Planning the trade exit in Amazon

One of the final steps in the execution of a trade is the Exit. It is a required step in recording a profit (or loss) in a trade and will be executed on:

  • movement up and stall/consolidate (if long)
  • bottoming process, start a new base (if short)

When options are involved, you are often presented with more than one path to take for an exit of the trade. However, one such path is an exit that is driven by an expiring option that must be dealt with in order to capture any gain before the expiration date.

I am in such a situation with $AMZN this week as I have the following trade from earnings after hour action last week:

  • long stock at 208.60 in A/H on 7/26/2012
  • I initiated an August 230/240 Collar on 7/27 for $.80 debit. I was able to unwind this Collar for $.30 thus keeping $.50 in premium in the same day.
  • later in the day I initiated an August 3w/Aug 235 Collar for a $3 credit. This means I sold an August 235 Call to buy an August 3w 235 Put.

This last bullet point highlights the piece of this trade that I must deal with this week – the August 3w 235 Put is set to expire on Friday so I need to get value from it. This needs to be balanced with the desire to have protection in place for the long stock position.

$AMZN is currently trading near $233 so this Put is ITM (In the Money) and is doing it’s job in protecting my long stock position. I will provide an update on any exit I perform this week via twitter.

Using layers to create, confirm, or invalidate your bias

One of the basic components of a trade setup is the formation of a directional bias. Most traders concern themselves with determining if a stock entry is to the long side or the short side. Less frequently there is a neutral view on a stock (and this is a bias that price will stay in a range).

As part of my prep work each weekend, I review a large number of charts. I take a look at different time-frames, different chart “types” (PnF, Candlestick, etc.), and with a few different indicators & moving averages. After a trader has done this for a period of time, you begin to be quicker at seeing a pattern developing within the chart. But what happens when you overlay a different indicator on the chart? Does it:

  • throw a wrench into your perspective causing a need for more review?
  • confirm your bias?
  • invalidate your bias altogether?
  • form a solid bias?
  • require more review to form a bias?

Let’s look at an example using the Daily chart of $EFX (Equifax):

This Daily chart of $EFX (Equipfax) has a nice Rising Channel or Wedge forming. The shakeout on Thursday (7/26) caused price to dip slightly below the 50 day simple moving average, but it managed to close above on Friday, 7/27. However, price now seems in no man’s land – in the middle of the channel – so what can I do to form a bias on direction? It looks like I need a bit more review.

Let’s take a look at the same chart with the Volume by Price indicator overlay-ed and the channel removed:

Ah, now we see where the #1 Volume at Price (VaP) resides – right at the current price level. In reviewing each VaP bar further, it can be noted that the bar at this level has a greater % of buy volume over sell volume (buy volume is illustrated by grey color).

This is a key level as it is testing the late April high, which is the breakout level from mid-June. My personal approach here would be to:

  • monitor for a hold of this 50 day simple moving average before entering a long position.
  • A break below this moving average and it is a short to the bottom rail of the rising channel.

The Fab 5 update

The Fab 5 was on hiatus this week. I did enter a position in $MDVN earlier in the week, from the candidate list, but this was done as a normal Swing trade. On the subject of my candidate list, I thought this may be a good time to give a little detail on how I screen, select, and ultimately choose candidates.

Here is a current screen result using Finviz:

Ok. So I start with a rather short list most of the time. This is primarily due to the constraints put on Price and Average Volume. In the selection process, I keep an extensive spreadsheet on numerous metrics for the company. Some of the filtering process is easy, for example:

  • $PM has a $154 Billion market cap here near $90. It will take a LOT to move to $100, a $16 Billion market cap boost.
  • $ALXN & $ATHN have really high P/E ratios so have to be careful with these (just how far can the market look forward?). $ALXN had an outstanding week – was the top performer in the candidate list.
  • $WFM is now past a recent earnings event so that catalyst is past

Of course each candidate receives a good chart review, a look at how the sector/industry is doing and any seasonality that could come in to play. Once I feel that I have completed that filter process, the next step is crucial: For the Option Chains of each candidate, are there any with poor volume/strike availability? This is key for me because I utilize Option Collars to protect the whipsaw that has been occurring with more frequency. A key filter component in my process.

