Kunkle began his journey in the trading room of Bentley University in Massachusetts, where he traded with the money meant for paying for his undergrad in finance.
After completing a master’s degree in investment management, he started working as an equity analyst for Thomson Reuters, before going out on his own.
He set up the Options Hawk in 2010 out of his apartment with “one extra screen and a table found on a street corner”.
Kunkle says monitoring and analysing option movements provides his edge, but calls himself an “equal opportunities trader”, taking elements from a variety of methods and combining them. Here are his tricks of the trade:
I monitor options flow in the market. By seeing what the big money is doing – with their huge spend on manpower and time and algorithms and analysis – I’m able to take part without needing to have the same level of resources.
To do this I use LiveVol. It provides the raw data, not the exact information. To monitor correctly I have to do quite a bit more: determine whether it’s a buy or sell and also when it’s tied to any stock – if it’s a hedge.
You can’t be 100% certain always, but through experience I’ve become quite accurate at figuring out exactly what and why the big guys are positioning in a certain way.
Once I find the what, I dive into the why. Identifying these movements is strictly idea generation. It triggers me to look into something further. I don’t jump into something just because a big fund has bought it; that’s putting too much faith in them.
I dive into the story, looking for the catalyst that’s triggered the position, whether that’s an earnings announcement, an analyst meeting or, if it’s a drug company, a trial announcement.
I always research short interest. If you see something with call options trading, but jumping in, the call has a good chance of just being a hedge rather than a positioning for the stock to go up: they’re simply protecting a short.
There’s a lot of different metrics that go into determining exactly what a fund’s position is.
“I don’t jump into something just because a big fund has bought it”
I carry out fundamental analysis by researching the financials of a company. I’m looking for quality companies with good management that are delivering on the numbers. I like companies that at least hit – but are usually exceeding – their own estimates, and are consistently raising their guidance.
I focus on growth. Momentum is something that a lot of technical analysts use. They buy because the chart is going up. But I look for momentum through the fundamental indicators in the financials; a company with accelerating growth that’s doing a smart acquisition and expanding its markets, for example.
I look at the total available market; the potential size a company’s market could be. It’s something that was easy to see years ago with cloud computing. People thought Salesforce.com was expensive when it was trading 100 P/E five years ago, but they didn’t realise it was targeting a market that was going to grow to a couple hundred billion.
I use technical analysis for entry and exit points. I’m not a big advocate of using technical analysis to determine whether to buy or sell a stock. But once I’ve done my other research and decided whether to buy or sell, I’ll use it to help determine when I should make the move.
I keep technical analysis simple: mostly just price patterns, trend lines and some uses of moving averages and a little Fibonacci, nothing too advanced.
I’m generally in names for three weeks to six months. I’m fairly active, but I’m not usually a day flipper. Once in a while there’ll be some option trades that I’ll buy and sell within any given day, but that’s only when the occasion calls. I’m usually in less than 15 different stocks at the same time in my trading account. It’s hard to monitor a ton of companies at once.
I’m not driven by strict rules in managing risk because I monitor the markets 24/7. I’m pretty traditional with using various stop orders and using technical-analysis tools to set an exit at the point I think a stock would lose all momentum. But when I’m not sleeping, I’m monitoring the markets. I’m always on top of my companies.
I’m into trends. I often take a top-down theme, such as an ageing population or security in cloud computing, and identify all the stocks in the space. I then drill down to the quality companies that are experiencing the most growth, gaining the most market share, and, hopefully, have a strong balance sheet.
I always want to find the margin leaders, because it’s pretty safe to say that a company with better margins than its peers is operating better than its peers.
Panic selling is never the right move. If I see something in a company’s results that tells me the fundamental story has changed, then I’ll exit. But if the fundamental story – the reason I got involved in a stock – has not changed, I won’t change my position on it. If there’s been a big sell-off, but the stock is still delivering the numbers, then I’m not going to exit.
There’s a lot of reasons people sell. Often investors are simply taking profits. Every great stock in the market’s history has had big corrections over time. If there’s no reason to change, stick with your belief and don’t panic.
“Whether the last one was good or bad, you have to move onto your next play”
For investing, I like finding small companies with a market cap of under $2bn. I hold these in my retirement fund for the long term. I find there’s so much more alpha generation possibility in companies that nobody is following yet, but will eventually become a company that everyone’s following. Recently I’ve found a number of medical technology companies doing exciting things.
To choose which I invest in, I look at their revenue growth, read their corporate documents, see what markets they’re attacking, check the size of that market, then extrapolate their valuation based on their available market and revenue trajectory. There’s a lot that goes into it, but if you do the work there’s no better way to make money, in my opinion.
I love to reverse engineer. One way I generate new ideas is by looking at high-growth companies I missed. I plot out the narrative and work out how I missed it.
If, for example, it’s a small cap that’s been bought out one day, I’ll look at its metrics, work out what made it an attractive acquisition, and set up stock screeners based on those metrics in order to identify other companies that fit a similar mould.
Shorting right now is fighting against the tide. I do short companies, but I’m mostly long because that’s what the current environment calls for. Even though there are some brief chances to short, you have to be very good at timing, because you can be shorting a really bad company and having success, but then a day comes where there’s a short covering rally and it can wipe out all your profits. Unless I see the market momentum shifting, focusing on long is the way I’ll stay, until things change.
You’re only as good as your next trade. Whether the last one was good or bad, you have to move onto your next play. I never dwell on a bad trade, which is tough psychologically, because the bad trades stick with you more than the good ones. I remind myself that I’m good at this and that I’ve shown my methods work; I look at the big picture. As long as the account is always growing and always hitting new highs, I don’t care which particular trade got me there, and which pushed me back along the way.
I stick to the “keep your losses small” concept. Again, it’s a psychological battle more than anything. When I exit something because I’m following my rules, and then it goes up a ton, of course I feel regret. But at the end of the day you have to stick to your rules to keep your losses small, otherwise one day they’re going to not be small.