Ch-ch-ch-ch-Changes - thanks David Bowie

Alright, time to change our trading style a bit.

As you can tell from the prior posts, I had some losses and am ticked at myself for not "seeing" the problems during my trading. I think I had a "...momentary lapse of reason..." and was too focused on my concrete rules and not letting my subjectivity out to play with my objectivity.

So, from this point forward, I'm going to be more balanced and we're going to have a bit more fun. I'm going to be putting quite a bit more out there to you regarding selling of options and of "debit spreads" and "credit spreads".

From here on, we will also play more with Theta and will work more to "fix our trades".

So, getting ready for some fun roller coaster trading

Time to learn some lessons!

Anytime that I have a losing trade, I ALWAYS go back to see what happened. Most times I somehow screwed something up, once in awhile trades just go against me and there's really not much I can do. But, in any case, going back and analyzing your trades is probably one of the most productive things you can do in order to become a better trader.

So, let's go back and look over our MEE and AGU trades to see where my mistakes were. We'll first look at MEE:

There were 2 problems with our entry. We should NEVER have gotten into this trade in the first place. Yes, it did meet our rules, but you also must look at the entire picture and develop your "trader's sense" before entering any trade.

Trading is definitely like an art. You first must have the foundation and basics, but after that you will find that there are just TOO MANY nuances to build into your "rules". I'll try my best from this point to list what I generally see before getting into a trade and hopefully you'll understand it after time. We are going to still follow our rules, but we'll let the artistic/subjective part of the trading help dictate our entries/management/exits of trading from here on out.

Okay, back to the 2 problems. FIRST, look at that stochastics indicator, particularly the black line. Notice how, on our entry day, that the black stochastics line was going down. When you follow the candle chart that corresponds with that line, you'll notice that during the time period of the most recent high to our entry that the line was going down. This means that the stock was getting weaker, but we thought it was getting stronger - so strong in fact that we thought it was going to break up through that purple resistance line.

Which brings us to problem number 2 - the resistance line. We should have waited for the stock to first break that resistance line and then find an entry. Most times, after a stock breaks a resistance line (or support line) that it will go a little further in the direction of the breakout, then it will come back to that same line it just broke and bounce back off it. This is called the "re-test" of that resistance/support line. That is by far the better entry.

So, those were the problems with MEE - we should have never even gotten into that trade.

Onto the next stock - AGU:

We still entered this at a resistance line, BUT the difference in this one is that at the time of the entry - the stochastics black line had already gone down and was then turning back UP. So, we were good.

The problem with AGU is that when we got up to the highest high on the chart (the end of that blue line) you'll notice that the stochastics line (also marked by a blue line) was basically the same relative height as it was before we even entered - even though we made a new high. When you make a new high, that stochastics should make a new high on it's chart. However, ours did not. That's the first issue - our stock wasn't getting stronger as it went up - it was losing it's momentum.

The second issue with AGU was that when we did make that new high it wasn't done with much gusto. It was done with a "doji" candle. You can look up candle formations online, but a doji candle is one where the buyers and sellers were in equal power. However, up until that time you'll see we had nice, decent size, white bullish candles. This means that the buyers were stronger than the sellers. Once we hit that high, the sellers came in and were equally as strong with the buyers.

With those two issues above, we should have closed out the trade for a nice profit on that high day and just waited to get back into the trade at a later date. But, I did not. Nope, I just stuck to my "rules" and waited. Rules are good, but you gotta let that subjectivity/artistic side come into play.

Finally, while this was all happening, let's look at what the market itself was doing:

I give most of my trades the priority over the market, but you also need to look at the market so you have some idea of what's going on.

I entered BOTH the AGU and MEE trades toward the end of the phase of the market marked by that blue box. Now, applying your new found knowledge from above via the stochastics indicator, what was happening with the strength of the market??

Answer: the market went up and then sideways, BUT at the same time the stochastics was dropping. The market was getting weaker even though it was still trying to stay up there at those prices. Finally, the weakness took over and the market came back down.

If I would have looked at what was happening in the market AND looked at my trades closely, then instead of having 2 losses, we would have had:

1. No trade whatsoever in MEE

2. Profit on AGU

Lessons learned. Keep these in your mind each and every time you look at a possible new trade or a trade that you are already in.

Now, a new week is coming, let's get 'em.

AGU - closed

We took a loss on our AGU trade. I was an idiot for the way I managed it. I made a mistake that I'll show you in a following entry, but for now, let's just look at the charts to see what happened.

As you know, our entry was the left-most blue box. It was a close above the high of the low day (which was the green circled day just before our entry).

We immediately rallied up and made some money - on paper, since we didn't close out the trade.

We then had a quick gap back down and started going lower from there. I sold an October 55 Call Option for $0.35 on 9/24 represented by the red boxed day.

Then on 9/25 the stock dropped even FURTHER and hit our stop.

Here's the breakdown on the trade:

9/15 bought a Jan 45 Call Option for $8.80

9/24 sold an Oct 55 Call Option for $0.35

9/25 stopped out of the Jan 45 Call Option for $6.60

9/25 bought back the Oct 55 Call Option for $0.29

The net of the trade is:

-8.80

+0.35

+6.60

-0.29

-2.14. So, I lost $214 per contract on this trade. SUCKED. I managed this very stupidly and will show you my mistakes in the following entry. Better for you to learn from my financial loss than your own. However, you LEARN BEST from your own financial losses - nothing will sharpen your skills, nor keep your memory sharp as losses!

MEE - closed trade

Well, we got hammered here. I made a mistake, which I'll show you in a following entry, but for now, let's look at the chart and I'll walk you through what happened from the last entry.

As you know, we got in when we had the close above the high of the most recent low day. The most recent low day is the far most green circle. We got in where the blue square is located. We did get in at a resistance area, but we were following our "rules" and got in anyway.

Then, the next day after we got in, the trade immediately went against us in a big and nasty way. We got slapped. So, in order to get some protection, I sold a Call Option. I sold the October 36 Call Option for $0.40. This was sold in the red boxed day.

Now, onto the next day after that:

The stock dropped even further - going even more against us and hit the stop loss, which as at $29.75.

So, we have a loss. A stupid loss that shouldn't have happened, but I'll go over that in a following entry. The good thing is that there was something valuable that you will learn from this that will make you a better trader in the future.

Here's the breakdown of what happened and the numbers:

We bought the MEE Jan. 29 Call for $7.00 on 9/22

We sold the MEE Oct. 36 Call for $0.40 on 9/23

We got stopped out and sold the MEE Jan. 29 Call for $4.40 on 9/24

We bought back the MEE Oct. 36 Call for $0.20 on 9/24

So, the breakdown net is:

-7.00

+0.40

+4.40

-0.20

-$2.40 LOSS. We lost $240 per contract - ouch! At least you can see here even when the trade is going fast and furious against you, you can still help to minimize (no matter how small) the loss by selling an option. By selling the option, we netted $20.00 to help offset our loss. No, it's not a lifesaver, but every bit helps.

MEE update

We'll we got hammered today on MEE:

This is about the worst thing that can happen to you when you get into a trade - it reverses on you big time the very next day. The reason for this was news. This stock was downgraded from "Outperform" to "Neutral", couple that with the huge move yesterday we got the double-whammy. No worries, we're still in the fight.

This is a great example to show you that you never know what's going to happen - because NEWS can really make or break you sometimes and there's just now way to guess what the NEWS is going to be.

It did not hit our price stop nor our 50% value stop so we are still in it.

However, I did sell an October 36 Call Option to offset some of the loss. I got $0.40 for the sale of that option. I'm planning on this either going sideways for awhile and then going back up, or it will just start climbing back up from this point.

But at this point, I've taken action by selling the October 36 Call Option to help out the position.

SPY Crossover

Hey, anyone take this trade I put out there on 8/2/09???

I hope so, because you should still be in it and you have gained 10 points so far!

That's all.

New Trade - STZ

Another bullish trigger today - STZ:

As you can see, a nice uptrending stock that today had a close above the high of the low day - i.e. our bullish entry trigger.

The Big Chart checked out fine, so then I had to go to a longer viewed chart to find the target:

You can see from the horizontal purple line above our current price action where the an old support, new resistance level is located. So our target is that general area - $18ish.

Next we gotta find where our stop would be - this is $0.25 below the low of the low day - which would be $15.03.

Now we can find our risk vs. reward since the price is $15.74. Calculating this out, we find our risk vs. reward is approx 1:3. Anything above 1:2 we like and the higher the better! So far a green light to take the trade.

Now onto the trading screen:

We are looking a the January expiration Calls since these are the closest to the timeline we want.

The highlighted line shows the January 12.50 Calls have a Delta of .88, which is the closest Delta to .70, therefore these are the ones we want. Plenty of open interest, so we're good to buy these Calls. Look at today's volume for this strike - 1 - yep, that's me again. "One is the loneliest number that you'll ever do..."

