Position Updates

A quiet week for me in the regular accounts – the focus continues to be on Earnings trades (both pre & post the event). There are 7 newly added positions this week to survive to the weekend:

Jack $JACK  I am Long the May 95/100/105 Call Fly with Short $85 Puts

United Rentals $URI  I own the May 95/98/91 RRCS

Earnings:  $RCL $VMW $TMO $ORLY $EW


Here is the Summary:


- DM 10:30 AM CST

The Put Ratio – a variety of uses

If you don’t currently trade Options that is fine – you may find this subject peeks your interest as I discuss the Put Ratio.

During my weekend review I noticed that several of my positions had Put Ratios that were drifting ITM (into the money) or very near it. Let me list a few positions here and then go over why I like this approach for protection:

Skyworks Solutions $SWKS  I am Long stock at $63 (since 11/18). The Option pieces: I am short the Jan 2016 $100 Calls (covered) and Long the April 24w 95/88 1×2 Put Ratio

Zillow $Z  I am Long stock at $82.96 (since 4/14). The Option pieces: I am short the May 08w $97 Calls (covered) and Long the 95/88/85 1×2 Split Put Ratio (L the $95 Puts, S the $88 & $85 Puts to create the ratio)

Avago Tech $AVGO  I am Long stock at $105 (since 11/26). The Option pieces: I am Short the July $125 Calls (covered) and Long the May 125/115 1×2 Put Ratio

If you do you homework to pick solid strikes, you can gain downside protection at a very low cost (does take margin however). I typically use a Stop on the stock if it gets anywhere near the middle range of the Put Ratio.

Another use of the Put Ratio

If you think there is more short-term weakness in the stock but see a level below where you own it – choose that level for the lower portion of the Put Ratio. For example:

If you think stock XYZ is going to $50 – and is currently trading at $54.00 then consider going Long the 52.5/50 1×2 Put Ratio. You can capture a move down thru $52.50 all the way to $50. B/E will be at $47.50 +/- what you pay/get for the trade.


- DM 1:00 PM CST


Chart review

Short to Intermediate Term:

A pullback Buy candidate
Back inside the Channel. A RSI Buy
I like the Hammer on Friday, will look for confirmation on Monday
Held Support & bounced. Back over this Rising TL too (blue line) PII_E
Trying to breakout over this Rising TL WBC_C

I would sell $40 Puts XPO_C

Breakout watch ZLTQ_B


Bottoming setup
Bottoming setup XME_B
Bottoming setup DBA_C

- DM 10:45 AM CST


Trade Adjustments – the power in Flexibility

For those that don’t trade Options, I’d like you to stick around anyway to read the rest of this. Why? To help illustrate the power in Flexibility that comes from trading Options:

The adjustment

For an adjustment example I will use the current trade in $ISRG. I came into this week owning the April 520/530/495 Risk Reversal Call Spread. Another way to look at this trade:

  • Long the 520/530 Call Spread
  • Short the $495 Puts
  • This takes margin until the short Puts are closed
  • I did this trade on 4/9 for a .39 credit

When you see a trader discuss an “adjustment” it doesn’t always mean a negative event to a trade. In the case of the $ISRG above, I am taking advantage of the continuation up move today to sell Option premium next week and BtC the Short $530 Calls for this week. The 520/530 Call Spread becomes an April/April 24w 520/540 Diagonal Call Calendar (takes margin). I now have flexibility for Friday expiration with several choices:

  • Take the stock at $520
  • StC the $520 Calls & BtO Calls in a future expiry
  • Build a Call Fly for next week
  • Do a new Risk Reversal

Just to name a few. Flexibility is what I focus on – the Trade Design to give me this – and that is what I have here.


- DM 9:30 AM CST


Stop vs. Options

I send this to client prospects for the DCMA to show how I would create a position for them. This is a recent Trade Setup for $VHT. I cover several key elements like Position Size, Amount to Risk, Stop price, etc:

If you would like to learn more about the Managed Account service at Dragonfly Capital you can email us at [email protected]

- DM 11:00 AM CST

Trend Following

I think most traders understand this concept of following the trend. Although there would be a lot of debate among traders on what they use to measure it, we can all agree that the 1st place to start is Price.

What I want to do now is to give you a different twist on Trend Following. This perspective comes from a review I did this weekend of all my current positions and noticing a common element in many:

Dip Buy at Support

Maybe this is a trend in itself, something that many traders are increasingly doing. A market participant “trend” if you will.


- DM 9:55 AM CST


Position Updates

I had activity this week in each of the 3 accounts:

Altera $ALTR  I traded the Intel rumor on 3/30 (exit the same day)

Emerson Electric $EMR  I tagged along in a large April $55 Put trade (Long)

Skyworks Solutions  $SWKS  I adjusted April 02 weekly Put Ratio (Long stock protection) to the April 24 weekly expiration

Trex $TREX  I traded the breakout but it fizzled (hit a Stop for +1.17)

Avago Tech $AVGO  I added a May 125/115 1×2 Put Ratio (protects Long stock)

ProShares UltraShort 20+ Year Treasury $TBT  I unwound the rest of the position when the Long ETF piece hit a Stop

Carmax $KMX  I am Short the April 72.5/65 Strangle and Long stock at $74.15 (hedge, 2nd trip long). Only new Earnings trade this week

Submarine Basket


50/50 Basket: no positions


Here is the Summary:


- DM 9:10 AM CST


Options versus using a Stop

I have been in an email exchange this week with a client prospect where a very important question came up in our discussions:  what is my Risk Reward approach for those that are very focused on keeping positions “safe”.

This once again brings up the debate on Options versus using a Stop so I decided to provide an example to the prospect on what I would do with a particular trade. Here are the details:

One of the Tools that I use is Options. This tool provides several important benefits in trading stocks including protecting a position fully (beyond what a traditional Stop can do). As an example for the prospect, I enclosed this Trade setup to show how I would do a trade to meet their goal of safe – within a 6-month time-frame:

Ticker:   VHT  (Vanguard Healthcare ETF)

Current price:  $135.5
Account Size:   $250,000
Position Size:   $50,000
# of shares:   369
Amount to Risk:   $2,500
50 SMA:   $130.77

Stop:  $128.73

Long Puts expiration:    September 2015
Long Put strike:   $135
Long Put cost:   $6.00   (600 per contract x 4 contracts = $2,400). You would be fully protected under the $135 level until September with a similar “Amount to Risk” as the Stop info above

Scenario:  Price moves above the $140 level between now and September I would  then sell Calls against the Long stock to recoup the cost of the Puts. I would expect to have several opportunities before September to sell Call premium – say at the $140 or $145 level – to slowly recoup the cost

Daily chart on $VHT:


- DM 12:25 PM CST