The Watchlist

watch-list for Wed: $CLGX $AFL $CTCT $CYNO $EVEP $CVA $AEGR $MJN $BYI $RJF $ALL $GNRC $COST $WMT $HD

Here are some stocks that I have on my various watch-lists. I thought, given the extra time today, that I would give a bit more detail on just what I am thinking with these. Here is a trade category breakdown:

Pullback Buys:

Breakout Watch:

Continuation Play

Hurricane Sandy – just a few stocks out of many with potential to move due to folks stocking up, secure their homes, etc.

Trading Adjustments

One of the important things that a trader should do often is a review of their trading process – looking for any areas that may need an adjustment. However, there are times during the year where I think this really is mandatory and one such time is earnings season.

With so much activity in the first month of the quarter, I have found it easier to lighten up my Swing and Long-Term positions so that I can focus on one type of trade: the catalyst, the earnings trade.

Some of the adjustments that I make:

  • I run my typical scans, but I build much smaller watch lists. Since I do a fair amount of post-earnings trading, I find that my “to fade” list gets a little beefier.
  • I increase my cash positions in each account so that I can be much more opportunistic with the reaction to earnings.
  • I become a lot less loyal to stock – meaning I have less of a bias when doing short-term trading. I find that the opportunities can often be in both directions intra-day so I do more U-turn trades. I don’t like to fight the market in this area.
  • I have done a review of my option use, specifically with the initiation of Collars, and don’t see any real adjustment needed here beyond the timing for when these get put on (I have noticed that I was putting them on a little earlier than I should). I will continue to have this as a key tool I use to protect a position but also use them so that I can be more focused on the short-term trades that I do.
  • A larger percentage of my time goes to the work I do in tracking earnings information, both before and after the event (catalyst). It is my belief that this increased effort during certain times each quarter is what allows me to be more in-sync with the other market participant that may also be trading a particular stock post-earnings.

One final comment here. I certainly am not advocating that each person must make adjustments as some may argue that “if it ain’t broke, don’t fix it”. This is just what I do and would expect this process to continue in the future.

The Fab 5 – weekly update

This week was volatile for the market and I never really got comfortable with filling the 1 empty slot. In addition, I lost the $NKE position early in the week to a trail stop hit (10/23)  as it continued to be too weak to gain any momentum. I now have 2 empty slots to fill but will be cautious in initiating any new positions until after the November election has passed (and the market has reacted to the result).

The option components to the Fab 5 positions continue to be invaluable. Case in point, the $PVH position was the poorest performer falling further below the entry. The November 100/95 Collar is offsetting the weakness (as it is supposed to) so I am leaving the position alone for now as we head into November. I may consider buying back the short November 100 Call this coming week as it is cheap here.

The other two positions – $MTB & $TWC – continue to hold up well with Time Warner once again making a healthy stab at the $100 Roll. $MTB has already completed the process as noted last week.

Here is the Summary:

Performance info:

  • Complete status remains at 21
  • Average gain of $12.06
  • Not Complete status is now at 31
  • Average gain of $2.99

Candidate List:

* Several are in pullbacks that I am keeping an eye on:

 

Look Both Ways – the series

Each week there are several opportunities in a stock to consider playing a BIG move in either direction. The problem being, you are not sure which direction – you are just sure that a big move is imminent.

One such scenario exists in $VRSN after announcing earnings – but noting an issue with the Commerce Department reviewing their contract with ICANN. This brings some significant uncertainty to the stock and the price reflects that at the moment:

So here is the situation. If the contract is not renewed, the stock will likely suffer more downside. However, if the contract is in fact renewed, I would expect a lot of this Gap above to get filled.

One way to play a Look Both Ways trade is own both a Put & a Call – this can be a straddle or a strangle.

Here is some Option chain info for November and December to review:

One trade idea:

  • Long the November 39 Call for 1.20
  • Short the December 41 Call for 1.20
  • Long the November 38 Put for 1.15
  • Short the December 36 Put for 1.15

This trade will require some margin and will need to be closed before November expiration on the 17th. Cost: Free (plus commissions). The contract expires on November 30th with ICANN so I would expect resolution before that time – so this play has that timing to consider.

Other trade ideas:

  1. Fork over $2.65 to own the November 39 straddle
  2. If you want to reduce cost, own the November 38/40 strangle for $2.00

Little known company Apple Inc reports after hours

One of the key companies in the market – for market sentiment as well – reports after hours today: $AAPL and will certainly produce a lot of winners and losers. I have a 3/4 position in the long-term account and I own the October 26 weekly 625 Put (paid 17.25 on 10/19).

I don’t typically like to pay outright for option premium, but here are the 2 scenarios that can play out for me:

1) Stock goes up making the Put position less valuable, sell it for whatever I can on Friday (tomorrow, it expires). Enjoy the gains on the long stock position.

2) Stock goes down. Oops. Will be thankful for the Put as it could have immense value – and will offset the loss on the stock positions.

