When I was in the military, there was a lot of talk about strategy and tactics. The grunt-level troops spend much of their time training with battlefield tactics. That would include actual battlefield tactics like shoot, move and communicate, enemy reconnaissance in a herring bone formation, and proper use of your weapon.
Senior-level officers spend more of their time involved in strategy sessions. This involves overall troop movement on the battlefield, positioning of troops for maximal impact on the enemy, use of air and indirect fire, logistical supply lines and on and on. A good strategy would produce the best avenue for victory allowing your tactical troops a supreme advantage over the adversary.
Trading is no different. The first thing a good trader has is an overall strategy. It is the actual game plan that you’re entering without getting into the nitty gritty of the actual trade. For example, I like to use a trade strategy on trending stocks about three weeks before a quarterly earnings result is released. Stocks often run up in anticipation of an earnings release. I call the strategy simply a Run to Earnings.
Here we have Texas Roadhouse (TXRH) in a nice uptrend. It has pulled back nicely since December and has a bottoming pattern with a PPO positive crossover (circled in blue) about 20 days ahead of its earnings release on February 20. This is a stock I have traded many times before as I love to contribute to their earnings regularly with a dinner run. This is a prime candidate for my Run to Earnings strategy.
Once the strategy is decided, I jump into tactical mode. For this type of strategy, I like to use bullish options, call-debit spreads or vertical. I think this can approach the all-time high at $206.04, so I make a target of $200 while TXRH trades on Jan. 30, at $182.60. Because I have my tactic memorized like a trained soldier, I know I want to buy a call at the money or slightly in the money (.50 delta), and I will sell a call near my target or about a .25 delta. I choose an expiration 45-60 days out to minimize time decay of my option premium.
TXRH has only monthly options, so I get as close as I can to my tactic. I like to buy at least three spreads for the reasons described below. I bought +3 Vertical (debit spreads) TXRH Exp. 21 MAR 25 180/200 Call Spread @ 7.73. The March 21 expiration is 50 days out. The $180 strikes I bought are at .55 delta, and the $200 strikes I sold are at .19 delta. Close enough!
I know with debit spreads I have a stop loss of 50% of the premium I paid which is half of $7.73 or $3.87. If I happen to be at that level or below at the close on any day, I exit that trade. It’s called risk management, and I am the manager of my trades, just like you are with yours.
On the profit side in this trade the spread is $20 (200-180), so the maximum profit is $20 – $7.73 (premium paid) = $12.27. I set the first to spread to exit at a 50% profit ($7.73 x 1.5), or $11.60. If it exits for a profit, I set the next to exit at 100% profit (2x $7.73) or $15.50. If that executes, I will let the remaining option play onward for a max gain. I generally exit the position before the earnings release, as even good earnings reports sometimes sell off in a binary market.
When you have all your tactics memorized or at least on a cue card for reference, you never have to give it a second thought. Pull the trigger, and await the result.
I should mention that mediocre tactics and a poorly planned strategy can lead to tragic results in the military and trading. Get your strategies and tactics worked out well in advance of entering your trade. Well-trained troops don’t have to think about what they do on a battlefield; it’s just part of them. A good trader should not have to think about his tactics and strategy when he is fully engaged in the heat of the market.
Enuf said.