One of the important exercises that every trader should do is routinely review existing positions to see how they are playing out versus the original plan. There is always learning to do regardless of your experience or capabilities.
I will take a look at the existing trade in $LL to see how we are doing with it:
Let me break it down:
- I am Long the December 100 Puts. Expiration is December 21
- I am Short the January 95 Puts. Expiration is January 18
- This trade cost $.50 per contract
- This trade takes margin
Now let’s see how these 2 pieces are doing by looking in the appropriate Option chains for closing prices today:
- December 100 Puts closed at $5.20
- January 95 Puts closed at $4.50
So what are the potential exit scenarios now? Here are a few that I would choose from:
1) Do nothing, wait until December expiration to decide
2) If you believe the $95 level will hold then you could sell the December 100 Puts and keep that gain as cushion for the remaining short 95 Puts for January (cushion would give you room down just below the $90 level)
3) Close the trade for a very small gain here. Boo
4) Sell the December 95 Puts (closed at $2.60 today) & use the proceeds to buy back the short January 95 Puts. This would create a Long December 100/95 Put Spread – but would be for a debit. Ehh
5) Adjust the short January Put strike down to $90 (closed at $2.70 today). This would be done for a debit. Ehh
6) Spin-off to #2 above. Use proceeds to buy the January 90 Puts to create a short 95/90 Put Spread. So-so but better Risk management
I receive questions each week regarding Option Collars – questions like when to do them, why I have one on a certain position but not others, why do this at all, etc – so I thought I would pick one of my existing positions to show how a Collar can help to protect gains.
I am currently long $RRGB (since 8/19) at $62.50 and have a December 80 Collar. Let’s see a Daily chart:
As you can see it has really pulled back to near the last breakout level (a breakout back-test).
Now let’s break down how the Collar is doing:
- I have had several Option pieces since putting on the original stock trade
- latest: The December 80 Calls were sold on 11/05
- latest: I added the 80 Puts on 11/11 to complete the Collar
- The Options Net is currently -$.17 cents
- The short 80 Calls are OTM (out of the money) now. This means that the value I got for selling them has decreased, so it is cheaper to buy them back ($.40 currently). This piece is winning
- The long 80 Puts are ITM (in the money) now (currently $4.70). This is the key piece to having a Collar: the long Puts are offsetting the drop in the underlying stock. This piece is winning
As part of the Changing the Lens series of Blog posts I wanted to show a few charts on $MAR with a different perspective on each. Let’s get right to a basic Daily chart:
As you can see above, $MAR has avoided the 50 Simple Moving Average below since early October and is currently Flagging/coiling in preparation for a potential new breakout. RSI continues to bump along the ceiling of 70.
Now let’s add a Rising Trend-line:
Looks like it is comfortably above the trend-line while price consolidates the recent up move. Now for a different look altogether. Let’s remove the trend-line and add Horizontal Support and Resistance lines:
The view above shows how price found resistance and has been hovering just below as it preps for a new breakout.
In order to have a proper trade process, a trader needs to determine ahead of time what their Stop is going to be on a trade they execute on. There are certainly a LOT of different approaches here but I thought I would provide a few different perspectives on what you can do if entering $FFIV right here.
First, a normal Daily chart:
As you can see in the chart above the 50 & 200 Simple Moving Averages loom just above as some Resistance so worth noting that. Now let’s take a look at a Rising Trend line below and how to use that for a potential Stop setting:
If this is your chosen perspective then you would go long stock here and set your Stop at $80. If you like to protect against mild overshoot moves, then try $79.50
Next is a busier chart showing some Gap Fill areas:
If this is how you see it then you would use $78 as your Stop – a Double Bottom pullback that holds. That is quite a down move for me but may very well be within your threshold.
Now I will change the lens again and show a Support line that has had some action several times this year:
If you think this Pivot area would hold then your Stop would be set at $79.50
One of the strategies to trading an Earnings catalyst is to actually wait for the post-Earnings move – and then construct a trade. I did just that in $BLOX today:
This was the second trade that I have done post-earnings (the first trade I was long stock overnight).
My approach in this trade was still the same though – wait until I thought there was a good bottoming process occurring. Once I felt that was the case this morning, I elected to sell the December 35 Puts for $2.30 credit (1/2 size position to start).
One key step in my process however is to monitor the price action to make sure that it does not breach the strike level (in this case $35). Once it did, I went short stock at $34.80 as a hedge on the short Puts. This usually affords me a minor cushion when price over-shoots a level. However, price continued to erode so the hedge ends up being VERY important in this trade as it is protecting the short December Puts.
Price has just fallen through the $33 level – the stock is down over 25% now. Yikes.