I bought the January 12.50 Calls for $3.60. Immediately after doing this, I put in my stop order to get me out if the price goes down and hits $15.03. I have another stop at 50% which would be $1.80.

From here, we monitor the position daily - and hopefully get our profits soon!!

On another note: I'm going to keep these posts nice and short and will make them shorter as we go along. This way I can start addressing other items to enhance your trading knowledge. By this point you should be able to basically do these on your own as it's following the guidelines from earlier posts. If you are having a hard time, just go back and look over those posts for clarity. It will get easier and you'll be able to do this quicker and quicker.

Now - let's make money.

New Trade - MEE

We got a trigger for a new bullish entry, this one was for MEE, check out the 3 month chart:

By now you should be fairly familiar with our entries and what to look for when buying an option. You can see above the trigger, which was a close above the high of the low day.

You can also see that we are going up above the resistance area (purple line) as well on this day, and that our Stochastic indicator in the lower part of the screen is below the 75 line, so we are good to go regarding the chart.

I then checked the Big Chart - it was good because it was not in the red.

So, it was time to find our target and figure our risk to reward. Looking at a longer term chart, I figured the target to be approx $45

The target is past support/resistance at the $45 area.

So, I took the price at the time which was $33.30.

The target is $45

The stop is $0.25 below the low of the low day, which would be $29.75

The risk to reward is roughly 1:3 (if you are lost on this, please refer back to an earlier post to figure this). Since I want at least 1:2 then I'm good to keep moving forward on this trade.

I pulled up my online brokers trading screen:

I chose the January expiration options due to the time frame. I then chose the January 29 Call Option to buy. It had a Delta of .71 and had plenty of open interest.

I ended up buying the January 29 Call Option for $7.00

After buying this option, I then put in my stop to trigger at a price of $29.75. My other stop will trigger when the option value goes to $3.50 (50%).

Now all we do is monitor this position daily, we're done for right now.

Market update

Yesterday, Sept 21st, the market had a brief pullback and today the market went just a tad higher.

This has essentially created a bunch of bullish entry triggers.

I'll put up each new trade in it's own post. All our previous current positions are still doing well, so we haven't done anything new with them.

PENN - update

Okay, time to kick up our trading another notch. Up to this point, we had a couple of possible outcomes regarding our active trades - either it would hit the target or it would hit one of our stops. That's a good plan and will work well over time.

But, I like to keep the advantages stacked on my side and sometimes you have to change the plan a little bit to keep the advantage vs. the market.

Look at the chart to see what happened to PENN today:

Let's first review our trade up to now. The stock was in a downtrend, and we entered on our trigger, which was a close below the low of the high day - represented by the blue square.

The next day after we entered, the trade went against us. Then the following day (today), it went against us again!! Curse you market - how dare you not play by our rules! Anyway, I'm not too concerned about that besides it didn't hit either of our stops and it's still under that downtrending resistance line (in blue).

Up until now, we would just have to deal with it and hope that it turns back down and goes to hit our target, or it would hit our stop and we would take a loss. But we now have a new trick up our sleeve - it's called "selling an option".

What does it mean to sell an option? Easy, just as it sounds, you pick an option and sell it to the market. The weird and wonderful thing about the market is that you don't have to own something in order to sell it (this is called a "short"). Where else in the real world can you do this - legally?

Here's how selling the option works, you simply do the same as you did when you bought an option - but rather you pick to sell it instead. Voila', easy enough.

Why do this?

Because you will bring in a premium (i.e. money). This premium will help to offset your loss if the stock continues to go against you and hit one of your stops. Also, remember that options have "Theta" (i.e. time decay) and if you BUY an option then time decay is working AGAINST YOU. But when you SELL an option, then time decay works FOR YOU.

Let's think a bit more about an option in general. You know the option can be bought or sold to the market at any time. You also know that the option will vary in price due to the stock's movement and also time (the more time that's in the option the more expensive it is). You also know that due to "Theta" that the option will decay in the time portion of the option price as we get closer to the expiration date of the option.

Keeping the above in mind, let's think of an example to clarify things:

Let's say there's a market for ice cream cones - this market will buy and sell ice cream cones at any time. So, you go up and buy an ice cream cone and then hang onto that thing for a couple of weeks - you live in Florida and it's hot out there and you don't keep that ice cream cone in the freezer. So, after a couple of weeks, that ice cream cone is a mess - there's basically no ice cream left. So, you sell it back to the market. But the market says, yes we'll buy it but for way way less than what we sold it to you for because it's a ton less valuable now than what it was then. So in that case you were the buyer.

