Six Different Ways to Express the Same Trade Idea

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We talked about big money traders, big money traders are the professional traders that make millions, if not billions of dollars a year. When we look at these traders, let's look at what separates them from everybody else. A lot of the best trading ideas at the end, if people were trend followers at the end of every trend, everybody's long that trend. Sometimes the difference is how that idea is expressed. Big money traders are experts at not only identifying superior trades, but then optimizing the idea through superior trade construction. With each trade idea, there's an array of instruments and instrument combinations that create different win percentages, and different reward to risk ratios for the same idea. Big money traders are clear about their trade objectives and as a result, they can choose the ideal combination to meet their objectives. Think about that. If you want to have a high win rate, or you want to have big wins, you can do either one, you can have whichever one you want on the same idea. Because of this, the differences in performance for the same idea can be stunning, massively different. Let's talk about this.

I put together this chart here that talks about how a trading idea can be expressed. So let's say that I'm a trader, and let's go through. I could buy an ETF. I could do an ETF spread where I bought one  ETF and sold another ETF. I could buy an ETF and sell an index. I could buy an individual index. I could buy index spreads where I buy SPY and sell QQQ. I could trade index volatility, so I could trade the VIX. I could do equity volatility versus index volatility. I could do equity options structures. I could do equity volatility. I could trade the equity versus an ETF. I could trade equity versus an index. I could do a pair trade where I traded one equity versus another equity. I could trade the individual equity, or I could curve trade stocks and an ETF versus an ETF. So many different combinations around the same idea. Let's look at this more practically. Let's say we have a trader that is interested in buying Apple. Well, that trader could buy Apple, the trader could also buy Apple calls. He could also sell Apple puts. There's a virtually infinite number of combinations and options that we could do in addition to just buying calls and or selling puts. He could buy Apple and sell NASDAQ as a spread. He could buy Apple and so XLK as a spread. He could buy Apple and sell Google as a spread. All of these are ways of expressing being long Apple, but each of them have a different payout structure. They have a different win rate, they have a different reward risk profile. 

Why would you trade spreads? Well, oftentimes in spreads, spreads don't have the whipsaws that the stock does. Have you ever had a stock that you bought and the market whipsawed, stopped you out, then came right back and took off without you? These whipsaws are one of the biggest sources of frustrations for traders as they get knocked out of really good trades. Well, when would you look at the spreads, a lot of times a spread like Apple versus NASDAQ or Apple versus XOK or Apple versus Google. You will not have these whipsaws, it'll be much smoother, so you have a much better chance to capture the full move. Also, you'll see the outperformance of Apple versus those. When you buy Apple, if we have a stock market crash, you're exposed. No matter how great the fundamentals of a stock can be, if the overall market is getting hammered, your stock's going down. The great thing is if I'm long Apple and short NASDAQ, I'm market neutral. If we have a stock market crash tomorrow, I'm not going to get killed. I may actually make money in a stock market crash because my Apple stock is really good. Apple is gonna go down but NASDAQ is gonna go down more. Same thing with Apple versus XOK, if the market’s down big, Apple is gonna go down but XOK could go down more. Same with Apple versus Google, go down big, Apple could go down, but Google will go down more. Adversely on the upside, Apple will go up, NASDAQ will go up, but because Apple is stronger, Apple will go up more. You can have a situation in spreads where you make money if the general market’s going up and you can make money if the general market’s going down. You're actually capturing the alpha of your idea. Each of these trades will get the trader long Apple, but each trade has its own reward to risk ratio and its own winning percentage. It also has its own margin rates. This is significant because each of these combinations could be much cheaper to trade than just buying Apple on its own. 

I love talking about options, I love talking about options. Here's an example, in ARWR, where we look at different ways to express the same idea. In these examples, we're going to go through all trades essentially have the same entry and exit prices, same date, same times and I want you to notice that all the hedge options trades here will have larger Rs, but they have less risk in the position, both at the time of entry, and after the hedge. We could buy ARWR, buy the stock and sell it when we get the exit signal, and we make six Rs, this is a great trade. You can buy ARWR and sell half of it when it's up three r and carry the rest until we get an exit. This gives us a 4.98 R and I have this efficiency versus baseline column. Baseline is just buying the stock and getting out when we get the exit signal. The baseline made 6.06 R, so we're going to be looking at all these as their efficiency relative to baseline. Selling half the stock at three R gives us 4.98 R and an efficiency of 82%. We could just buy calls via a straddle and hold to exit. This actually yields a 10.42 R, 172% baseline. In this, where we talk about buying calls via a straddle, what we're actually doing is we are buying a stock and then we're buying a straddle. We buy the stock on the open to get the opening print, then we buy a straddle against the stock and what it does is it turns a position into long two calls. It's long a call from a straddle and it's long a put with long stock, which is a long synthetic call, so we're long two calls. This is why I'm saying we're long calls, via straddle. We could be long the calls and make 10.42 R. We can buy the calls via the straddle and then hedge by buying at the money puts at three R, just like we did here, but instead of selling half the stock, we're going to buy puts. This gives us 9.14 R, but we're hedged. We could buy calls and then hedge was selling at the money calls at three R, this puts us in a long call spread. This gives us 8.65 R. We can buy calls and then hedge by selling stock. This gives us 8.26 R, or we could buy calls and hedge by selling a call spread where we sold out the calls were long and replace them with higher calls, collecting a credit. This gives us 9.18 R. All of these options strategies significantly outperform buying the stock alone and four of the five are hedging and three R. All of these have less risk initially because they have limited risk and these four strategies have less ongoing risk because of the option hedge or because of the hedge. Trading with less risk and bigger return and this doesn't even count the margin efficiency. This is much more margin efficient than just being long ARWR. 

Think about this for you, are you even aware of the different ways you could express your trade? Have you ever gone out and mapped out the different possibilities and array of possibilities? What you'll find is that oftentimes one of them is significantly better, do that one. You've wanted to figure out how to separate yourself from your competition? Do this. Examine the different ways to express a trade and then express it that way. This is another example of ways they You can take your performance to an elite level. Check us out next week and in the interim, have a great week and God bless. Bye