Some performance metrics since inception:

  • Complete Status: 17
  • Average Gain: $13.41
  • Largest Gain: $EL at $23.85
  • Smallest Gain: $DLTR at $2.85
  • Not-complete Status: 22
  • Average Gain: $2.33


Sometimes you need the Sledgehammer

There are times when the “normal” tools used in trading are not able to get the job done. Sometimes you have to bring out the Sledge to finish the job. Certainly a harder tool to use, takes a LOT more energy, but at times necessary.

With earnings trades, there are situations where you have to hedge the option trade with a position in stock (long or short). I am in such a situation now with my $EXPE earnings trade:

Trade details:

  • short the August 50 Call
  • short the September 36 Put
  • long the August 43/39 Put Spread

In after hours, the reaction to the earnings report was positive and the stock moved up. With price above the $50 level, I had only one action to take: go long the stock to protect the short August 50 Call. I had to bring out the Sledge and went long at 50.65 because Options don’t trade outside of market hours (one disadvantage to them).

This morning I have bought back the short August 39 Put for $.05 (part of Put Spread) leaving the long August 43 Put. I have done nothing with the short Sep 36 Put (so far away now, and protected for a while by the long Aug Put).

After doing this, I focused on what to do with the long stock & short August 50 Call piece. I elected to focus on looking for a top with this being the plan:

  • sell the long stock
  • play for a drift back down so that the short August 50 Call will shrink in value

I have in fact sold the long stock position on the 20 SMA break on the 5m chart (one of common rules to follow) near the $57 level. I use the Accumulation/Distribution indicator as my primary guide, and it is currently at a low for the day. Profit taking by the Bulls makes sense so would expect to see a bit more of that.

The August 50 Call is currently at a bid/ask of 6.50/6.80

Updated on August 9, 2012:

The only remaining piece to this trade is a long position on the August 43 Put which I expect to be worthless at expiration next Friday. This trade has a booked gain of $4.42 to this point and that is expected to be the final total.

When a Put is involved, it is not always Bearish

I received several questions/comments this morning regarding my current trade in $GNC. I was stalking this from the earnings reaction and was patiently looking for a bottoming process.

I ultimately decided to ease in at the $36 level and started a 1/3 position. A final flush took the stock under the $35 level for a few minutes where I instituted one of the tactical components to my trading: the Put Sale.

This is where I think some folks get confused because it involves a Put and almost always think Bearish. However, the Put Sale is a Bullish move in that I am taking the view that the price of the stock has a floor. The key part is that I want to get paid if I am wrong (the floor is not quite in for example). As long as I am close in the chosen strike, the premium collected helps lower my cost basis in the overall trade.

In the case of $GNC, I sold the August 35 Put for $1.95. This is the time to sell Puts in my opinion, nice RED day. This was also a 1/3 pos bringing my position size to 2/3.

After the bounce I sold the stock pos at 37.15 and remain short the August 35 Put. This puts my cost basis, if Put the stock, at $33.05. The stock is currently trading at 37.10

The Option Collar series

I never intended for this to become a “series” on my Blog, the topic of Option Collars, but I find that they have become critical to protecting positions in this summer trading roller coaster. This week is no exception as I find myself unwinding a Collar in my long $TRIP position after a negative reaction to their earnings report.

Here are the details:

  • Long the stock on June 11, 2012 at 42.82
  • Initiated a July 45/48 Collar on July 2, 2012 for a $.28 credit (paid to have insurance, unreal). This was closed on July 12, 2012 for an additional $1.65
  • Initiated an August 49/45 Collar on July 18 for a $.25 debit

Because of this Collar, I could calmly carry the long stock position through the earnings report. And boy do I need it now. So far, I have bought back the short August 49 Call for $.05 and continue to hold the long stock & long Aug 45 Put positions. No rush to do anything there yet. Here is where the trade stands now:

  • The August 45 Put currently has a bid/ask of $8.7/$9
  • I am down $6.60 on the long stock position


The Long Tail Down starring Chipotle Mexican Grill

One of the less-commonly used chart system is the Point ‘n Figure (PnF) chart system. Nonetheless, I view these often because there are individuals participating in the market that trade solely on this type of chart – I want to know what they are doing and thinking.