Instead of buying that ice cream cone, you are now going to sell it to the market (yes, you don't have one to begin with, but the market doesn't care and they basically cover you for it). The market says okay, the ice cream cone is worth $5 (it's expensive ice cream) so they essentially front you the $5 via what's called "margin" (like a line of credit) and they buy that ice cream cone from you. Again, it's hot and it's Florida and they don't use a freezer and a couple of weeks later that nasty ice cream cone is now worth $1 and you say okay I'll buy that ice cream cone back from you now to cover my "margin" (line of credit). So, you originally sold an ice cream cone that you didn't have, essentially you were -1 ice cream cones, then you later bought the ice cream cone +1, then you came out with 0. You don't end up with an ice cream cone, you are now even steven. However, since you sold it for $5 and bought it for $1, you made a profit of $4 on the transaction.

Now let's figure out what may happen if we sell an option at this point referencing the chart way above. We'll get into the specifics about selling an option after the scenarios immediately below.

We have a few things that may happen from here:

1. The stock keeps going against us (up in this case) and hits our stop.

We lose money on the initial option we bought, BUT the option that we sold also becomes less valuable (therefore we win money on that one). We will still have a NET loss, but it will be quite a bit less vs. if we didn't sell an option.

2. The stock just trades sideways and doesn't go anywhere for awhile.

We are losing Theta on our option that we bought, BUT the Theta on the option that we sold is really killing the value on that sold option MUCH quicker than the option we bought. So we are NET winning money - or possibly breaking close to even. In either case, it's better than losing money which is what would have happened had we not sold an option.

3. The stock goes in our original direction we thought and hits our target.

We make money on our initial option we bought, BUT we lose money on the option that we sold. HOWEVER, we will still have a NET profit due to the specifics of the option that we sold (to come next).

As you can see, selling an option when the stock price starts going against you is a great way to give you an advantage in the market.

SPECIFICS ON SELLING AN OPTION:

1. You have to have 2 days that the stock price is going against your direction. It DOES NOT MATTER where the price is trading, it only matter that it's going AGAINST your intended direction. So, if you are close to your target, halfway to your target, or the price immediately goes against you (like in our case) then you SELL an option.

2. You want between 20 - 40 days until expiration left in the option you are selling.

3. You are selling the same type of option. So, if you are in a Call (bullish) option, then you'll sell a Call. If you are in a Put, then you'll sell a Put.

4. You want the Delta of the option that you are selling to be .30/-.30 or less.

5. Open Interest - you won't get an ideal open interest, but as long as there's 100 or more, then you are okay.

That's about it.

EXITING THE SOLD OPTION:

Okay, so after you sell the option, you will exit when 1 of 3 things happens:

1. The stock hits one of your original stops - when this happens, exit your sold option (i.e. buy it back).

2. The stock hits your target - sell your original option you bought and then buy back this sold option.

3. The sold options VALUE falls to around 20% of what you ORIGINALLY SOLD it for. Example: you sold the option for $1.00, once the value gets down to $0.20 (where you can buy it for) then you'll want to buy it back.

A couple of final thoughts before moving onto our trade:

1. If you have a few month's left and the stock is just dragging to get to your target, you may be selling an option every month until you hit your target.

2. There's a specific name for this style of trading: "Diagonal Calendar Spreads" Be sure to look these up. I do them a little different than how they will tell you to do them, but it will give you a good explanation. If you can't find these, then look up "Calendar Spread" then look up "Diagonal Spread" - it's simply a combo of both.

Okay FINALLY onto our specific trade.

So, we obviously had 2 days of the stock price going against us. Once I seen this (you must monitor your trades every trading day), I then knew it was time for me to sell an option. I pulled up my broker's trading screen:

First thing we want 20 - 40 days until expiration, the closest was October with 28 days until expiration.

Remember, I want to sell the same type of option that I bought - this is a bearish play, and I bought a Put option, therefore I need to sell a Put option - which is on the right side of my trading screen.

I now need to find an October Put Option with a Delta of -.30 or less. Obviously it's highlighted in yellow, where the delta is -.19, which is the 25 strike.

The open interest in the October Put 25 Option is 8,509 (wow, that's a ton). So we are good there. On another funny note - look at the volume for today, which is "1" - guess who that "1" is - haha that's us, it was "0" before I sold the option.

