Fast Money Clarity

Well, it’s 12:40 a.m. on Friday and I just woke from a nap after a long but enjoyable day doing three shows on CNBC.

I was compelled to write this after reflecting on the busy week I just had on TV and getting several dozen emails about how I should have been more vocal about fellow Fast Money expert Guy Adami’s response to my trade.

One of my goals as a trader/educator is to enlighten people to the way I view the markets and risk, but more importantly, inform them about options and how to use them to increase the probability of success in your trades and as a way to provide real protection for your stocks.

As it was my premiere on the Fast Money desk, live in NYC, I choose to keep myself more low-key, reserved, and learn the dynamics of the show and get more aggressive with time. Maybe this was a bad choice on my part …

My whole life I have dealt with traders of all sorts. Since I have been in this game since my teenage years and have traded on three exchanges, I have traded beside and now work with some of the most talented and brightest traders in the world. We all have our own strengths, weaknesses, and personalities. I know that I have my mine, that’s for sure.

One of the traits I feel makes a trader successful is the ability to listen and be as objective as possible, especially with subjects they do not know. I consider myself expert in options trading, knowledge, and theory, but I am always learning and I know there are people out there that are not only smarter than I, but with unique perspectives that could possibly increase my probability of success in my trading and methods.

There is a multitude of ways to view, correlate, and trade the markets. Fast Money is a fantastic show that is heavily focused in fundamentals, with a minor technical touch. I agree with both of these approaches in my trading. I feel that in the long run, fundamentals typically trump, but the short-term price fluctuations in a stock can be read more easily by reading the tape and using technicals. These fluctuations are the result of emotional shifts, correlations with indices and/or indexes amongst other things. The bottom line is that a stock’s price is just what people are willing to pay for it.

Predicting stock price moves with accuracy is like predicting the drunken walk of a college freshman after eight shots of tequila. But even the drunks have limits. Like people, stocks have different behavioral characteristics. I am not going to get into detail here, but to oversimplify, let’s say the drunk has to take 10 steps forward and it’s my goal to stay out of his way, where should I stand?

Normally his stumbling leads him to step either one foot to the right or one foot to the left at each pace forward. What are the chances that every step he takes, he stumbles left 10 times? He probably will have to take a step to the right to re-balance himself. To get out of the way of the drunk, I could move nine feet to the left of him at the end of his walk and there is a very good possibility I won’t be in his way.

As strange as this may seem, stocks tend to behave a lot like this. When was the last time you saw a stock go up 15 days in a row without closing down one day? It’s not that common.

The point of this whole thing is that I combine my fundamental and technical beliefs, make my decision on what I think the direction of the stock is, then use options to increase the probability of my success, using several measures.

On the show today, I suggested traders should look to sell the First Solar (FSLR) July 145 Put @ 3.40 (where it was trading at the time) if they are bullish on the stock and agree with me at that price point. I said this trade had roughly a 75% statistical probability of success in terms of price distribution until July expiration.

This means with the stock at $174.00 and using a 63% volatility factor (at-the-money implied volatility) there was a 25% chance the stock would touch $141.60 (my breakeven point) and roughly a 14% chance it would go below that.

I have a feeling that Guy Adami is not an options trader (I do have a great amount of respect for him) and I didn’t feel it was appropriate for me to embarrass anyone on the show. So I figured I would use this forum as well as a special show on put selling this week on www.ONN.tv.

Anyway, Guy said that "it’s the 25% that blows you out…." I respect the fact that he was most likely warning traders of risk, as trading anything involves risk, but he’s wrong in this case. In fact, this trade is MUCH less risky and less costly than buying the stock today at $174.00.

The short put obligates you to purchase the stock at the strike price you sell, so in this case, I would be obligated to buy FSLR at 145 (a $29.00 discount to current price) and I would get paid $3.40 to do so. Which means that my cost basis is actually 145-3.40, or $141.60.

The short put is also like me owning the stock at 145 and selling the 145 call at 3.40 ( a covered call).

The best part of this trade is that all the stock has to do is stay above 145 by July Expiration and can go all the way down 141.60 and I will break-even in the trade. (I like those odds!)

As for the "blow out," I certainly am assuming risk here were I to sell these puts, but the stock trader who buys FSLR at $174 will have a "bigger blow out" than I if the stock dropped to this level.

Happy Trading! I really do feel privileged to be a part of the Fast Money Team and promise to chime in more with specifics when I can.