Despite what your time-frame may be – very short-term like a day-trade, or longer time like a value investor – there is one component that must be present in your trading process: Discipline.
Of course being disciplined is very difficult as there are many things that will pull and tug on you in the course of trading. It can be hard to set your emotions aside (especially when your stock watch lists are a sea of red). Nonetheless, the trader that keeps a disciplined approach will have an advantage over other market participants – the ability to work through a trading process in a more mechanical fashion.
A position hits a stop? So be it. A position hits your target and you sell it? Way to go.
One component however that is much more difficult to master has to do with the timing of a trade, or the timing in one step of the trade. I found myself in such a situation today with a “to fade” short position that I have on in $GOOG (Google Inc for those that don’t know).
Since this is a stock short position, it is an important part of my disciplined trading process to protect the position – and I usually do this with options. In this case, I am looking to put on a Bear Collar – short a Put, long a Call – to help alleviate any potential for a quick reversal (or one that happens overnight for example).
Let me break it down:
One way to protect a short position in a stock is to sell a downside Put and then use the premium collected to buy an upside Call. In this case, I sold the Oct 12 weekly 740 Put and bought the October 12 weekly 750 Call. This was done for a $.10 debit (5.60/5.70).
The goal of this is to allow the short position to run a little further (capped at 740.10) but more importantly it protects a reversal up by owning the 750 Call. This option piece expires this Friday.
The timing for this option piece is very important here because you don’t want to cap further gains on the short unnecessarily – you have to be objective in looking for a floor (and in considering the time frame for the option piece).