Tony B: Thomas is back my friend. Best Practices. Don't even say it. If you're going to leverage this one article
Tom S: What will I see from you. Took a Costco run yesterday. There were six people in Costco.
Tony B: Mm. Costco.
Tom S: I don't know. Worst of stock.
Tony B: 50 cents this morning but $1.38 in change. You could change up to $1.45-ish.
Tom S: Yeah. What was I going to tell you? Okay, we've got a fun… I don't know, is Best Practices fun? It's not fun. Best Practices is not fun. Best Practices is content. It's information.
Tony B: Is it fun to eat with a knife and a fork?
Tom S: Not really.
Tony B: There you go.
Tom S: I much prefer eating with my hands. I don't understand the protocol. I don't understand the…
Tony B: Oh my god it's amazing. Oh my god. I must stay politically correct here but is this a sympathy play?
Tom S: What?
Tony B: Is this a sympathy play?
Tom S: I'm thinking that there's got to be a better way. I'll figure it out again. It's a complicated process. Let me see yours. What's that?
Tony B: It's nice. What are you talking about?
Tom S: You have this because you don't have none of this.
Tony B: Yeah, I do okay? Hey, I do have that but I don't want to show it. I'm not a poser like you.
Tom S: Oh, well anybody can just do this.
Tony B: This is what you're trying to do. Here look, we'll do it one more time. See, look, this is what you're trying to do. Is that what you're trying to do so you can show some of the stupid sleeve?
Tom S: Yeah. What you got? There you go.
Tony B: You did it the old way.
Tom S: Huh?
Tony B: You did it the old way. You did it this way; it's the old way.
Tom S: Whatever.
Tony B: I traded good on the old way. I did it that way and then it was eh.
Tom S: Do you see something you really want to do here yet?
Tony B: I wish I could. 2001 I sold it. 2004 and a quarter. 2005.50. That's what I wish I done.
Tom S: Yeah, the funniest thing about this…
Tony B: I was waiting on the trade up for 2000 and give you how did daddy do it. That's what I was waiting for.
Tom S: The funniest thing is that this doesn't surprise me.
Tony B: It doesn't surprise me either.
Tom S: Yeah. It went up $15 but it doesn't surprise me. All right, let's do our little Best Practices. Because we've got some great content today. We're actually going to to a really interesting piece in the fed, a really interesting thing about zero-something-gain so I think you'll like it. This, to start it off, we're going to talk about… what do you do when you get tested?
Tony B: Have somebody else take the test for you?
Tom S: What do you do when you get tested? You have somebody else pee in the cup for you? That's what you got to do? Okay. I don't think that's the right thing. Number one, the short strike becomes in the money. Number two, it breaches break-even and number three, the short option trades are two times the sale price. So the first thing the guys (said), we sat down on Friday and we said, "let's think this through for a second. There are basically three scenarios of getting tested. What are they?" Because we have to come up with the definition.
Tony B: Sure.
Tom S: What does being tested mean? Are you tested if someone looks at you funny? What does being tested mean? First thing…
Tony B: You test me every day then.
Tom S: First thing, you have your position on and your short strike becomes in the money. That's like a violation of the event. A violation of the trigger. Let's call it that way. In classic stock-trading terms, that used to be what getting tested was.
Tony B: Mm-hmm (affirmative)
Tom S: And whenever the number you are looking at, whenever that number was triggered, that's essentially the mentality behind stop orders, things like that is that you pick a number, you number gets triggered, that's the event.
Tony B: Mm-hmm (affirmative)
Tom S: And usually people use the short strike. One idea of getting tested is the short strike goes into the money. The second one is when it reaches break even which to me makes a hundred times more sense than number one.
Tony B: Yeah.
Tom S: Now breaches break-even just means if you're short the xyz, you're short to 50 calls.
Tony B: For a dollar.
Tom S: For a dollar. So your break-even is 51. Tested is when you breach the break-even. But a lot of traders and throughout
Tony B: [crosstalk 00:00:00] going to be a losing trade.
Tom S: I mean at that point, sure.
Tony B: Typically.
Tom S: Yeah, but a lot of traders think it's a little bit different. A lot of traders' use the mentality that when the short option trades two times the sale price, that's being breach and the reason for that is that you've got to give yourself a fair chance. If you're risking one to make one, that's all it is.
Tony B: Sure.
Tom S: So if you're trying to make 50% of the width of the strikes, then it's when the short option trades at one over the sales price, whatever it is. That kind of makes sense because if you sell something in for a dollar it's not really apples to apples until you make $2.
Tony B: Yeah, because if you're looking to make a dollar..
Tom S: That's right, if you're looking to make 50 cents…
Tony B: So maybe 150 is the…
Tom S: That's right. That's right.
Tony B: The price to be looking for.
Tom S: That's exactly right.
Tony B: You just have to come up with something and be consistent about it, I guess is the most important part.
Tom S: You do something and then you keep doing that something and that's the consistency of it, and those are the mechanics. So it's when the short strike becomes in the money strike, for the purpose of this discussion, we'll use break-even and we'll use Because that gives us three legit different ways of getting tested. So what enhancements can we make to a short put that is being tested? We can sell an out of the money or at the money call, we can sell stock and or futures, we can sell a call spread and of course you can end up with the equivalent of Jade Lizard. We can also buy a cheap out of the money to reduce capital requirements or we could sell a call in a correlated underlying. The problem with selling a call in a correlated underlying is extra capital requirements and the problem with cheap out of the money puts is that there usually aren't any at that point. Anything that you buy is not going to look that pretty. Occasionally you have to but for the most part, it's not going to be there. Understand something that's really critical; what you end up losing position on, anything you do is painful.
