Asymmetry Is What Makes Me Trade

Asymmetry is what makes me trade.

I wake up in the morning and I look for asymmetry in the marketplace all day long, and it has nothing to do with knowing where a stock is going.

Friday morning Amazon had a $16 expected move. The stock moved 32 bucks.

The expected move is the range the options market is pricing, and price stays inside it about two-thirds of the time. Double it and you're sitting at two standard deviations.

So I shorted 100 shares.

Now hear me, because this is the part people skip. I'm not saying that Amazon is definitely going to be down. I don't know if we sell off, and I don't have a problem saying that.

The stock was already up 32 bucks. It already had a 13% rally and the news was out.

Do we have upside? Yeah, but not that much. Maybe it gets crazy and runs another 8 bucks.

Do we have downside? Oh, yeah. A stock that ran 32 on a one-day catalyst can hand back 16 without a thing being wrong with it, and more than that if the tape leans on it.

That's 8 bucks of risk against a 16 buck move the other way. No forecast in it anywhere.

Plenty of people would buy the put instead. Those 267.50 puts were $1.60 this morning. Buy them and you need the move to show up, and if the stock sits flat you're out 160 bucks for being right that nothing happened.

Short the shares and time isn't working against you. The put needs a move down to pay, and I think that puts you at a slightly lower probability.

100 shares, and that's on purpose. I want skin in the game. That's it, that's all I wanted to do.

If I lose 8 bucks in here, I lose 8 bucks. Then I set up a similar trade down the road at similar pricing and knock that one out of the park.

Did the same thing Tuesday on the same premise. Shorted 100 shares made four bucks and done. Nice, clean trade.

There was a reversal in the first five minutes Friday that I never got in front of. We popped and then we dropped, and going after it at that point is throwing caution to the wind and getting stupid. That's not trading. That's gamble.

So I sat there until a two standard deviation move sat down in front of me, and then I put 8 bucks of risk against it.

It's a low risk, high payout trade if it works, and I don't know that it will. The 8 bucks was worth finding out.

To your success,

Don Kaufman

P.S. Look, I can't force you to use a checklist.

But I CAN tell you what I've seen...

The traders who skip these five checks? They don't last.

The ones who build the habit? They're still around years later.

Grab the checklist. It's free today.