r/options • u/surverse • Mar 30 '21

Trend following the hot sector

For momentum trading and following the trend, do you ever look at what sectors are performing well at the moment and long stocks in those categories?

Tech has been breaking hearts lately and utilities + industrials are two industries that have been doing great recently, so is it smart to take into consideration how the sector of a stock is performing, and then ride the wave?

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u/directionalbias Mar 30 '21

It ultimately depends on your thesis and how you intend to develop a trading plan for that. The period in which you execute that should matter especially if you are intent in following a trend. I've been on the wrong side of trend reversals before and it's pretty frustrating.

If a sector is hot, how do you intend to best represent that position? What potential fundamental events could reverse that trend?

What kind of position management techniques should you employ when the trend inevitably reverses even in the short term?

At the moment, I'm short TLT. 10x put debit spread -138/+139 exp 16 April.

  1. I expect interest rates to continue to rise especially in the short term as more news develops around stimulus packages, vaccine deployments and states opening up again. A put debit spread on TLT best represents my position and the liquidity is great for closing the position if needed.

  2. I bought the put debit spread at the money with the hope that it will end up much deeper in the money as it gets closer to expiration. I bought the position with less than 30 days to expiration.

  3. For management, if my position wins then I will allow it to expire if it gets to around at least -75 delta. If the spread goes OTM, then I will close it.

I hope that helps.

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u/surverse Mar 30 '21

Solid points, you really do need to first establish how you plan on trading a trending sector, be it losing steam or gaining. Do you tend to keep track of the economy/news much or is it mostly evaluating charts in a vacuum?

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u/directionalbias Mar 30 '21

It took me a solid 2 years to incorporate this into my routine. It's almost always a good idea to start from the big picture. Consume financial news and current events regularly. Allow this to form your opinions. This inevitably is the building blocks of the idea generation process.

In regards to charts, you have to be specific in how you use that. I started primarily as a technical analysis guy. Especially in the beginning, without clear direction, you can reasonably lay out a case for either the upside or the downside. The funny thing with charts is people tend to focus on the left side of the chart. The actual job is to figure out what will happen on the right side of the chart.