[Image] 45,650% Overnight? Decoding the SPLK-CSCO Trade Mysteryâ¦ Towards the end of last week, a friend of mine showed me a trade that had been circulating on social media as if it was some incredible achievementâ¦ In reality, itâs one of the stupidest trades Iâve ever seen (more on that later)... But more importantly, the fact that some traders are admiring this kind of asinine move can potentially teach you a valuable lesson. In the options market, if you start trying to hit home runs (or grand slams), youâre setting yourself up for failure. You need to strive for consistency. Hit singles over and over again. Donât go for outlandish trades (like the one weâll break down today)... Keep reading and Iâll show you what Iâm talking aboutâ¦ The One Catalyst That Sparked It Allâ¦ First, letâs talk about catalysts. A significant enough catalyst can cause BIG swings in the underlying stock. (Think earnings reports, press releases, Fed meetings, geopolitical factors, etcâ¦) And if the underlying stock moves 10-20%, the directionally-correct, near-term options contracts can gain hundreds or thousands of %. Naturally, this is a tantalizing draw to a lot of newbie traders looking to make millions overnight. But itâs also a huge mistake to seek out these kinds of trades because theyâre impossible to foresee with a solid strategy. You have to either get Powerball-level lucky or break the law. Speaking of that, the trade weâre gonna talk about next is so sketchy that I think it could potentially catch the attention of Federal regulatorsâ¦ 45,650% â¦ Overnight?! As mentioned earlier, last Thursday, I got forwarded the following screenshot: This trader allegedly turned $22,000 into $10 million+ â¦ overnight. At first glance, this may look incredible â¦ like something to aspire to. But Iâm gonna show you why itâs actually exactly the oppositeâ¦ Ask yourself: How could this individual have known about the deal between Cisco Systems Inc. (NASDAQ: CSCO) and Splunk Inc. (NASDAQ: SPLK) before the information was made public? Are they the âNostradamus of trading,â or did they possibly front-run a deal they knew was about to go through? Iâm not accusing anyone of anything, but simply pointing out how weird this looks (and how bad it is to shine a spotlight on this type of trade). WARNING: Thereâs A Hidden Factor in This Tradeâ¦ Another factor at play here was the implied volatility (IV) on the options going into this tradeâ¦ Usually, the market has some expectation of an upcoming catalyst (like a scheduled earnings print), causing the IV to rise. In these cases, itâs pretty much impossible to make 45,000% returns because the premiums of the contracts are more expensive. But heading into this crazy trade, the IV on SPLK was just 34% with a 97% chance of closing out of the money. No one had any idea that CSCO was going to acquire the company, market makers included. Again, itâs impossible to predict these moves with any sort of conviction unless you have illegal, non-public information. I donât want any of my students thinking theyâre gonna make 45,000% in one trade. This sort of mentality is a recipe for disaster. Take it from meâ¦ I didnât survive 20+ years in the trenches of Wall Street â watching hoards of over-eager traders come and go â by taking stupid risks like this. (On a professional trading floor, if you nail a 15% trade overnight, youâre treated like a golden god. This is because institutional traders know that marginal gains compound to create enormous money piles. Thereâs no need to shoot for the stars, so to speak.) In fact, my boss wouldâve fired me immediately had I made this trade during my days on Wall Street. If you follow my âBurn Noticeâ trades, youâll notice I almost never make trades that bag hundreds of %. This comes from experience. You donât need to make such large returns within a single trade. Consider the big picture: The SPDR S&P 500 ETF Trust (NYSEARCA: SPY) returns an average of 9% per year. Think about that. If you make just 10% on one trade, youâre outpacing the benchmark index for the entire 365 days. So, donât get ahead of yourself. Donât admire these ridiculous âYOLOâ plays. Be consistent, disciplined, and steady. Nurture Your Long-Term Vision In his massively popular book Outliers, journalist Malcolm Gladwell suggested that nearly every âmasterâ of a difficult skill had spent at least 10,000 hours honing their craft before achieving true mastery. To put this in perspective, thatâs about four hours of practice per day for ten years (or two hours for 20 years). However, remember that every trader is different. This number should be taken as a rough guideline. It may take you far less than 10,000 hours to get your footing in the market, or it could take considerably more timeâ¦ Me?! Iâve been trading since 1998. This means Iâve spent tens of thousands of hours trading, charting, and thinking about the market. In other words, my success didnât happen overnight and neither will yoursâ¦ To succeed over many years (or decades) in the stock market, you need to have a clear, long-term vision. Here are three simple ways to think about it: - Trading isnât a zero-sum game. There are trillions of dollars circulating throughout the stock market. Just because some other trader makes a huge trade doesnât mean that an opportunity is being taken away from you.
- Forget about instant gratification. Donât expect to turn $1000 into $100,000 overnight. Understand that the vast majority of traders lose money in the beginning. Trading is a marathon, not a sprint.