Okay, next is what to sell it for - this will be the lower price. I always try to get something in the middle if I can for a better entry price. I actually was able to sell it for $0.45 instead of what they originally had listed ($0.40) - so see, it doesn't hurt to try.

So, now we have the original option that we bought and we have this new option that we sold. Now we simply monitor our positions and look for one of the exits (from above) to happen.

Sorry for the stupidly long post - but you gotta know what to do and why to do it.

AGU - Update

Nice move in the market today going up. Our AGU trade was up 2.27% today - so it's already making us some nice money. Let keep it going up!!

New Trade - PENN

The market has been going up quite nicely - so I took a bearish trade. What?? I always look to keep some balance to my portfolio of both bullish and bearish trades - no matter what the stock market is doing. This way, I have some protection if the market goes against me.

Most of my portfolio is bullish right now, and I've been looking for a bearish play and finally found a nice set up in PENN.

Check out the 3 month chart:

We've got lower highs and lower lows - i.e. a "downtrending" stock. And, as you can see from the blue shaded box, we had an entry signal for a downtrending stock - a close below the low of the high day.

Looking at the chart above, you will see the following:

Entry stock price - approx $27.45 (I got in precisely at $27.43)

The stop will be $0.25 above the high of the most recent high. The most recent high is $28.80, we add $0.25 to that to get our stop at $29.05.

Now we have to find our target - let's look at the 2 year chart to figure that out:

You'll see we have a couple of lines of support. The first line we are rapidly approaching, which is approx $26ish. I'm figuring that we'll break down through that and head down to the next line of support around $21ish. More specifically, my target is $20.75 - close enough.

On another note, the Big Chart has this stock's industry group in the yellow around 45. Since we are bearish, we don't want the industry group to be in the green - so we are good to go on that front.

Let's now figure out risk vs. reward to make sure this works for us. Remember, we want to make sure the odds are skewed in our favor when it comes to what we are willing to risk vs. what we are looking to win.

Risk = $29.05 (our stop) - $27.43 (our stock's entry price) = $1.62

Reward = $27.43 (our stock's entry price) - $20.75 (our target) = $6.68

Risk/Reward = $1.62/$6.68 = 1:4 approx

So, we are risking 1 to make 4. That checks out great, so let's now look at the option to buy.

Here's the trading screen:

Remember, we want our option that we are buying to be approx 90 - 120 days until expiration. The January 2010 options are the closest to the days with 121 days until expiration.

Looking at the yellow highlighted line of the right side of the screen. YES, THE RIGHT SIDE OF THE SCREEN THIS TIME. This side is for Put Options - these are bought for when you believe the stock price will go down. They get more valuable as the stock price goes DOWN.

We are looking for an option that has a delta of -.70 I know what you are thinking - the highlighted one is for -.59 My screen print was a little off, when I bought the option it was actually -.60 and the option below it was -.80 (instead of -.79). So, both were equidistance from -.70 and I simply chose the cheaper one. It was cheaper by ALMOST HALF! So, I bought the January 30 Put Option.

A couple of items:

1) Why is there a negative number in front of that delta. It's simply because we are looking for the stock to go NEGATIVE. We want that price to go down.

2) Look at the open interest for the January 30 Put Option vs. the 35 Put Option - big difference. Lots of traders like that 30 vs. the 35 and therefore it will be more liquid and easier to get out when it's time to sell.

I was able to buy the January 30 Put Option for $4.40. I tried to get it for $4.30, but I only had 1 minute left in the trading day and it was not getting picked up by the market, so I had to buy it for what the market maker was asking. Doesn't hurt to try.

After buying this option, I then put in my stop order. So, now we hope for this stock to fall while the rest of the market goes up! This is going to help protect our portfolio if the market starts going down and getting nasty on us.

You will find in ANY MARKET that there will be some stocks that go against the trend of what the rest of the market is doing.

To quote a great trader, Jeff Kohler, "Think of it as a market of stocks, rather than a stock market". Great advice.

AGU Trade

Okay, let's get onto this now after our Big Chart discussion. By the way AGU is in the Agriculture Chemicals industry group which is currently at 36/Yellow on the big chart. This is going to be a bullish trade and my rules say as long as my bullish play is not red on the Big Chart, then I'm good on that part. Game on, here's the chart:

First things first - what kind of trend do we have? Higher highs and higher lows - therefore we have an uptrend, which is BULLISH.

As you know by now, in an uptrend I'm looking for a close above the high of the most recent low. Today in AGU we closed above the high from the most recent low, which was happened to be yesterday.

