Can you understand what I mean? Sounds very confusing, isn’t! Actually
this is very simple fact especially important for investing: no one knows for
sure what will happen for any given stock, regardless how much research one has
done. It is a certainty that there are always uncertainties out there in
dealing with stocks. Got it?! I guess no
one will probably argue with me on this statement but in reality, not
necessarily many people will count this much in their investing and trading.
People tend to believe what they are convinced about and don’t want to easily
change their mind even if the uncertain/unknown fact may have proven that their
belief may not be so right. I’m talking about the exist strategy for
trading. As a general rule that I’m
trying to follow (not really easy to strictly stick to it honestly), for each
position I entered, I should have a clear mind predefined when I want to exist
from it, since I know I may be wrong about the stock even if I have done great
research and totally convinced about it. For stocks that I have bought for
trading, I use a stop loss (e.g. 5% below the top or below my entry) to
determine when I need to get out as the worst case scenario. For options, I usually use spread to hedge my
positions which will predetermine my potential loss already.
You may ask why I suddenly want to talk about the uncertainty in the
stock market. Well, I think there is a
very relevant real life example about
the GE stock I recently talked about. As
you know back to end of Dec last year, I had a bullish call for GE, thinkingthat its bottom was likely reached around $17 and was poised for a big move up.
I had done my home work with quite a conviction that I was right. As such, I
opened three types of trade on GE. Since then, GE has gone through a roller
coaster journey in the past few weeks with some quite surprising negative news
that has proven how uncertainty we could run into. I thought it may be a good
idea to share how I’m handling my trades with GE.
- I bought short-term calls for GE, aiming for a quick win if GE moved up soon as expected. Lucky me as GE indeed did exactly as expected in the following 2 weeks. My calls jumped very fast and I ended up with an almost 200% gain within a couple of weeks. So my short term call was correct without any surprise.
- Per my research, I thought GE has reached its ultimate bottom and could be starting a long term uptrend and I like its dividend as a value investment. So I also opened a stock position with an intention for holding it long term with dividend reinvestment. This one has caught up with really unexpected bad news! GE surprisingly announced a week ago about a massive loss in its legacy insurance business that was a shock to the market and its stock of course got sold off en mass immediately. Then their CEO talked about a potential breakup, for which it was too early to judge whether it could be beneficial to the shareholders. For long term value investment, the last thing I’d like to see is the apparent uncertainty and I decided to get out for now. Thanks to its initial run-up, I got out with a tiny gain from this stock position.
- Then I have another intermediate term play for GE with put selling (using a spread to minimize the downside risk). This is low risk trade as all I’m betting is that GE won’t decline below $17 by Mar 16. Since my potential loss was predefined, I decided to hold this on after its initial surprise with the insurance loss. Actually I was thinking GE could be reacting well to its earnings a few days later due to how pessimistic the market was for it. I was half right as GE indeed responded quite well with a 6% jump immediately following its earning and then another bombshell was dropped: GE announced that it is facing a SEC investigation into its accounting practices and may need to re-report its 2016/17 earnings.
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