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
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
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 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