Now, I want to visit item #1 for a bit. If the stock does go up, and continues on Friday, one of the strategies is to sell Call premium against the long stock position. You may even be able to sell enough to cover the cost of the initial Put – and you would have held the gains on the long stock position as well.

Not a bad deal at all.

An earnings trade review for Under Armour

One of the tasks in planning a pre-earnings trade involves scenario planning for after the event. What this means is an effort has to be made to consider the potential scenarios for price after earnings is over – and the reaction has occurred.

One of the common trades that I put on is Risk Reversal using Options. One of the scenarios that puts pressure on this type of trade is when price goes down, towards the short Put strike for whatever is sold.

For a look at a real trade in progress, I will use the current $UA trade as an example. Here is a summary:

Let’s break down the trade:

  • I am short the November 60 Call
  • I am long the December 60 Call
  • I am short the December 47.5 Put (2:3 ratio)

This trade was put on for free.

Now that the event has occurred, price has moved down to the $53 level where it is trying to find some footing. So let’s take a look at how the trade looks.

Here is the current bid/ask for each Option piece above:

  • November 60 Call is at .10/.20
  • December 60 Call is at .60/.70
  • December 47.5 Put is at 1.10/1.20

The scenario that I look for here is what I call the “drop pop” play. Since price has fallen from the close yesterday, I could consider buying back the short November Call and leave the other 2 pieces. This works well if price slowly recovers into November and the end of the year (Dec expiration) = December 60 Call grows in value & the short 47.5 Put decays more.

Another scenario is to just let the November Call expire and keep the remaining dime or so in premium (just think about that for a while, uncap the Dec long Call for a dime here).

Patience as a Tool

I have had some great conversations this week with other traders on the subject of Patience and how it can be used as a tool to put on successful trades. I know what you’re thinking though, something like “how on earth can I quantify patience”?

Of course this would be near impossible to do since patience can be viewed as a state of mind, an attitude, etc. So how can you use it as a tool? Let’s start by taking a look at a trade I am in, and I will walk you through how I use patience as a tool to enter when I WANT to.

For an example, I will discuss a U-turn long trade that I am in at the moment in $COH (Coach). Here are some messages from my stream this morning:

Let’s first start with the pre-market action after the earnings announcement. The stock makes a nice move up and I elected to put it on my “to fade” list. Do what? You did what? Sometimes I do this because the move is out-sized in my view, or if I expect profit taking at some point soon. I posted a chart to my stream showing how price was hanging out near a prior important level near the hod (high of day) from last Thursday.

Once it appeared to have stalled here in my opinion, I initiated a short position at $57.65 and continued to monitor the action. The Gap Fill below was the obvious first target, but based on the indicator that I trade from it appeared that the $56 level would hold so I covered some.

I typically trade with a 1% trail stop in situations like this, or I use the 20 SMA as my entry/exit point – simple rules that I follow. This trail stop did hit so the position was now closed. However, I often continue to monitor a post-earnings stock because I expect some rebound/recovery to occur – and I was not disappointed.

My entry long on what I call the U-turn trade was at the test of the 20 SMA from below, and a break through it at the $57.10 level. Once it broke through $58 and probed the hod (high of day) I elected to sell 1/2 and start the process of putting on a Collar for the balance.

Here is another area where patience can really pay off. I often try to get a Collar put on for free (or better) as a goal. I began monitoring the November option chain and found the 57.5/60 Collar to be real close to free ($.20 debit when I first began to look). The stock seemed to be rather strong still so I elected to be tactical in how I put the Collar on.

I sold the 60 Call first, and now I am waiting to buy an appropriate Put for November with the proceeds collected – being patient to get MY price. One way I can benefit here is this: if price continues to drift up, any Put that I below will become cheaper to a point where the Collar can actually pay a credit.

Now that is one way that Patience can in fact be quantified. ;)

A Look at the SPDR Industrials Select Sector – the $XLI

Here is a brief summary of $XLI courtesy of SPDR:

Here are the Top 20 Holdings:

A full list of the 62 holdings can be viewed here (note how the current infamous $RRD comes in at #62 lol)

Some of the stocks in this list that will likely keep the selling pressure on are: $CAT $CMI $CSX $NSC

The recent $GE earnings report, and the reaction to it, will also contribute to more downside. Very important here as it is the #1 holding.

Speaking of performance, let’s see how the $XLI has performed:

For a complete listing of the available performance data go here.

Finally, visit the SPDR website here for a FactSheet on the $XLI

The RSI Signal – the series

It has been a while since I have done one of these posts so I thought I would pick one from the chart review today and have decided on $BSX (Boston Scientific).

For those that may be new to this series of posts, let me give a quick overview:

  • This approach uses RSI to signal a buy or sell entry
  • The signals trigger on a touch at RSI 30 or 70
  • No other indicators, moving averages, trend lines etc are used as this is a mechanical approach
  • Once entered, use your own stop management/exit rules

I bring you the Daily chart of $BSX:

The Blue boxes show the long entries that could have/could be made and the Green boxes show the RSI signal trigger point. One additional thing I will note here is that price is outside the lower Bollinger Band so traders that use that signal will show up here as well.