I often get questions regarding certain steps that I take in exiting an option position that are hard to answer in a twitter message. Sometimes the questions pertain to time-frame, or “why did you do that, why not do this” so I find it easier to do Blog post where I can lay it all out.
A heavily followed stock is $GMCR so my current trade has generated a lot of questions surrounding what I have been doing the past 2 days on the option side. Here is a summary of the initial entry:
- L stock at 33.85 in after hours on 11/27/2012 (earnings report day)
I sold 1/2 of the position on 11/28 for $36 for a profit of $2.15 per share. Once I see a stock stall, and I did in this case, I like to at least sell Calls against the position to give myself a cushion for any downside move. I did just that with this trade:
As price churned yesterday, I elected to move up the strike to give the position a little more room:
I came in today with a plan to address the 4 positions that have weekly options (including this position). After some review today, I elected to sell the long stock position and manage this short Call into the close. The $.69 in premium gives me a lot of room to do so and is worth the effort.
I like to use PnF charts often just to ensure that I understand the perspective of those trading from them. In order to do that, it is important to change the lens within PnF as well.
For an example, let’s take a look at 2 charts showing how the chart changes when you change the Reversal Box #. First up is the normal 3 box Reversal PnF on $AAPL:
This looks like a nice DT B/O setup with a Bullish PO of 755. Looks great!
Now let’s see what a 4 box reversal looks like on $AAPL:
Oh man. That Low Pole Reversal on 11/20 was a KEY tell. The Bearish PO of 561.67 has already been met.
Change Your Mind Lyrics – The All-American Rejects
It’s just your doubt that blinds you.
Just drop those thoughts behind you, now. (now)
Change your mind.
Let go too soon.
I got a head start this week in doing some review for my November trading and one thing that has really stuck out to me is how often I have been switching my bias with a stock trade. A key element in my trading is the trade design, ensuring I have flexibility – because I want that, but nonetheless I have noticed an increase in switching a bias much more frequently.
I have several example just this week alone, but will use my $ANF trade to highlight where I started from – and where things stand now. Here are the specifics of the initial trade idea and execution:
- This was a “to fade” play after earnings. I decided that it was a move that could be faded.
- Because of this view, I kept that is on my “to fade” list and ultimately initiated a short position at $46 on 11/26
- Later that day I added a November 43.5/45/46 Bear Collar for a $.06 credit
Now let’s move on to the adjustment that was made this week once I saw what the market thought about $ANF:
Even though I have an option Collar on a position, it does not mean that I don’t also use a trail stop on the underlying stock. It is for this reason that I will, from time to time, close out a stock position and convert a Collar to a Risk Reversal trade. In this case, the Bear Collar becomes a normal Risk Reversal trade.
I am short the November 43.5 Put and long the 45/46 Call Spread, same expiration (tomorrow). With this in mind, I need to manage the CS to ensure I get optimum value for it soon. I don’t expect a need to address the short Put, it should expire tomorrow.
One of the “oldest” earnings trades that I still have on is the trade in $VFC from 10/23/2012. I am long the stock but have had to do several option trades to lower the cost basis, protect the position along the way. I did a trade update here.
I spent some time doing some analysis this morning, updating my Trading Journal, and thought I would share the specifics here on what has transpired up to this point:
These are all the option pieces that I have sold or bought including the exit on each piece. A few of them expired worthless allowing me to keep the premium collected.
At the moment, the only open option piece is a short December 160 Call – a covered call on the long stock position. The stock is currently trading around $160 so this position has potential to be capped once above the 162.70 level.
A quick note, was amazed on the variety of meanings for “getting capped” via a Google search:
Now on to the trading related version of “getting capped”. When you have a long position, one of the key ways to protect the gains against a downside move is to initiate an Option Collar. A Collar is where you sell an upside Call against the long stock position, and then buy a downside Put.
Another strategy is to just sell the upside call, thus creating a Covered Call. But what happens when price moves up through the Call strike? This is where your gain gets “capped”. So when that happens, what do you do?
Here are a few scenarios using my current $DE trade as an example of what to do if your long stock position has a capped gain currently:
- I am long the stock
- I have sold the November 30 weekly 85 Call against it (so it is a covered call)
Price is currently arm wrestling the $85 level and looks very interested in breaking up through it. Here are my potential paths to take:
- Do nothing. ride the trade until expiration this Friday then decide.
- Buy back the 85 Call and sell a Call one strike higher for this week. Not likely a good option given the $2.50 spread between each strike.
- Wait until Thursday to decide on what to do. If I can, buy back the Call for this week and sell an appropriate Call for the new weekly’s that are available then.
- Since the stock could be called away at any time, this is always a path that can get chosen for me.
I received several questions today regarding a few option trades that I did earlier on $CRM and $DE long positions that I have so I thought I would provide some detail on why I did what I did and what the potential scenarios are.
Here is a summary of current positions with these 2 stocks:
- I am long $DE at 82.45 from 11/21
- I am short the November 30 weekly 85 Call on $DE at $.42
- I am long $CRM at 156.40 from today, 11/23 (after closing a short position I held over Thanksgiving, I did a U-turn trade) — a 2/3 position
- I am short the November 30 weekly 160 Call on $CRM at $2.28 (2/3 position)
Here is what I have done today regarding these 2 stocks:
The point on selling the Calls against a long position in this scenario is to create some cushion for any minor pullback in price. If this pullback does occur, then at that point I consider doing one of the following:
- buy downside Puts for protection (using the proceeds from selling the Calls, creating a normal Collar)
- sell the long stock position and then I am naked short the Calls
- do nothing, hold the position as-is until expiration next Friday. On expiration day, I then can decide on what to do with the long stock position and/or short Call
As is the case with every indicator, there are trades that can be found with oversold readings AND over-bought readings. The Williams %R indicator is no exception.
To illustrate this, I bring you 2 charts. The first is the Daily chart of $CSCO:
Very elevated reading here and the Hanging Man candle seals the deal.
Now for a chart of $TSN (recent earnings report too):
Another with a very elevated reading but may still have a little left in the tank. A Short here would require a little more patience but a nice trigger nonetheless.
I don’t see a lot of conversation on the use of Williams %R indicator and thought I would offer an example of how to use as a buy trigger – for those that like a simple approach.
Here is a Weekly chart of $CNP:
Once again the indicator is at a point where a buy trigger is present. Note the prior buy triggers and how well price performed after.
As always, use your trading process if you use any trading idea.
Received a few questions on the option collar that I put on for $DE so here is a detailed breakdown:
I am long the stock from the earlier bounce. I have put on a Collar now for the November 23 weekly expiration and will hold through earnings. Here are the pieces:
- short the November 23 weekly 87.5 Call (covered)
- long the November 23 weekly 85 Put
- short the November 23 weekly 80 Put
- The trade above creates a 85/80 Put spread for some downside protection. It also caps the gain at the 87.5 Call strike
- This was done for a $.10 debit
Here is the chart I was trading from this morning: