Are You a HIMI Trader?

by Options Sensei

It has been one of the wildest weeks in memory as the destruction in individual names is finally dragging down the headline indices.  As of midday, the SPDR 500 Index (SPY) and Powershares Nasdaq 100 (QQQ) are down over 1%; now off some 5% from 52-week highs. 

This still masks the bear market bloodbath that’s been occurring below the surface, and it’s showing no sign of abating. Most everyone from sophisticated hedge funds to meme YOLO call-buying retail traders are getting shellacked. Rather than listing individual names, we’re taking Cathie Wood’s ARK Innovation ETF (ARKK) as a proxy for the high growth, low or no-profit names that everyone piled into, as they soared during the 12-14 months of the pandemic.  We’re getting a better picture of what’s happening to a lot of people’s accounts.  ARKK is now down some 38% from its February high. What’s amazing is that it’s top holding, Tesla (TSLA), which represents 10% of the fund, is still up 45% for 2021. That means most of the other 25 holdings are down over 50%

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ARKK stock market chart 2021

For example, today’s disaster is Docusign (DOCU) down 40% today alone and now down 60% from its 52-week high it hit two months ago.  What’s equally amazing is that the stock’s still up 80% from March 2020 lows.  This illustrates just how far ahead of themselves these stocks ran and also how much further they could fall. 

I have a feeling that all those with the Fear Of Missing Out (FOMO) are now having some regrets.  I was certainly starting to feel like an idiot for the first half of 2021 as I stuck to waiting for pullbacks, and applying conservative strategies into blue-chip names in order to grind out consistent returns. 

The Options360 Concierge Trading portfolio actually picked up 1.5% this week and is now up some 54% for the year to date. Not to sound smug but, I guess you could say I’m Happy I Missed It (HIMI)

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This is not to say we haven’t had our share of losers, PayPal (PYPL) being a notably wrong long.  But, as I repeat ad nauseum, defining risk through position-sizing, setting well-defined exit and entry parameters, and using hedging strategies are a must for long-term success. 

A recent example of employing this discipline comes in Options360’s recent trade in Nextera (NEE) that I discussed in this article two weeks ago.  To sum it up, it began as a simple calendar spread, and we took partial profits last week. Yesterday, I closed out the balance to achieve a 63% gain over the two-week holding period. 

The reason I closed the position wasn’t that I’m so smart (shares are down over 2.5% today) but because we had a very nice gain.  Here’s what I wrote in yesterday’s  Alert:  

Stock has been solid and still looks good. But we know this market can be fickle. It was a small position, let’s secure a decent profit.”  Many people might have seen the stock making a new 52-week high and stayed in the position looking for bigger gains. What I saw was a nice profit and the knowledge that this market is now in a high volatility environment in which lack of liquidity can lead to quick reversals. 

A byproduct of keeping risk low, taking profits, and remaining flexible is that Options360 currently has plenty of dry powder with 65% in cash.  Meaning, while others operate in the fog of margin calls and damage repair, we take a clear view of the current market and find opportunities inside the mayhem.  Indeed, this morning I sent an Alert to initiate a new bullish position in Walmart (WMT). 

Has the past year of seemingly-easy money being made on ridiculous valuations left me bewildered and frustrated at times? For sure.  As I wrote last month, I felt like I was wandering in a wonderland.  However, with what’s been happening over the past month I’m HIMI.

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