The Simple Approach – using RSI as a Buy/Sell signal

part of the Simple Approach series of posts

The subject for this post is Potash as the Daily chart has a nice clean flow of RSI Buy/Sell signals. Here is the $POT chart:

POT_C

As you can see there are numerous areas on this chart where RSI tests 70, 40 or 30 levels making for a smooth trading process (long and short). Here is a 2 minute video as I walk through this chart:

A Strangle Swap in GT Advanced Tech

One of the more anticipated news event is the Apple product announcement today. One of the potential benefactors is $GTAT and so I put on the following trade yesterday to play for an IV crush:

GTAT

Here is a breakdown of the trade:

  • I am Long the September 18/17 Strangle
  • I am Short the September 12 weekly 18/17 Strangle
  • I am Short the September 22/14 Strangle
  • This trade takes margin
  • This trade paid me a $.21 credit

So how does this trade work? Let’s view another way to look at the trade:

  • I am long the September 18/22 CS
  • I am long the September 17/14 PS
  • I am short the September 12 weekly 18/17 Strangle

Once the $AAPL event is over – and the $GTAT news is available – I am looking for the weekly Option IV to implode. As long as it stays within the 14-22 range I can look to do any necessary adjustments this Friday (if price stays in this $17-18 area, yippee).

GTAT_B

 

A trade idea breakdown in John Deere

A Put Ratio in $DE using the September 26 weekly Options:

I would be looking for the $82 Puts to get ITM (in the money) by expiration

DE_Sep26w_Options

A few scenarios to consider:
1) Price is at $81 at expiry. I would let the 82/81 Put Spread auto-exercise for a $1 credit.
2) Price is at $80 at expiry. I would let the 82/81 Put Spread auto-exercise for a $1 credit. I would then evaluate if I want to be Put stock at $80 or not. I could consider adjusting those short $80 Puts to a future expiration as a possible step.
3) Price is at $85 at expiry. The Put Ratio goes poof.

A diamond in the rough

Oh yes I did.

Each weekend I run a variety of proprietary scans to look for potential new trading setups for the upcoming week. Although I have a rather full plate in terms of the number of positions, I do have some room in the Submarine Basket now. With that in mind, I wanted to focus on stocks that have pulled back to a good potential Support/bounce area.

One stock that caught my eye was $DO and here area a few graphics to ponder:

DO DO_Oct

RSI briefly tested the 30 level in March – look what happened after. RSI is back to arm wrestle the level again so I would look for history to rhyme. One additional data point I’ll add here: 22.6% short interest is some serious fuel for the fire if it can bounce from the Hammer it formed on Friday.

Someone was very hungry for the October $45 Calls on Friday …

 

A deeper look at the Diagonal Collar starring Altisource Portfolio Solutions

I have a position in the Submarine Basket for $ASPS that includes the use of Options. Here are the specifics:

  • I am long stock at $84
  • I am short the January 100 Calls (so Covered Calls)
  • I am long the September 90 Puts (currently ITM)
  • The Option pieces were done for a $1.20 debit on 08/08
  • This is a Diagonal Collar given the 2 Options pieces are of different expiration 

So let’s look at a Daily chart to see how things have played out since entering:

ASPS_C

The Green line represents where I am short the Calls and the Blue line is the where I am long Puts.

 

Is your trade “capped” ?

For those that use Options as part of their trading process the situation of having an initial trade capped elicits a lot of different view points. I interact frequently with Option traders that focus a lot on avoiding this situation – but do they do the analysis to determine how often a price move actually warranted avoiding this in their trades?

Another element to capping that is often incorrectly stated – when a trade is actually capped. To illustrate what I mean let’s take a look at a Daily chart of $IBN:

IBN_B

I am long the stock at $43 since 05/05/2014 with short September $49 Calls (so these are Covered Calls). Is the trade “capped”? Let’s look at the crucial piece of data that will actually determine this: Options Net

For my trade, I have an Options Net of $4.27. So in order to determine the true capped price level of the trade you do the following:

  • Take the strike of the short Call: ($49)
  • Add the Options Net: ($4.27)
  • The resulting price is the true capped price level for the trade: $53.27
  • Price closed Friday at $51.97 so this trade is not actually capped

 

A healthy setup in Cardinal

If you like to improve the probability of success in a trade it is important to have a solid disciplined approach for trading. Follow a routine. Keep doing what works. Stop doing what doesn’t work. This approach needs to include the review of relevant data to help support your thesis – whether Bullish or Bearish – and should include Option chain data.

Whether you actually trades Options or not.

I have been doing some normal chart & scan review this morning and noticed the Daily chart of $CAH:

CAH_B

What lead me to look at the chart in the first place was the following additional data:

1) It hit my Large Cap scan this morning. Week Up, Friday Up

2) Look at the August Option chain information:

CAH_Aug_Options

Well hello Option Volume at the $75 Call strike. And at the Ask.

An Earnings trade idea in ManpowerGroup

I posted a trade idea on @Stocktwits earlier this week but wanted to follow up with a few data points. First, a look at the idea again:

  • Long the August 85/90 1×2 Call Ratio
  • Short the August 75 Puts
  • This trade closed at a $.20 debit Friday
  • This trade would take margin until the short Puts and one set of Calls are closed

Here is the Option chain info:

MAN_Aug_Options

As you can see above, the August $90 Calls have the largest Open Interest by far.

Here is the Daily chart:

MAN_b

A few scenarios to consider:

1) price moves above the $85 level but avoids $90. StC the August $85 Calls when you see price stall for your time-frame. This would leave the short 90 Calls (2x) and the 75 Puts (a Short Strangle) until closed

2) price goes nowhere. No harm, no foul. The small debit for this trade is your cost to participate

3) price goes down to the $75 level (near the April lows). If you are comfortable owning there (you did sell the Puts at that strike) then let the stock get put to you