One of the stocks that is receiving a lot of attention in the market currently is $CMG. The earnings report last week was met with a violent reaction to the downside, and now traders are looking for a floor in the stock. Very tough to do here.

In looking at the PnF chart of $CMG this evening, the new pattern that has formed caught my attention: Long Tail Down. No idea what this is? No worries. Here is an excerpt from StockCharts:

This Long Tail Down pattern occurs when there is a down move of 20 or more boxes without any reversal. Here is a look at the current PnF chart of $CMG:

Price has sliced through the lower rising Trend Line and looks interested in testing the $300 level soon. In order for the Long Tail Down reversal to occur, there must be close at $316 or higher.

Disclosure: I currently have a position in this stock.

Add a belt to your Shorts

No one ever wants to lose their shorts. As the cartoon below depicts, the runner was ill-prepared for a very embarrassing moment as he came up short of the finish line.

If you want to avoid such situations while trading, one of the ways to do this is to utilize options in conjunction with your stock trade. For an example of this, I thought I would use my current short position in $MLNX. This position stemmed from my “to fade” list and this is my 2nd trip short since the recent big up move.

Let’s get on to the option piece, here are the specifics:

  • I am Short the August 82.50 Put
  • I am Long the August 90/100 Call Spread
  • This trade was executed on July 20 for free

Here is the breakdown on ways this could play out by August expiration:

  • Stock consolidates in the $85 to $90 range. Option trade expires with no event.
  • Stock continues into the Gap Fill area below but stays above the $82.50 strike. Call spread would have little value (and expire worthless at August expiration, as would the short Put). Short stock position would increase in value.
  • Stock breaches the $82.50 strike put and settles at $80 at August expiration. My short stock position would have the gain capped at $82.50. Call Spread expires worthless.
  • Stock rebounds to $92.00 at August expiration. I would sell the $90 Call and let the Short $82.50 Put and $100 Call expire worthless. I would have let the trail stop hit on the original short stock position as price rebounded.
  • Stock rebounds to $100 at August expiration. I would have let the trail stop hit on the original short stock position as price rebounded and would sell the Call Spread at expiration.

There are likely other scenarios possible, but this gives you an idea of how this Option Collar protects a Short stock position. Add a belt to your shorts. 🙂

The Fab 5 update

I came in to this week with an incomplete Fab 5 basket of stocks and the plan was to fill out the team. Here is a summary of what existed:

  • (3) Fab 5 stock positions ($COST, $DVA, &$WFM)
  • I was short the July 105 Call in $ALXN (this stock had completed the Roll and this was left over from the July Collar).

I entered a 1/2 position in $LH as the only new addition this past week. I spent most of my energy managing the existing positions and the option collars that were on for protection. Here is where things stand now as the week concluded:

  • $COST is the only Fab 5 position to survive the week. 4 slots to fill, yowza.
  • $DVA hits a trail stop on July 18 at $99.20 and was put in the “Not Complete” category. I did record a profit of $3.90 on the trade. This position did not have an Option Collar due to poor volume in the option chains.
  • $WFM took some energy to manage this trade. The Option Collar proved to be critical in softening the loss on selling the stock (as it should). I did a blog post here on the specifics. This trade concluded with a gain of $6.30 and was put in the “Not Complete” category. Here are a few twitter messages I posted as I unwound the trade:
  • The 1/2 position in $LH did not last long as it was hit with a downgrade. I did have a July 95/90 Option Collar on and this was critical in avoiding a large loss on the stock (-$4.80). I had collected a credit of $.45 on the Collar. The exit on the collar was to exercise the Put. I then closed that part of the trade for a gain of $5.00 on July 20. I  let the short Call expire. I managed a small gain of $.65 and this was put in the “Not Complete” category. A few twitter messages:

The new, very thin, Fab 5 as it currently sits:

Here is my current candidate list that I am working from:

  • $ALXN (will use a rule exception for another shot)
  • $ATHN
  • $DVA (will give another shot)
  • $LMCA
  • $MDVN
  • $ORLY
  • $SRCL