This week saw an increase in volatility that we have not seen for a while – a welcome change. I ended the week with a few newly added positions:
- The Short May 24 weekly 13.5 Call in $BAC is expected to go poof (covered call)
- The Short May 24 weekly 49 Call in $DDD is expected to go poof (covered call)
- I adjusted the Short June 47 Call to June 46 Call on $AIG for a credit
- I adjusted the Short June 72 Straddle on $EWW to a 72/67 Strangle for a debit
Here is a Summary:
Some of the food brands for Mondelez above.
I have been working up a trade in $MDLZ and as part of this process I have reviewed the Option chains out to January 2015. I had this setup labeled as breakout play but wanted to get a glimpse at what others may be thinking.
Here are a few of the Option chains with some notable action:
Big footprints in June at the 28 Put strike. There are over 100,000 contracts sitting in Open Interest. Gulp. This makes me pause to rethink the breakout play strategy as I need to determine why traders are Bearish for June – and picked this strike.
I have noted the last breakout level with a Green line. As you can see, the nearest moving average to this $28 level is the 200 SMA (currently at 27.78). Worth noting that.
For now I am going to sit idle on finishing up a trade setup – to see how price handles a test of the rising 50 SMA (looks like a test very soon).
I am trading $CRM today post-earnings, and in reviewing the chart I noticed a nice volume bar Buy setup that existed on the Daily chart:
- The key here is to buy the first Green volume bar after at least 4 Red volume bars in a row
- There are 4 signals on this chart
- It is likely that at least 2 would hit a trail stop if set under 3%
- The last signal was the big winner
- There may be a 5th setting up if today holds Red
On the flip side of this, there were several volume bar Sell signals as well (late Jan and early Mar that looked real good).
A large percentage of my trades involve the use of Options either as the trade itself or in conjunction with stock. One of the most common positions you will find in my portfolios is the Covered Call. This can be done for income, protection, or for leverage.
Today I thought I would highlight the reason of protection. I am currently long $CRZO (entry at 27.46) and I sold the June 27.5 Calls against the long stock on 5/20 for 1.76 giving me a range of 25.7 to 29.30 to work with.
A simple approach to providing protection to a long position. Today price is hovering near my entry and this short Call is now OTM (out of the money) so no risk of being called away now.
Some of the math:
Long stock at 27.46 & collected premium of 1.76 so this gets me the downside target of 25.7 that I need to manage. Being long at 27.46, short the strike at 27.5 plus the 1.76 gets me the capped target of 29.30 above.
The Gap Fill trade set up can be both on an upside move as well as after a downside move. This particular play involves setting some price alerts after a stock has gapped up – or down – and then being patient for price to attack one of the levels.
I had been monitoring one such trade setup in $SPPI — here is a current Daily chart:
As you can see in the chart above, the RSI had been drifting up as price drifted up towards the Green resistance line (the area where the Gap Fill starts). A rather clean set up especially after price broke up through the declining 50 SMA.
The 200 SMA is the 1st target with $11.75 being the Gap Fill target on this trade.
SMA = simple moving average
I have had a long position in $EWW since 3/4/2013 and wanted to do something with Options that would protect my gains. A newer play that I have been utilizing is what I call the Go Both Ways play. This involves being long stock and then selling a Straddle near the current strike. You could do the same if short stock.
In the case of $EWW I sold the June 72 Straddle on 5/10/2013 collecting $4 in premium. This gave me protection down to $68 but capped my gain at $76.
This has been working ok but today I let the stock piece hit a stop at B/E (entry was 70.85). This means that I am now short the June 72 Strangle and the Call side is no longer covered.
The $70 price level looks vulnerable so I will monitor closely to make sure that it avoids going down too much further. Currently the June 72 Strangle is at a bid/ask of .61/2.55
I am an opportunistic trader that utilizes a variety of strategies to participate in a stock price move. Sometimes I just use stock, long or short, sometimes I use just Options, and sometimes I use a combination of the two. Sometimes the opportunity requires patience to set up – even though I can see it coiling on a chart – as the setup has to be anticipated.
In reviewing several charts this morning, I noticed several stocks that had price banging its head (from below) on a down-trending (DT) line above. I like this setup because at some point it will break above this DT line and I want to play that move.
One such stock is $IO:
One thing to note here is this: once price does break above the DT line, there will be some formidable resistance next at the 50 & 200 SMA (simple moving average) at 6.50 & 6.65. Volume is trying to increase here so be ready for the imminent break.
Anticipate, but be patient.
This week was extra busy as it was May Options expiration. This meant some extra time spent planning for adjustments/exits on existing positions that had May options set to expire. There were no newly added stock or option positions this week that made it to the weekend. As of Friday at noon, the short May 50 Call in $DDD was the only position that had options set to expire (and it did). All other positions have options for next week or further out.
Here is the Summary (I have added a G/L column which reflects price chance only from entry to current or booked gains – does not include Option piece gains/losses):
One of the stocks that I have stalking this week is $TXRH and it looks ready for a new breakout. What I have been monitoring is the elevated RSI (wanted to see it work off some) and I also wanted to see how the MACD would resolve (has become embedded here, does it bounce or cross down).
A look at the Daily chart:
There are several ways to start a trade here. One of the easier ways to play is to just go long stock and protect with a Put. Here is how it works:
- You go long the stock
- You buy a near-the-money Put to protect against any downside move
- One reason this may be tough here is that you only have the 22.50 & 25 strikes to work with.
Other trade ideas:
- A June 22.5/25 Risk Reversal
- Long the June 25 Call ($.30)
- Short the June 22.5 Put ($.25)
- This trade can be done for a $.05 debit at the moment
- Note: the June 20 Call has very large Open Interest so this makes me more bullish
- Buy the June 25 Call for a $.30 debit
Had to do that.
Since you are here anyway, I really want to layout the Covered Call trade with $DDD as the example. I am currently long and have been selling upside Calls against the stock as it moved up. When this is done at the same time, it is referred to as a buy-write. When you own stock and then sell Calls against later, it is referred to as a Covered Call.
Yesterday I made the most recent adjustment to my trade by buying back the short May 47 Calls (had been sold for .85) and then selling the May 50 Calls. These were going at 2.27 at the time so the premium was significant for Calls that are expiring Friday. This adjustment was at a debit of $2.22 when filled.
I had made the decision at the time that the key $50 price level would be a good battle area for May expiration so that is why I chose that strike. Currently price on the stock is hovering around the 48.75 area and the May 50 Calls are at a .80/.85 bid/ask. The significant move down in the value of the Calls has helped to offset the pullback in price – exactly what the premium sale is supposed to do.
Just one of several ways to protect a long position.
Note: The “net” on the Option pieces for this trade up to this point is now a debit of $1.37 and my stock entry was at 40.18 (I noted my entry here on my Blog this past weekend).