Anatomy of a Swing Trade
I operate within an investment framework at The LongVol that combines thematic investing with our methods of market timing.
What that means in simple terms is that we look at situations where a tailwind might inflect a sector or stock.
That can share buybacks, government policy changes, Central Bank policies etc. - that can also be a technical inflection that leads to asymmetric entries.
Asymmetry is key when investing longer term if you want outsized gains.
I discussed this on my website here in an educational post.
What I am going to do in this post is explain the anatomy of a Swing Trade and what goes it for me.
By the way - this is not investment advice. Please don’t be a putz.
Expedia Long
This is not really a stock that I would consider a value investment - the PE is way too high and there’s not much about it that I like other than the chart.
In some situations, it is chart based but that’s rare and part of the reason for this post.
I know that some schools of thought teach people to scan charts - there’s a well-known trader who has books that only buy breakouts and looks at charts.
He was made a fool on CNBC a while back for not knowing what a company did but he’s just a chart guy.
Normally, just looking at a chart leaves a big piece of the puzzle unfinished because you leave out things like:
What sector it is
What tailwind is driving price (share buybacks/spin offs/policy changes etc)
That stuff matters, or at least it used to before everyone became a professional investor in recent years.
Expedia is a stock that had a dismal 2022 and a flat to sideways 2023 so far.
But that made my watch list in the report in late January.
I talked about this stock two posts ago so if you want to catch up to the “research” part of it read this.
With this stock, I liked it for my list for a number of factors:
Suppressed for almost a year
It’s a well-known name
It was basing and tried to break out in January of 2022
So if you look in January, that’s when it made it to the Swing Trade Monitor
But then it needed execution and with that comes part 3: technicals and market timing.
I don’t want to be rude when I say this but most people don’t use market timing or technicals in any way near how they need to - if that offends you sorry but I’ve seen enough voodoo chart stuff in my day that I feel comfortable saying it.
When we started to rally in April we tested a simple 61.8 Fib level from the January high, paused, and then made the continuation leg up.
Where most folks would wait for that $125 to break to get long I started the swing before.
I have no emotional attachment or narrative for this company.
This is simply a technical inflection and nothing more.
That’s important to separate because there are investments like when I wanted to be long “Homebuilders an Inflection” last year -
Execution
This is an important part of the investment idea cycle. You have an idea but then you need to make money on that idea and it might be as simple as “just buy the shares” -
But if you do this long enough you’ll learn to:
Maximize the trade
Become efficient with your capital
Learn to ‘see the trade’ ahead of time
I don’t mind to start buying small shares in a name to build a position.
That includes options that I did on this and which I’ll get too.
If it helps - famed investor Stanley Druckenmiller does this too.
Druckenmiller: I don’t know who but I heard a saying with analysis comes paralysis, or Soros used to say – invest and then investigate, which I was already doing before I met him.
He discusses that in this interview.
I don’t remember if I got that from him or not but in my earlier years, I did study a lot of guys like him.
But the reason is that when price moves I want to be in and especially in a situation on Expedia where if it breaks this range it then becomes this huge trade that I started with minimal risk: asymmetry.
In “swing trades” like this they might take 6 months or less.
I wrote about Core Position v. Trades here.
So taking the trade a bit “early” allows me to cut it if it gets to a level and slows.
I can put it on, then take it off - simple as that.
If you’re reading this and think every investment/trade has to be something that you have to stick with then making a mental shift is something I would encourage.
The Trade Structure
So what I did was buy a mixture of DITM (deep in the money) and some out-of-the-money calls along with shares.
Why the mix?
Because this is not a stock that I have deep research on I don’t want to put too much risk (money) in actual shares but I will take some.
If this was a Core Position - a stock I did the work on and believed in the sure more capital goes to shares/equity.
So mitigating that risk comes by way of optionality on calls.
The DITM calls give me a higher delta which allows me to get closer to a 1:1 more replicating owing shares.
The OTM calls get me paid off if this breaks out and explodes say, +20% inside 60 days - that increase in vol will have those OTM Calls moving quicker.
I might get a 50%-80% on the DITM calls and then might get a 3/4 bagger on the OTMS.
Now this is case by case on any trade and this is where having a top-down framework for analyzing investments is critical.
If you’re reading this and you’re used to a ‘trading system’ that tells you to do X if X does that always then you miss out.
Not to take a shot at Online Trading Academy but years ago I taught a lot of students from there.
They were told to use a certain duration selection for options trades.
Why? They can’t think for themselves?
Not every investment situation possesses the same characteristics.
In the case of Expedia, it has the potential, or so I believe, to break out of the range and trade significantly higher, but, with velocity.
All of that I take into account on how to put the trade on.
Again, you might just want to jam the trade and buy shares and calls that are ATM - whatever works.
But I had almost 4 months to track this idea and think about how I wanted to play it when and if it triggered so that’s what I did.
Management of The Trade - The Final Step
So with all trades, I have price targets.
Said price targets are purely derived from price levels.
No moving averages, no magical macd, and no indicator that some DNG made up in his basement.
If you look at anything Bruce Kovner - he always knows his exits ahead of time.
Technical analysis is like a thermometer. If you are a responsible participant in the market, you always want to know where the market is – whether it is hot and excitable, or cold and stagnant. You want to know everything you can about the market to give you an edge.
Technical analysis reflects the vote of the entire marketplace and therefore, does pick up unusual behavior. It is very important for me to study the details of price action to see if I can observe something about how everybody is voting. Studying the charts is absolutely crucial and alerts me to existing disequilibria and potential changes.” - Bruce Kovner
So as the trade approaches those targets I begin to manage the risk.
Do I trim the position?
Do I exit completely?
Do I add more once a we breach?
Those are questions that are asked until the trade is done.
Again, I think novice traders do 25% of the work and the rest is never finished.
How you extract the profits matters just as much as the idea and the old saying of “if it’s in your hands it’s real” applies to an investment/trade.
I’ll also pay attention to how the weekly candles continue to form.
In the case of Expedia, they have been bullish.
So all of that goes into the account of the management of the trade.
In this rare case, this stock has earnings on July 31.
So that adds a layer of uncertainty to it and part of the trade management goes into that.
It might just be that it reaches a level that I am comfortable at before earnings and where the IV on the calls rises due to that event and I end up losing all or part of the position.
But obviously, I don’t know that yet but it’s something to think about.
“One of the jobs of a good trader is to imagine alternative scenarios. I try to form many different mental pictures of what the world should be like and wait for one of them to be confirmed. - Bruce Kovner
Conclusion
So that might be a little longer than I wanted it to be but hopefully, this gives you an insight into what a trade/swing trade looks at from start to finish.
Of course, there are probably some unanswered questions and if I can help in answering those please let me know….
By subscribing to my report or DeltaOne 😎
All jokes aside - I hope that helps.
Thanks for reading.
Disclaimer: I am long shares and various call options on EXPEDIA. This is not investment advice.
This article is presented for informational purposes only, is an opinion, is not intended to recommend any investment, and is not an offer to sell or the solicitation of an offer to purchase an interest in any current or future investments. Any such solicitation of an offer to purchase interest will be made by a definitive private placement memorandum or other offering documents.
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