It’s measure twice and cut once!

Whether you have ever built a house, a doghouse or even just a birdhouse you probably already know the old saying “Measure twice cut once! ” It’s true. I used to frame houses many years ago and more than once we would see some guy who would be a lil bit less than on the ball make a statement like ‘I cut it twice and it’s still too short!” … Okay, we would then tell him to go get the board stretcher and make it better…….. Hint:: There is no such thing as a board stretcher…

In trading / investing, especially Options like the real life example I’m going to talk about today. We need to “Measure twice and cut once”

How do we do this? By having our checklist in place and utilized prior to ever placing our trade and or investment. Meaning that our potential trade should pass all of the criteria we have set forth before clicking the button, not after.. This is not the same as your Goals. What we are talking about is a step by step checklist, 1,2,3, A,B,C, and if your stock or option does not meet all of the criteria, you do not enter the position. It’s really that basic, that simple and that potentially headache saving.. And unless you own stock in Aspirin there is no need to want any more headaches…..

As a Options trader I often trade $AMZN. I trade it for it’s liquidity and it often meets all of my other requirements. I have a whole complete 10 step checklist ( yours might look different ) in place that if a potential trade doesn’t meet the criteria, its not going to be placed. A couple of things that I like about $AMZN is it has good volume, often has Gaps which I trade regularly but that is another topic for some other time. But what I did recently on a trade with it was I became complacent. I only measured once, not twice. Which would of saved me a lot of extra work. Sometimes we can become so familiar with a product that we think we know enough about it and not double check our checklist before entering the trade.

Complacency can kill our trades. What I did was I bought ATM Calls, went 90 days out, all is well, on a up day, but did not double check the Options Chains OI …. What was I thinking??? At that brief moment I dont believe that I was, not properly or prudently at least… As the position turned there wasn’t any OI there for me to unload it fast enough .(that means Open Interest for those who dont trade Options) And now all of a sudden I was stuck in a down position. All hope was not lost. I immediately went to work. Good traders ( I am not trying to label myself that ) are competitive by nature. They dont wait to see what is going to happen they go make something happen for them. And that is what I did, To not only offset the loss but cap it ( stop the bleeding if you will ) I bought Puts. Now please know this, that can be a very tricky game, and it does not always work out well, you now have 2 separate positions that are opposing each other and really only one can win. But both could potentiality lose!!  What if the price now stays stagnant and you are stuck in the middle of the 2? What if your Puts have a significantly  lower Delta? Or higher cost basis than our Calls? Or worse yet what if Theta is about to kick in on the Call side?? Ouch….( it wasn’t by the way , like I said I bought 90 days out) With Options you have so much more than just price movement like you do with a stock. You have Delta, Theta, Gamma, Implied Volatility, and so much more and they are all trying to beat you up if you didn’t measure twice before cutting!

So my question to you is do you have a set checklist in place that you not only check, but double check each and every time before you place that trade or investment?  If not, now might be the time to start one so hopefully you only have to “Measure twice and cut once”

Trade smart, live charitably and be well…. Bill Mc