I have been doing some trade review for 2013 to determine where (not if) there are areas to improve my trading process. This process causes me to evaluate different approaches, back-test some strategies. One thing that I have been thinking about this weekend is how often a Stop is hit – and what could be done as a different approach to avoid that.
There are frequent debates on how/if to use Stops but I wanted to mix things up a little by showing 2 different approaches:
1) long stock with a Stop
2) long Calls (or Call Spread) as the alternative
Let’s go to a Daily chart first on $PEP:
Now let’s do a comparison to the 2 strategies. First, long stock with a Stop. Using this chart above you would go long the stock here at 83.15 and use the Thursday low of $81.89 as the Stop. This means you are risking $1.26 on the trade. The first target would be $86.73 (the 11/06 Highs).
Now let’s look at the second approach. If you are willing to risk the $1.26 in the 1st strategy then let’s see what kind of Option trade can be done for that same amount. In looking at the December and January Option chains, here are a few choices:
- Long the Jan/Dec 85 Call Calendar for a $.60 debit. If the December Calls expire, there is no cap to January
- Long the January 85/87.5 Call Spread for a $.55 debit. Gain is capped
- Long the January 85 Calls for $.88 debit. Gain is not capped
A few things to chew on when thinking about this:
- The long stock with a Stop approach could go on for a while and not hit – it could go past the January Option expiration of the Option approach
- The long stock with a Stop approach could have a Gap down event & miss the Stop – so the loss could be more substantial. Yikes
- The Option approach has the Risk well-defined
To illustrate what I mean by “trading against yourself” I will discuss the current Submarine Basket position that I have in $EBAY.
Here is the current trade:
- I am long $EBAY at $49 (exercised weekly Calls last week)
- I am short the December 6 Weekly 50 Calls (against stock)
- I am long the December 6 Weekly 52.5/51.5 Put Spread (was short the 49 Puts as the other part of the short strangle)
This notion of trading against myself is really a choice to take advantage of the pop in pre-market (upgrade) and the expected pullback. Why? One key reason: I am capped by the weekly short Calls so I am not really participating in the pop anyway (at least not beyond the $51.41 level – short Call strike plus Option cushion). So, what I can do is use some of the Option cushion I had to buy the put spread and play the pullback << trade against my long stock, trade against myself.
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.
A few newly added positions survive the week:
- $ITT I am long stock at $41.49
- $SQQQ I am long this ETF at 15.70 (a hedge)
- $ADT I am long stock at $40.15 (1/4 size) and short the December 40 Straddle (1/4 size each, Calls are covered)
- $FNSR I am long stock at $20.669
- $WDAY I am short the December 80/65 Strangle (Earnings)
- $CBRL I own the December 115/120/105 Risk Reversal Call Spread (post-Earnings)
- $BLOX I am short the December 35 Puts (1/2 size) and short stock (as a hedge, have done several) at $32. Trade cushion stands at $5
Exit of existing position (including newly added this week):
Current Submarine Basket:
Here is the Summary of normal Swing & LT positions:
A lighter list this week:
$CTSH I own the weekly 93 Puts. These Puts are currently OTM so they look to expire worthless
$TWTR I own the weekly 42/42.5 Call Spread. This CS is currently OTM so it looks to expire worthless (but this could change)
$EBAY I own the weekly 49/50.5 Call Spread and short the 50 Puts. The 49 Calls are ITM so I will get value from the today. The Puts are OTM but will still need to monitor. These are 1/4 size positions each
$CRM I am long the weekly 56 Calls which will go poof today
$JCP I am long stock, short the weekly 8.5 Calls & long the weekly 9/8.5 Put Spread. I will let the stock get called away, the PS goes poof (price is hovering around $10 today, a Pin)
ITM = in the money
OTM = out of the money
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
I have been active in this Basket of stocks this week so I thought I would get the list up-to-date:
A few positions to make a note on:
$EBAY I now own the Weekly 49/50.5 Call Spread and short the 50 Puts
$GTLS This has been a wild one but the bounce has worked quite well. I am currently capped (so can get called at any time) but I do have a significant Option cushion to work with
$HTZ I used some of the large Option cushion to make a Put Spread (gets rid of the downside Risk from the original short $22 Puts)
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).