Tony B: Yeah, Because you're going against you originally assumption.
Tom S: Anything is painful. There's no, "wow, this is really cool" or "wow, this is great". Everything is painful. So what are our rolling options for the tested put? So the first thing is that you can roll out to the next month, just buy more time. The first thing you do it buy more time. The second thing you can do is roll out and down for even money or a credit. That's fine too. Just give yourself more time and room. Our preference, just give ourselves more time because by rolling out to the next month, we get more credit. I don't always like to use that credit on a trade that's already losing trading so I like that credit just to lose my original basis and then I feel better about it. But some other people like to buy down and out which mean just give yourself more room, use the credit for that purpose.
Tony B: Sure.
Tom S: Tony and I, you know, our first of fault, is always to roll out to the next month and take the credit.
Tony B: Yeah.
Tom S: Right, until you can roll your positions from the portfolio page, first we click to highlight the options we are looking to roll. So in other words it's a really simple process. Simple on toss too. Right click and create rolling order on dough. You roll right from the position page. You highlight the options you are looking to roll, confirm send to send. Next they give you the choice to roll positions. This should bring up the trade page and then key up the rolling trade. It's basically very similar on both platforms and we've tried to simplify the whole process of the complexity of derivatives, make it into a very simple boom-boom, one-two-three process.
Tony B: Sure.
Tom S: In fact, somebody wrote me last night on Future's Role on Friday and you showed rolling on the future and blah-blah-blah: I'm on a platform that doesn't allow you to go to the future's mart, it doesn't allow you to go to the future's role markets. They don't support them. What do I do? I say change brokers. Because one click can save you hundreds of dollars. Why would you go to markets that are $12.50 wide when you can go to markets that are $2.50 wide. Just because your broker doesn't want to write the code? Change brokers.
Tony B: Right, right.
Tom S: It's simple.
Tony B: Can't get what you want, go some place else.
Tom S: What can we do if we have a short call that is being tested? Well it's the same thing. Sell an out of the money put … it's just the inverse of what we talked about before but again this is all about repetition. This is about going over the same information, rinse-repeat, rinse-repeat, rinse-repeat, and this all becomes second nature. There's not a lot of complexity in this business any more.
Tony B: Well because the platforms have become com.. it has been built which makes it so easy.
Tom S: One thing we've proved concept on is that if the customer is engaged, this stuff's not that complicated. It's hard to make money because it's a very fair market and you're not paying for the edge. It's not like… There's no… you're not disadvantaged. I think that's the most important take away. So same choices here: Watch for binary events, maintain long bias, sell wide put spreads, cover portion of trade or buy higher strike. That's what you do when you're tested. We continually deliver the exact same message. If your strike gets breached, we usually don't do anything. If you got to your break-even, that raises a red flag and we may do something. If you get to one times your loss, or two times yours credit's received, that when we have to do something. Sometimes you don't even have a chance to do that. Sometimes you're trying to do everything and you're doing a great job of it; I was doing a great job managing my oil position last week at 66 and then at 60, I ran out of bullets.
Tony B: I agree.
Tom S: It's really hard. How long have you been doing this? How many times do you write it on paper? At a certain point, it's freaking difficult. Our moves are outside five-signal moves, whatever they are. Really freaking hard. I guess that's kind of the crux of what you do when you're being tested.
Tony B: It really comes down being consistent. Now I'm getting other people running and saying about other rules, other triggers for them when they're being tested. When they're dealt to other numbers and other things like that. Whatever works for you is fine for you as long as you're typically not adding to the position and then you're doing it consistent all the time. Any variation of what we talked about here works for us. Doing nothing. If you're comfortable with the position and the assumption hasn't changed, you can totally argue for I am doing nothing all the time and then I just continually roll. It all works out as long as you continually do the same thing.
Tom S: So I've been arguing for doing nothing for a long period of time because I think it just makes the whole process of trade engagement easier.
Tony B: It certainly keeps you honest on your entry.
Tom S: The problem with it is like moves like oils are the SMP.
Tony B: Correct.
Tom S: Most people have trouble just with the size and I understand that. I am coming up with ways with soften the pain.
Tony B: Sure.
Tom S: It's hard, man.
Tony B: Listen, the process is easy, the application is hard.
Tom S: Agreed. I've been thinking about all the years of trading and kind of what saved us. Unfortunately, a lot of what saved us throughout the years was more offense rather than a good defense. I was thinking about this, the other night I was playing poker, or from trading or any other business. What generally makes or breaks a business is again a good offense. It is really hard to run a successful business when you're just fixing problems and then figure out what you did wrong but not doing something else, you know? It's really, really difficult. I kind of think it's the same thing; if you have a crappy defense, you can fix your defense, but I'm not sure if that gets you to win games.
Tony B: Mm-hmm (affirmative)
Tom S: I kind of think over the years we kept having the opportunity to have a good offense which saved us. I think it's much more difficult as an independent investor and you know, I'm cognizant of that, I just haven't been able to figure it all out yet.
Tony B: Understood. Let's take a quick break, we're going to come back. We've got the opening bell next, got a few stocks moving. We'll be talking about that in 90 seconds at tastylive Live.