So what next? Let’s look at a few scenarios:
1) The stock stalls at $33 & finally finds a bottom. I would cover the short stock hedge for a $1.80 gain. This would bring the overall cushion in the trade to $4.10 but I would still be short the December 35 Puts (ITM) so I would only do this step if I anticipate a recovery to that strike level by expiration
2) The stock rebounds to $35. No harm no foul. I would cover the short stock hedge and leave the short December Puts alone
I make an effort to understand (at least be aware of) other chart styles that exist because it makes sense to know how other market participants may be trading. One such chart style is the Point ‘n Figure chart and I thought I would show an example today of $PCLN:
Priceline had a Double Top Breakout on November 20 that adjusted the PO (Price Objective) to 1370. As you can see from this chart, you have had very little reason to sell as it has held way above the Rising TL since $680.
You can read a LOT more on PnF here
One of the key elements to my Trading Process involves the selling of Option Premium. There are a variety of scenarios where I incorporate Options with stock in an overall trade, but there are situations where I just want to sell Options (I take a Neutral stance, don’t care on direction at all).
When it was announced that $TWTR would be offering Options for trading on 11/15 I devised a plan on what I wanted to do. I ultimately decided on selling a Straddle:
The goal is simple here: I want the price to stay within a range of $39.97 to $45.03 by Friday expiration (Straddle price +/- Option cushion). Here is a Daily chart showing the price range I am looking for by Friday expiration:
Here are a few scenarios that show what my next step would be:
1) Price continues sideways into Friday expiration. I would buy back any “winning” piece cheap & resell a new Straddle for the December 6 Weekly expiration. This would increase the Option cushion
2) Price falls to $41 into Friday expiration. I would buy back the “winning” Puts & resell a new Straddle for the December 6 Weekly expiration. Depending on the strike(s) chosen, this could increase the Option cushion
3) Price rises to $44 into Friday expiration. I would buy back the “winning” Calls & resell a new Straddle for the December 6 Weekly expiration. Depending on the strike(s) chosen, this could increase the Option cushion
Note: This trade takes margin. There also may be situations where I hedge with stock (any breach of $40 below or $45 above).
This was a very busy week as it was November Options Expiration. I have a very large # of existing positions with November Options (see my Plan here) and so this was my focus this week. I did add a few new positions that survived into the weekend:
Trade Exits this week (including new trades this week that are closed already):
- $MNST (Submarine Basket)
- $WFM (will let stock get called away, keep premium collected)
- $YOKU (Earnings, short Puts will go poof today < this is the remaining piece)
- $URI (Earnings)
- $FOSL (Earnings)
- $QCOM (Earnings)
- $CVX (CS expires worthless)
- $TTWO (CS expires worthless)
Current Submarine Basket:
Earnings Trades that remain:
Here is the Summary:
One of the lesser discussed price moves is the False Breakdown – when price breaches an apparent Support level only to reverse quickly, trapping Bears (which is more fuel for the rebound).
To illustrate this I bring you the Daily chart of $OLED:
Of course I always like to change the lens so here is another look at $OLED:
Since we are in Earnings season now, a great deal of my trading in new positions involves trades for this catalyst. My plan is always to do some pre-earnings trades but I often get involved post-earnings as well. Here are the newly added Earnings trades for this week that survived into the weekend:
- $TLSA I am short the December 6 weekly 140 Puts
- $FOSL I am short the November 135/130 Strangle
- $QCOM I am long the November 70 Calls
- $STCY I am short the November 50 Puts and short stock at $58 (1/2 size left)
- $WFM I am long stock at $58 (1/4 size) and short the November 58/57.5 Strangle (1/4 size each)
Here are adjustments to existing trades:
- $CRZO I adjusted the short November 45 Calls to December 45 Calls for a credit (calls are covered). Options Net is now +$.51
- $DAL I adjusted the short November 24 Calls to December 26 Calls for a debit (calls are covered). Options Net is now -$.68
- $EPL I exited the final piece of this trade on 11/04
- $LULU The short November 8 weekly 74 Calls go poof, keep all premium collected. I remain Long stock and the Long the November 70 Puts
- $NSM This position had an Earnings report this week and I did several steps in the trade. The long stock position was sold on 11/07 for a large loss. I exercised the Long November 50 Puts and covered the stock for a large gain (exceeded stock loss, was protection for this purpose). I am currently short stock on the breach of $40 on 11/08 as a hedge on the remaining short November 50/40 Strangle. Options Net is +12.35
- $RRGB I adjusted the November 75 Calls to the December 80 Calls on 11/05. Options Net is currently +1.40
- $RYL I BtC the November 40 Puts on 11/08. The short November 43 Calls remain
- $TRIP I adjusted the November 82.5 Calls to the December 85 Calls, BtC November 60 Puts & added November 80 Puts on 11/04
- $EWW I adjusted the November 65 Straddle to the December 63/62 Strangle on 11/08. Options Net is at +13.84
- $XONE I added November 55 Puts on 11/08 for Earnings next week
- $SYY I StO November 34 Calls on 11/04 (calls are covered)
- $ANF I exited this position (Submarine Basket)
- $CTRX I exited this position (Submarine Basket)
- $MLNX I exited this position (Submarine Basket)
Here are newly added regular trades:
$CTXS I am long stock at 59.80 (1/3 size) as of 11/07. I added the short November 60 Straddle (1/3 size each) on 11/08. Submarine Basket
Here is the Summary: