Here are some questions that I get from time to time and my answers:
Q: How do I get started? I don’t know anything about options trading.
Jacob Mintz: I recommend reading my Guide to Options Trading—it breaks down the various definitions and strategies that we use. Start off by reading about calls, then move on to puts. Once you understand the fundamentals, options are not that complicated. When you’re ready to start, trade one contract and track how the option moves. When you’re more comfortable, execute two contracts. My Buy Alerts, Sell Alerts and Updates tell you exactly what to do, and you can always ask me any questions by email (jacob@cabotwealth.com).
Q: Can you recommend options brokers?
Jacob Mintz: I had email conversations recently with several subscribers on the subject of commissions. Some were paying between $5 and $10 an option contract. In my mind, that is ridiculously expensive. Commission rates continue to come down, and you should be paying close to $1 an option contract.
If you are paying more than that, simply call your brokerage provider and ask them if they can meet the industry standards. Many subscribers have made the call, and gotten better rates. The worst your broker can say is no.
There are many online brokers, so competition has forced commissions down significantly in the last few years. I use Interactive Brokers. I find that its commission structure is extremely competitive, and the system is relatively easy to use. As a reference point, I pay around $1 a contract. That said, I have no additional relationship with them, nor is this an endorsement. My point is that you should make sure you’re paying a competitive rate on commissions!
Q: How much capital should I start with?
Jacob Mintz: The beautiful thing about options is it doesn’t take much capital to gain large market leverage. You certainly don’t need more than $1,000 to put on many of the trades I suggest, though many of my readers trade much higher amounts.
Q: How much should I allocate to each trade?
Jacob Mintz: There’s nothing that I’m more sure of than the fact that I will get some trades wrong. Cold streaks happen for every trader. However, my expectation is to get six or seven out of 10 trades right. If I get on a hot streak, I might get eight out of 10 trades right. Assuming I get six or seven out of 10 right, and I cut my losers fast and let my winners run, we should end up way ahead.
To do this properly, you need to have a balanced allocation of capital in each trade. That way, you aren’t overexposed to the losers and underexposed to the winners. As an example, let’s assume you have $10,000 in a brokerage account allocated to options trades. I recommend allocating 2% to 5% of the capital to each trade. When you receive a trade alert, read my thesis and decide if you want to put on the trade. And if you like the thesis and risk/reward, decide how much of your 2% to 5% to risk on the trade. (Never go all in!)
Also, if you ever don’t feel comfortable with a trade, please exit it without my instructions.
Q: I missed your recommended price. Should I trade at the current price?
Jacob Mintz: With each trade recommendation, I lay out my thesis. It’s then up to you to decide if it’s a good enough idea for you to make the trade. And if you like the thesis, you need to decide how much capital to allocate to the trade, and at what price, based on your feel for the market and your investment goals.
Q: Should we add to our positions when the trade is going against us?
Jacob Mintz: No, I don’t recommend adding to trades when they’re going against you. In my nearly 15 years of trading, I’ve learned not to double down when a trade is going against me. Sometimes it works, and you can get to break even when the double down works; but when it doesn’t work, you’re stuck with twice the loser. It’s perhaps the toughest lesson for traders/investors: letting winners run and cutting losers off.
Q: What is “Order Flow Reading”?
Jacob Mintz: I categorize some trades as “order flow reading,” which is a strategy I use to follow the biggest hedge funds or traders into their trades. Often the big traders place very large bets based on insider information. A scanner tool that I created helps me find these large trades. If I like the risk/reward, I might recommend a similar trade.
Q: What should I do with the Daily Watch List?
Jacob Mintz: This refers to the daily watch list I send to subscribers before the market opens every morning. By sending you this list, I’m simply trying to give you as much information as possible so that you can make informed investing decisions. You may decide to make trades based on the list, others might use it to get a feel for market tone, and some will study the list of trades and use the information to become a better trader/investor. However, they’re not trades that I am executing for Cabot Options Trader, and therefore I will not be updating them.
Q: At what point do you get concerned about an option?
Jacob Mintz: While I want every trade to be an instant winner, that just will not happen. And when a trade goes against us, we need to step back and assess the time remaining until the trade’s expiration. Take for example our recent trade in AbbVie (ABBV).
Shortly after we entered into a bullish trade, ABBV bought a rival, and ABBV stock dropped nearly five points. As I said, I never want a trade to go against us—however, this trade had nearly 10 months until its expiration, so a five-point drop in the stock was not overwhelmingly alarming to me.
Because we had so much time until the calls we were long expired, I was able to take a longer-term look at our trade. Shortly after the stock fell, bullish order flow resumed, and now the stock is again trading above our initial entry point.
However, as we get closer to the month before the call/put expires, price movement will become much more important.
Q: How much capital should I allocate to each trade?
Jacob Mintz: Just like every investor/trader, I get hot and cold. So you need to stick to the plan of allocating 2% to 5% per trade. That way, if I get several in a row wrong, you will not feel uncomfortable. And if you ever don’t feel comfortable with a trade, please exit it without my instructions.
Q: Do options trades run in hot and cold streaks?
Jacob Mintz: 2014 was a choppy year for just about every trader/investor, including me. In 2013, subscribers to Cabot Options Trader made well over 300%. Looking back on the year, it could have been significantly more if I had let our winners run. So my 2014 New Year’s resolution was to let our winners run as far as I could. But in 2014, seemingly every rally should have been sold. 2015 has gotten off to a great start!
Hot and cold streaks come and go. However, because of the upside potential of options and my faith in order flow reading, I know that it only takes a couple of 200%-return trades to more than offset the choppiness.
Q: How many trades/ideas should I expect each week?
Jacob Mintz: I’m not a high-volume trader. I only trade when I think the time is right. Some weeks we’ll make two trades, some weeks we will make none. I will never push out a trade just to make a trade--that’s a great recipe to lose money and waste commissions.
Q: What is your strategy regarding losses?
Jacob Mintz: I feel so strongly about some of my trade recommendations that if we lose, we lose. The option activity in AstraZeneca in 2014 is a great example. I recommended the trade because the option activity was, without question, the most bullish I’d seen in the market in many months. Clearly, we could lose on the position; but when a trader puts on such an extremely bullish trade, I’m willing to be right or wrong with them. The hedge funds putting on these trades are not doing it to lose money. They like the risk/reward or they know more than you and I—so when they initiate such large trades, I’m willing to win or lose with them.