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Here's how I'm managing risk in Disney, Berkshire Hathaway and Nvidia: veteran trader

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Sarge986 President Stephen Guilfoyle joins Yahoo Finance’s Jared Blikre to discuss the latest market action.

Video Transcript

[MUSIC PLAYING]

AKIKO FUJITA: Welcome back to Yahoo Finance Live. We're seeing a pretty flat trading day on Wall Street as we head into a three-day weekend. The Dow the only one in the red right now. Just down just about 29 points, there. Let's bring in Jared Blikre for the very latest on the market action. Jared.

JARED BLIKRE: All right, well guess what? I'm going to bring in Sarge, also known as Stephen Guilfoyle. Been a long time buddy. President of Sarge986. You can with some charts today, so let's talk about that. Starting with Disney, you're writing about this today, and I noticed you're taking a position in the options market. Can you lay out that trade for us?

STEPHEN GUILFOYLE: Yeah, sure. OK, now, if you take a look at the chart here in Disney, you're going to see it there's been a few gaps over the past year since it rebounded off the lows. The May and the August gaps were filled no problem. But as you know, gaps, they don't have to fill, but they usually fill. The November and the December gaps never quite filled. I'm counting on a sell off in Disney. I want to inquire the stock. I missed most of the second half of this run up. I want to get the stock in. I'm thinking that I can get it, hopefully, as cheap as 160 or 130 when those gaps fill.

So I'm selling puts that expire in May. I'm short at those puts already. I shorted them this morning. I didn't buy the equity yet. But I do think that at the very least, we see 179, 173 in the stock. That's why I want to start by an equity. That's the 21-day EMA, the exponential moving average, and the 50-day SMA, the simple moving average. That's when the algorithms will wake up.

JARED BLIKRE: All right. And could you just kind of break down exactly what it means to play the options? Maybe just a little bit of background in there for somebody who's not familiar with options, and how this exactly leverages the trade for you.

STEPHEN GUILFOYLE: OK. Well, what I'm doing here is a little risky actually, OK? Because I'm selling these naked, I'm writing them naked. I have no position in the equity in Disney itself. So if it trade's down past through 160 or 130 by May, I have to buy those shares. Someone else has paid me the right to sell me the shares there. So I'm committed if I hold-- if I don't just cover the position prior to the expiration date.

Now as I said, I plan to buy the equity on the way in. When I do that, I will also sell covered calls against my long position further decreasing my net basis. The whole idea here is to make money. And if you do it, whether the stock goes up or you bring your net basis down, either way, you're a winner. And that's why sometimes people will write back to me, oh, come on. How do you always make money. I don't always make money, I just talk about my winners more than my losers.

But the fact is, I have more winners than losers because I know how to manipulate my net basis. Your cost is just as-- your entry point is just as important as your exit point.

JARED BLIKRE: Yeah. A lot of wise words there. And you know, if I listen to Twitter, I hear about a lot of winning trades, not a bunch of losers. But I want to go now to Berkshire Hathaway, this is another stock you're looking at. Just recently reached all time highs, finally eclipsing highs ahead years ago. Financials finally coming back as we see the yield curve expanding. What's your take on Berkshire, here?

STEPHEN GUILFOYLE: I am actually long in this stock, OK? I like Berkshire, but technically, because I saw the big cup with handle form-- right up until about August is when you saw the handle start. And the handle runs through November. In late November, we see the breakout. The breakout kind of fails, but it comes back. But we see support right at the pivot point in December and it's still trying to breakout. It's up a little bit right now. My target price for Berkshire B is 283. The pivot was 235, you can see it on the chart. And now my panic point on this stock is 218. Because every good trader has a target and a panic. You don't trade without either one of those.

Every person at home, I wish I could just tell you this, OK? You want your winners and your losers to be in your head before anything happens because then there's no emotion involved, all right? Set your targets at least 20% to 25% above your entry. Set your panics 7% or 8% below your entry. This way, even if you're right half the time, you're going to make money because your targets are three times higher than your panics. You're going to lose money sometimes, you'll get shaken out, but you'll never take more than an 8% hit unless it happens while you were asleep.

JARED BLIKRE: Sarge, you are putting on a clinic, here. I hope everybody listens to what you're talking about. Very important. We got less than a minute, what are you seeing in Nvidia here?

STEPHEN GUILFOYLE: Oh, I love Nvidia. I'm longing to stay into it. By the way, with the squeeze that's going on-- it's not a short squeeze-- but with the scarcity semiconductorships right now, I think we're just going to see an operation warp speed. But for chip boundaries, and that's coming. That's going to help a lot of other names. Not Nvidia, Nvidia's the designer, really.

But Nvidia just broke out of a long, flat base. You'll see on the chart. There was an ascending triangle that was forming right up until about November. Then the flat base runs out till February, kind of consolidation period. It just broke out through that. My target price is 670, the pivot, you can see, was 588. Now, my panic point is 537. It's not exactly an 8% discount, but it's the 50-day simple moving average. And if any of my discounts or targets are closer to an average, I know the algorithms respond, then I go there because that's where the algorithms are going.

JARED BLIKRE: All right, Sarge. Thank you so much for joining us. Tossing it back to you, Akiko.