying trend. This is the point where I recommend that a trader keeps a watchlist of a few stocks that they have a feel for and like to trade. At least until they develop a preference of what they like to look for in an underlying stock. Using one of the stocks I mentioned earlier (HD, GM, CECO) when these stocks move, they don't move all that much. Perhaps 5% or so on an average move? Are you taking these moves into consideration before you place a trade? If you have ever traded an option on something like a Dow component, perhaps you need to revise your stock picking methodology.

When I answer the question...

"Hey Jeff...When you have numerous trades that you want to trade, but can't decide which trade to place...what criteria do you use?"

Answer: "I pick the one that will make the most money."

It is the truth. Take the stock that makes the biggest average movement. If you are going to be an option buyer and plan to profit on the directional movement of a stock...PICK THE STOCK THAT IS GOING TO MAKE THE BIGGEST DIRECTIONAL MOVEMENT! If not... I would trade spreads, and not worry about price movement. As a stock picker, you need to pick stocks that will best operate under your selected strategy.

I see this taken for granted occasionally and thought I would vocalize my opinion about it.

Recommendation: If you are still struggling picking stocks, don't worry. You'll get better at it along the way.

Long: GROW...unbelievable. Let it run.

Short: HIBB

Posted by Option Addict on 3/26/2007 at 4:27 PM | Permalink

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Mike, thanks so much for allowing Jeff to use this example as I think it will greatly help us all.
Bob H.

Posted by Anonymous | 3/26/2007 05:40:00 PM

Trust me, it was one of those "Ah ha!" moments when Jeff pointed this out. I'm now in the process of revising my watch list for the bigger movement stocks. At least for buying options.

For bounce plays this means calculating the average 30 day move which I can say I wasn't doing. Breakouts are easier because the target price is built into the pattern.

I'm also ignoring pattern breakouts unless the projected move is a 3:1 or better which seems to require by it's nature a bigger moving stock.

I suspect this may make my risk management a bit tougher so will have to really focus on hitting the bounces right at support and breakouts, just as they break.

This is all going to need some refinement. So if anyone has tips on how to find or pick these type of stocks let me know.

MikeH

Posted by Mike | 3/26/2007 06:48:00 PM

I hate the white on black text, this blog would be 100% better the other way around, it's just too painful to read

Posted by Anonymous | 3/26/2007 09:02:00 PM

I agree with Mike. This was a big Ah ha moment for me too! Even if I am looking at a 2 to 1 R/R for my calculated risk, if I use my mental stop I will get a much better actual R/R if the expected move is $4 instead of $2. Much more profitable.

Bob

By the way Jeff, you can make this any color you want. Just keep doing it. Your blog has really helped accelerate my learning process. Maybe it should be green for show me the money!

Posted by Anonymous | 3/26/2007 10:01:00 PM

Mike, if you use the Investools Power ProSearch, try adding the following to any of your favorite searches (I got this from Brian Anderson).

Step 1: Performance
Step 2: Stock Relative Performance
Step 3: 3 Days
Step 4: high as possible

Step 1: Performance
Step 2: Stock Relative Performance
Step 3: 1 Days
Step 4: high as possible

Now, add volume:

Step 1: Volume
Step 2: Volume Ratio
Step 3: 3/30 Day
Step 4: High as possible

Step 1: Volume
Step 2: Volume Ratio
Step 3: 1/30 Day
Step 4: High as possible min 150 max 500

This will help find stocks that have just done a breakout with volume.

Bob

Posted by Anonymous | 3/26/2007 10:06:00 PM

I am out surfing in Hawaii. Taking some time to clear my head and take another look at my rules. X is helping pay for some of the trip and that is what keeps me in this profession. This blog just keeps getting better. A new rule for me will be : I promise to add more more posts when I get back...thank you everyone.

Jamie

Posted by Anonymous | 3/26/2007 10:48:00 PM

Jamie,
I like your new rule! I would love to make a post about my vacation paid for by trading!!!

So are these homebuilders going to take down the market again today? I've been in this industry for over 12 years now and am amazed at how blind these national builders have gotten and how much inventory they've flooded the market with. Compounded with the subprime situation and, well let's just say I'd love to be able to trade full time.

It should be an interesting day, I don't know how long the bulls are going to keep holding the market up. Yet, I don't want to tighten the stops too much because of the price swings during the day. Any suggestions Jeff???

As for the color of the text, I'll keep reading it no matter what.

Gary

Posted by Gary D | 3/27/2007 05:33:00 AM

Bob, thank you for the Power Pro help-will try.
Jeff thanks as always and I personally find the color helpful.

Posted by Anonymous | 3/27/2007 08:44:00 AM

BZH breaking out of a descending triangle today, $5 move potential

Posted by Ken | 3/27/2007 09:23:00 AM