Today, we continue with Part 2 of my interview series with Moby Waller, our Chief ETF Strategist.
Today at 12 p.m. Eastern, I’m hosting a LIVE special event with Moby. Inside the webinar, he’ll share his ETF trading strategies . . . and show you how to use a simple options strategy for winning more trades.
Join me for the exclusive trading webinar: Earn 22% to 135% in 2017 from this “Must Buy” ETF
IAN: Moby, tell me about your trading strategy.
MOBY: I like to follow momentum, trends and outperformance in order to target above-average gains.
I believe in three primary things:
- An object in motion tends to stay in motion
- The trend is your friend
- The tape tells everything
IAN: What is your long-term view of the market?
MOBY: Big picture, I’ve been largely bullish since the mid-1980s when I first got interested in the markets.
If you look back at the past 30+ years, the stock market has been in an overall bullish mode about 75% to 85% of the time. Betting on crashes and downtrends has NOT been a winning strategy. Until that changes, it’s prudent to lean to the upside.
At the same time, everyone should be cautious and protect against the inevitable downward moves.
IAN: What is the biggest risk to this long-term bull market?
MOBY: The biggest long-term financial risk is if interest rates spike sharply higher. It could cause something of a global economic “death spiral.” Right now, the entire world is far too reliant on 0% interest rates.
IAN: What is the No. 1 lesson you wish you’d learned earlier in your career?
MOBY: One of my biggest rules in trading is not to let a small loss turn into a very big or max loss. I’ve had to impose discipline on myself to avoid those.
IAN: Why is it better to trade sector ETFs, rather than simply owning the entire market?
MOBY: The “market” is made up of numerous sectors. And when you look at the entire world, the number of opportunities grows tremendously.
Most years, the stock market ̶ measured by the Dow or S&P 500 ̶ is up 6% to 8%. Yet the top-performing ETFs are up 50% to 120%.
Consider 2016. YTD the S&P 500 is up 7.7%. But consider the performance of the top sector ETFs. It’s worth noting that these aren’t leveraged or inverse ETFs; they are simple “pure play” sector ETFs.
- ProFunds Junior Silver ETF (SILJ) +168%
- S&P Metals & Mining ETF (XME) +117%
- VanEck Coal ETF (KOL) +112%
- VanEck Steel ETF (SLX) +106%
- iShares Global Silver ETF (SIL) +103%
I believe the KEY to success in owning the RIGHT sectors, at the RIGHT time. By owning winners and avoiding losers, you can dramatically improve your overall performance.
Multiply Profits with Sector ETFs
IAN: Explain HOW you identify the best ETFs to trade ̶ BEFORE they take off and double in price.
MOBY: I have a select list of 100+ of the best ETFs, which cover the entire world, virtually every sector of the U.S. stock market, international market and commodities.
I go through this list every week to create a Bull and Bear watch list, using a unique, tested setup I’ve created on Daily charts, which helps find strong directional trend moves. I then will narrow down from the watch list to create a holding portfolio of two to six diverse ETFs that will beat the market. I actively manage this portfolio and make changes throughout the year. And I may hold an ETF several months or more in the portfolio.
IAN: Trading sector ETFs is a great strategy. How do you take this strategy to the next level to multiply your profits?
MOBY: Among with my favorite long-term ETF trades, there are also strong short-term trends. I look to identify these early, with a directional trade that can last from a few days to a few weeks.
For these, I use options trades to leverage my capital. My goal is to multiply my gains by 3 to 5x. Basically, I buy calls and puts that act as basically a stock substitute. This can allow me to earn bigger gains with a small cash outlay.
Mechanics of the Trading Strategy
IAN: So how exactly does this work?
MOBY: I buy in-the-money or ITM options with a Delta of 60 to 90, to get bang for the buck. A Delta of 0.70 means the option will move $0.70 for each $1 move in the underlying stock. Options traded will normally be in the $1 to $6 price range. That means they cost $100 to $600 per contract.
The ITM options with high delta give a lot of leverage on the underlying ETF move, with limited risk and a small cash outlay. For example, if I buy a $3 option with a 70 Delta and the stock moves $1, the option will theoretically gain $0.70. That is a +23% gain on the option with just a $1 move in the ETF.
I generally purchase options with three weeks to three months of time left in them. These are usually monthly options that are one or two months out from expiration. I select options with very little time premium ̶ known as Theta ̶ so I don’t lose from time decay on the options. Specifically, I buy enough time in the option for the anticipated move to play out.
IAN: How do you manage your trades? When do you lock in gains?
MOBY: I want to let winners run and cut losers short. That being said, I’ll generally take 1/2 profits on a position when it reaches +25% to 40% gains. And I’ll hold the remaining 1/2 for potential further upside. In some of these trades, I am to earn profits of 100% or more
To manage risk, I always use a trailing stop to avoid giving up the net overall gains. It’s common for my winning option trades to net out to 40% to 60% gains.
Because I like to lock in profits early, I think it’s important to trade at least two options contracts. If I’m only trading one contract, it’s impossible for me to take off 50% of the position.
IAN: Everyone has losing trades every once in a while. How do you manage your losing trades?
MOBY: I’ll generally set a stop-loss in the -20% to -30% range on my trades. With the 1/2 profit taking, the average winning trade will generally be bigger than the average losing one. This means I can make a profit even if I’m only winning 50% of my trades. But I actually aim to win 2/3 to 3/4 of all my trades.
IAN: Earlier this year, we tested your ETF sector trading strategy using in-the-money options. The results were extremely impressive. Can you share a few details?
MOBY: In preparation for launching this strategy with Wyatt Investment Research, I did extensive testing with ETF sector options.
During a three-month period, I issued 15 trades. Of those, 73% of the trades were winners. The average gain per trade was 35%.
Had you started with $10,000, you could have earned a 30% return in just a few months.
IAN: That’s pretty exciting! Thanks so much for your time today.
It’s great to hear Moby’s life story of trading at the CBOE in Chicago and setting up a trading firm in London.
For over 10 years, he’s been committed to helping other investors learn how to trade like a professional. I’m thrilled that we’re adding his experience trading sector ETFs ̶ and options ̶ for the members at Wyatt Investment Research.
Remember to click here now to join me for Moby’s exclusive webinar ̶ it’s free to attend:
P.S. If you missed Part 1 of the interview, you can click here to read it now.