Time as an Edge

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Over the last week, I refined my investment approach after realizing a few mistakes. Now my strategy is simple: half is for long-term wealth, half for active trading. This balance gives me both safety and flexibility.

The Beta Side. Buy & Hold Blue Chips

The only strategy that has no flaws is a diversified buy and hold of blue chip stocks. Why? Because good stocks will go up it’s just a matter of time. This has been proven by every major index or stock like JNJ, IBM, or ALV.DE. No matter how bad the crash was, after a few years they always reached new all-time highs again.

That’s why fundamentals are the most important thing for this side of my portfolio, such as:

  • Consistent positive cash flow
  • High institutional ownership
  • Share buybacks
  • Reliable dividends

So why not just invest in an ETF like the MSCI World?
The simple answer is greed. People, including me, believe they have a strategy that can outperform the market.

The Alpha Side. Timing the Market

I don’t like a game where others have an insane advantage just because they have access to better information or more capital than I do. So I’m not trying to compete with them on that level. Instead, I asked myself: is there an advantage that I, as a small retail trader, have that market makers don’t?
And yes, there is it’s called flexibility.

Market makers have to disclose their trades to the SEC, discuss them internally, and follow strict procedures. I, on the other hand, can jump in and out of trades within seconds without having to justify it to anyone. Especially in biotech stocks, where there are frequent news events that can drastically change a company’s valuation, timing means everything.

As an example, let’s take a trade I made last week with Cidara Therapeutics ($CDTX).
Alt text About two hours before market open, the following news was released:
“Cidara Therapeutics Receives U.S. FDA Breakthrough Therapy Designation.”
This is clearly positive news, no matter whether the drug is preclinical or already in Phase 3. It shows that the FDA acknowledges the drug’s potential, which drastically increases the chance of approval. Therefore, the likelihood of a rally is very high after such news.

But you have to be careful not all seemingly positive news is truly bullish. For example, “Topline results: Primary Endpoint met” may sound great, but if the market expected stronger data, the stock can still drop.

In this case, I looked at the premarket chart and noticed that the stock barely moved. That’s where your edge comes in: if you’re fast enough to buy shares early, you’ll likely benefit throughout the day. You don’t even need to analyze the stock deeply just ask yourself two questions:

  1. Are the news really positive?
  2. What’s the downside risk?

If the stock has already rallied 20%, it becomes much harder to decide whether to enter, and then you really need to look into the details of the news and consider things like:

  • Chance of FDA/EMA approval
  • Peak sales estimates
  • M&A buyout possibility
  • Upcoming catalysts
  • Royalty agreements
  • Standard of Care potential
  • Dilution risk

In the CDTX case, the news and the overall market sentiment were clearly bullish, and the stock hadn’t moved yet, so I had basically zero downside risk and decided to take a large position. The reason I didn’t go all in, even though it was tempting, is because a black swan can always happen. You should never underestimate the market.
Sadly, I sold right after market open and missed out on huge gains, especially since new analyst ratings came in during the day that pushed the stock even higher. That was the moment I realized that I take wins too early. So this is how I should have played it:

Don’t Realize Your Profit Too Early

  1. Positive news comes in, and the stock hasn’t or barely moved yet.
  2. I don’t overthink and directly buy 50 shares.
  3. I let the market react and wait until market open.
  4. If the stock rallies, I buy an put that is worth the unrealized profit and 50 more shares now I got a free hedge and the worst case is breakeven.
  5. I let the stock react throughout the day (maybe sell an OTM call if IV is high).

With this approach, I cut my losses down to breakeven while keeping an infinite upside.
But what if you’re wrong and the stock dumps?

Limit Your Risks

No matter what trade you do, you should never take a trade that could potentially wreck your portfolio. That’s why I never short unhedged, sell naked calls or puts, or make a position too large. In case the stock drops because of a dilution, bad news, or a broader market move and you believe the drop is unjustified you can always make your position an investment and hold it or even buy more and average down.

But of course, don’t hold it just because you want your money back. If you no longer believe in the company’s future, it’s better to realize your losses and move on. Then ask yourself: why did I buy the stock in the first place?