I have a confession to make. I'm not an investor. I'm a short term options trader. I don't care about fundamentals. I trade what I see.
I used to buy stocks too. The problem is that you have to know too much about the stock in order to be correct. Many people don't realize that. They buy stocks every day without having a clue about the company or the stock they buy.
When you buy a stock, what makes you think you know more than the market? If Apple (AAPL) is trading at $575, you need to know something that others don't to believe that the stock is going higher. Do you really believe you have any edge against the professionals?
Before you buy the Apple's stock, try to answer few simple questions about the company:
- What is their market share?
- Who are their 5 largest customers?
- Who are their 5 main competitors?
- Who are their 5 most important suppliers?
- What does their product roadmap look like for the next three years?
- What is on the technology roadmap?
- How are the sales pipelines looking for this quarter and next?
- What are their competitors planning to launch?
- What's on the Google roadmap?
Unless you can easily answer all these questions and more, an investment in the stock is nothing more than a gamble.
If you do know the answers, you are probably in a better position than most "investors". Good for you. However, you still need to know something others don't. And don't forget the market risk. If the market tanks, most stocks will go down, no matter how good your research was.
If you do make money, most probably you are riding the wave - in other words, you are lucky. Will you know when to get out when the music stops? Or you will continue averaging down - after all, if AAPL was a good deal at $644, it must be even a better deal at $600, $550 or $500. Google (GOOG) was a good deal at $700 five years ago, is it a better deal now at $565? Maybe. But meanwhile, it was dead money for five years.
This brings me to another confession. I'm not an Apple bull or bear. I don't care about the company fundamentals. I don't want to predict where the stock is going in the next month, year or 5 years. If I can predict where the stock won't go in the next month, this is good enough for me.
In my article Is Apple Entering A Trading Range I argued that Apple might be entering into a trading range. The best strategy to take advantage of the trading range is Iron Condor. The Iron Condor is a combination of a bull put spread and a bear call spread. The whole trade is done for a credit.
With Apple trading around $565, looking at July expiration I suggested the following trade at $1.35 credit:
- Buy AAPL July 2012 495 put
- Sell AAPL July 2012 500 put
- Sell AAPL July 2012 640 call
- Buy AAPL July 2012 645 call
The thesis was that in the next few weeks, there are no major catalysts which will move the stock one way or another.
The thesis proved to work beautifully. Three weeks later, the stock is just 2% higher and the trade produced a 22% gain.
Another factor which contributed to the nice gain was decrease in the IV (Implied Volatility). Since Iron Condors are vega negative trades, they benefit from declining IV. Sometimes you can make spectacular gains in a matter of few days. This was the case with the Apple Butterfly Trade which I shared on March 19. IV went from 40%+ to under 30% and the trade made 50% in just one week.
This is the beauty of the non-directional volatility trading. You don't have to know anything about the company. All you have to do is to use the fear built into the price to your advantage.
Are there any risks? Sure. No strategy is without risks. If the trade goes against you, you need to respond quickly. Those trades can be brutal and should be treated with respect.
However, there are many ways to mitigate the risk. The most important is proper position sizing. Another technique is to hedge the trade with other trades which are negatively correlated. This is what I call a true diversification.
The bottom line is that if done correctly, the non-directional trading can produce excellent returns no matter what the market is doing.