Monthly Archives: October 2011

Trading with a Long Term view

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“Once our minds are ‘tattooed’ with negative thinking, our chances for long-term
success diminish” John Maxwell

One of the difficult aspects to trading in the Public Stock markets today is in keeping the correct perspective on the proper strategy for a successful Long Term account. For those that follow me you know that I run such an account. I find myself managing this account with more frequency due to the elevated volatility (darn daytraders, lol). What this means for this account specifically is:

  • Stocks are called away more often due to the fact that I sell calls against the position
  • Requires a wider stop on a LT position due to the whipsaw action that occurs
  • The initial stock picking process for the LT acct remains the same, but selection has to be even more precise

Now for those that have asked questions regarding some recent trades, let me help clear up my approach further here. I do attempt to be clear when posting a trade in terms of what account I am trading in, but I do realize that it would be hard to follow this over time as some exits are weeks later.

A recent example is with WFM (Whole Foods) where I have a Long Term account position, and a Swing account position at the same time. Each position has its own strategy attached and therefore have differing rules on entry and exit execution. Today I did trim some of my Long Term account holding (as posted via twitter) but have not exited any of the Swing position -  it has a wider stop.

Remember, there are several key things to stock trading – including timeframe.

S1 R2 Pivot hut hut hut

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3rd down and 8 on the 45 yard line and you want to go Long (a stock). The Defensive line keeps shifting but you are sure that your play (trade) will work. You think you know the S1 and R3 points, you know where the Pivot is. Time to hike the ball and execute.

Wait a minute. What is R3? 3rd Receiver? Is this football or trading? LOL

If you are new to trading and often wonder what folks mean when they talk about S1 this or R2 that, here is a great place to start. FreeStockCharts.com

It is quite simple to use the “Add Indicator” function from the menu and choose “Pivot Points” as shown in this example:

 

My Approach

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I am often asked questions regarding my trading strategies, but recently I have seen an increase in questions that have to do with comments I make regarding a trade in a particular account.

With that in mind, I thought I would put a little detail in to how my trading is set up from an account perspective. I run 4 accounts:

  • Daytrade
  • Swing
  • Options
  • Long Term

A large part of my trading activity is in the first 3 listed accounts with the Daytrade account being the most active. For me, it has just been easier to utilize the different accounts with a strategy focus for each. I do not have all the accounts at one broker either – I like to have the ability to work around issues that may reside with having only one vendor.

Of course there are some caveats to this structure. For example, I do end up with option trades in the other 3 accounts at times. Also, a trade in the Daytrade account will turn in to a swing for various reasons.

My LT account contains stocks that I view as good investments, and I will sell calls against them each month for additional income. This will cause me to have to re-enter from time to time as the stock is called away. So be it. IBM is an example. ORCL is another.

Hopefully that helps provide a little more insight into my approach. Trade ‘em well.

 

The Buy Write

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One of the frequent trades that I do, especially in my Long Term account, is the Buy Write. This trade involves buying the underlying equity position and selling an upside OTM (Out of the Money) Call option against the position.

This trade accomplishes 2 key things:

  • Provides some downside protection for the underlying equity
  • Although it caps the gain with the sold upside call, it helps to position oneself for a predictable upside gain

A trade I am putting on today is a Buy Write in ANR (Alpha Natural Resources). The trade goes like this:

For each 100 shares purchased of ANR, sell 1 Call contract of the November 21 option for 1.60.

Breaking down the trade, this is what happens. If you put on this trade here, you are buying ANR at 19.75 with downside protection to 18.15 (from the equity buy point). You are capping your gain on the underlying equity at 21 (if excercised).

Summary:

  • You keep the 1.60 in option premium collected on the sold call contract(s)
  • If the stock does drift up to the 21 strike by November (and called away) you achieve additional capped upside of 1.25 from this level for a total of 2.85 in upside.

If you prefer more downside protection, but with a tighter cap on equity gains, you can sell the Nov 20 strike Call for 2.10 for protection to 17.65

What is on deck for next week

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Economic Calendar  (be sure to choose the “Next Week” tab)

Earnings really kick off next with AA (Alcoa Inc). But for me, I am watching JPM (JP Morgan). I want to see where we really stand with financials and this will clear up the picture a LOT in my opinion.

Before I move on to other items for next week, how did we finish off Friday? It appears that money ran for the hills as folks finished up their profit taking (do you really think that the shorts put on new positions in to the close?). The $SPY on Friday - 3o minute chart:

Easy volume pattern to follow here each day, but the question is always this: is it Sell volume or Buy volume?

The SPY made an intraday Lower High and a Higher Low to close out Friday. Price now back under the Gap Up launch point from 9/26.

The 2nd largest Volume at Price bar resides in this price level, with a slight edge to Buy volume. Now on to next week again.

China is back from holiday and so a lot of emphasis will be placed on watching that market ramp back up. Will it be pent-up demand? Or will we see a continued down drift pick up right where things left off? Let’s see what the SSEC (Shanghai Se Composite) weekly chart looks like:

This chart shows a Double Bottom touch fast approaching. The reaction to that Horizontal Support line will be key. Battle Stations, Red Alert.

There you have it. 3 Things to keep on your radar, here is the Summary:

  1. Economic Calendar
  2. Earnings kick-off
  3. China market back in action

 

 

Pairs Trade with BEN AFL

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This is a pairs trade idea involving BEN (Franklin Resources Inc) and AFL (Aflac Inc). Here is the daily chart for BEN:

Chart shows continued weakness as it is not able to break above declining trend line. This is the short component to the pairs trade. Next is the AFL daily chart:

As you can see in the chart above that it has made a recent B/O attempt and is pulling back today. This the long component to the trade.

So in summary, this is a Short 1 lot of BEN and go Long 2.6 lots of AFL.