- I like this trade because it accounts for the underlying stupidness of humans.
- What is the exact point at which the Kansas City Chiefs came back from their 24-0 deficit against the Houston Texans in the 2109 AFC divisional round?
- And as mad as I get for not investing in TSLA sooner, I am more intrigued on why it is still going up and when it might come back down.
Momentum, defined as the "product of the mass of a particle and its velocity." Or otherwise stated as momentum = mass x velocity. In physics, this is an excellent definition; for all others, it means nothing. The rest of us who don't know Newton's 1st law of motion by heart think of momentum as a shift. This shift can be considered anything from a sports team gaining momentum after being down a colossal deficit or a stock that is seemingly never going to go down. But I think the ultimate form of momentum in our world can best be described as just an attitude. A sort of hive mind mentality in which we need to get in on the action, have our self become part of the whole. Going back to sports for a second, science cannot measure momentum in the way we might think. What is the exact point at which the Kansas City Chiefs came back from their 24-0 deficit against the Houston Texans in the 2109 AFC divisional round? Was it the stop on a fake punt? Was it Patrick Mahomes hyping up his teammates? Was it the one fan who left after that score for the team to come back? Surprisingly it was none of that. Instead, it was a mental shift in each person's head. Just as each person made the conscious (or mostly unconscious) decision to get back into the game, each person in the market is making their unconscious choice to invest in stocks. And best of all, we can profit off of this momentum shift. The best example of a momentum play is to invest in an extremely overpriced, at an all-time high or near an all-time high, well known FOMO (fear of missing out) inducing stock. Or know by its stock ticker, TSLA. TSLA, as of writing, is priced at $844.99. Ever since the stock split, I have been banging my head against a wall for not buying naked call options for this stock. And as mad as I get for not investing in TSLA sooner, I am more intrigued on why it is still going up and when it might come back down. But that is the cath right there; there is no way of knowing when a stock might come back down. The theoretical max profit one can make on buying shares of TSLA is infinite. And due to this property, people will continue to buy and buy and buy TSLA stock until it reaches Mars. And with the momentum move, we only leave ourselves a bit of possible downside potential. Let's say I want to make a momentum move on TSLA or another overpriced stock at or near an all-time high; what do I do? Step One: Let the first 15 minutes of trading happen without touching the stock. The first and last 15 minutes of trading are strictly reserved for algorithms and where they think the stock should be priced. This is where market orders either form the day before or the minute before the market opens is filled. Lots of money is lost by average traders in this short time frame alone. Step Two: Make sure the market is in the direction you want it to go. For instance, if you wish to make a momentum move on TSLA, you are assuming an upward trend in the stock. On the other hand, if you want to momentum trade NKLA in the downward position, you wish the market to be weak that day. One will compound the suffering or glory of the other. Step Three: Buy options in the way you want the stock to go. For TSLA, you will buy call options, while on NKLA, you will possibly purchase put options. I always like to buy one or two strikes out of the money. Also, make sure you buy these options of the same week or next week's expiration. This allows for maximum volatility and the shift in options prices. For buying, I recommend putting in a limit order. This allows us to get the lowest price possible in the day and allows us not to get screwed by algorithms that think the bid is 10-20 cents higher than it is. Step Four: Sell about one hour to thirty minutes before the end of the day. As I mentioned before, the last 15 minutes of trading on any given day can be hectic and unprofitable. It is always better to get out before that happens. On another note, if the market is moving up and the stock has a nice day, you will usually see an end of day sell-off. Since we wish to not hold our options any longer than needed due to time decay, sell before the day is over, or risk a possible swing trade. For selling at the end of the day, a limit order is preferable for the same reason at the beginning of the day, but you can get away with a market order. While I have had success with this trade many times, it is not mathematically perfect in the grand scheme of things. It is not based on any models, nor is it found in an economics class. I like this trade because it accounts for the underlying stupidness of humans. We, humans, see a stock in which we want and equate this stock to making lots of money so we can quit our day jobs and vacation. A homerun rarely comes along, especially if you buy it when everyone else has made profits. That is why this is a one-day options trade that takes advantage of impulsive buying when the markets are hot.
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