The purple line represents a level of resistance, which is where we are at currently. We've been around this area for a few days and I'm basically taking the stance that we are going to break right on through that bad lad.

After we break out of resistance, I must determine my target, otherwise how am I going to know when to get out. I also must know my target because without it I cannot determine my risk to reward ratio (which is very very very very important - very).

I have to go out to a longer chart, here's a 2 year chart:

You will notice another horizontal line of resistance at approx 59ish. Remember, support and resistance are AREAS not exacts. So, we'll put our target at 59.

Our stop needs to be placed at $0.25 below the low of the most recent low. The most recent low's (yesterday) low was $49.06, we subtract $0.25 from that and get our stop, which is $48.81.

When I bought the option, the stock was trading at $51.25. These are all the numbers I need to determine my risk vs. reward.

Reward = $59 - $51.25 = $7.75

Risk = $51.25 - $48.81 = $2.44

So my risk vs. reward ratio = 2.44/7.75 = approx 1:3

I'm risking 1 to make 3. That's what I'm talking about, looks good.

All is looking good, now onto the exact Call Option to buy, let's look at the trading screen:

Looking at the yellow highlighted line:

I chose the January expirations for my Call Option. There's 122 days left until expiration. I ultimately want 90 - 120, and these January options were the closest ones.

Once I figured on the January options, I then moved to the correct strike price. Remember, I want a Delta of at least .70. As you can see, the January 45's have the Delta closest to .70 with a .73. Voila'

Finally, time to click the buy button. I tried to get this option a little cheaper (I always do, you never know when you'll get a fill for cheaper than what's it's listed - besides it doesn't cost anything to try). I could not get it cheaper than what it was listed for and bought the January 45 Call Option for $8.80

After buying that option, I immediately put in my stop. I set my stop to sell my option if the price of the stock hits $48.01 or lower. (It's not gonna do that - it's gonna be a winner you know!!).

So from this point, we simply monitor this trade every day. We'll also keep looking for other trades. I'd like to get a bearish trade. Even though we have been going up, I also like to get something going the other way to balance out my portfolio.

New Trade - AGU

Just entered a new trade today - AGU. Before getting into the details of the trade, I wanted to add another aspect of what I look at before actually getting into a trade - it's just another level of items that I look at to help my advantage over the market.

I ultimately want BIG MONEY (i.e. institutional traders) to be driving the industry group and sector of the stocks that I'm trading. Big money can either make a trade easy, or difficult. If you trade in their same direction, then your trades will tend to be easier.

So how do you monitor this?? In addition the the Money Flow indicator that's at the bottom of my stock chart screens, I also look at what's called "The Big Chart" - here' the link to the Big Chart.

The Big Chart will show each industry group and if money is coming into the industry group or out of the industry group. Each industry group is assigned a number and a coinciding color. The lower the number, the weaker the group. The higher the number the stronger the group.

The numbers go from 0 - 100.

The numbers and coincidental colors are as follows:

100 - 66 Green

65 - 33 Yellow

32 - 0 Red

In general, I'm looking for the big money (via this Big Chart) to basically NOT be going against my trade. So, if I put on a bullish trade I DO NOT want the color to be red for my particular stock's industry group. And if I put on a bearish trade, I DO NOT want the color to be green for my particular stock's industry group. Again, I do NOT want the colors going against the direction of my trade for my stock's sector.

If I put on a bullish trade, I can have my stock's industry group be either green or yellow and NOT red.

If I put on a bearish trade, I can have my stock's industry group be either red or yellow and NOT green.

Also, it's nice to see the colors and corresponding numbers going in the direction of my trade, example:

Bullish - it would be nice to have the colors going from red to yellow to green (the current color). This shows big money COMING INTO the stock's industry group.

Bearish - it would be nice to have the colors going from green to yellow to red (the current color). This shows big money GOING OUT OF the stock's industry group.

Again here's the LINK TO THE BIG CHART.

The Big Chart works in conjunction with everything else. It doesn't specifically make or brake a trade. If every other thing is pointing bullish for your trade, but the Big Chart does not, then you should be okay to still take the trade. At some point trading becomes an art and you have to let some subjectivity into it - otherwise you may never have a trade set up.

The more you trade, the more you will find your own set of rules and items you look at, but for now this just gives you another info source.

Sorry to get so off tangent, but these things are going to come up from time to time and I'm going to address them as they come up.

I'll continue on the next post with the AGU trade.

BDK - closed trade

I took profits today in BDK around the stock price of $47.50 or so.

My initial target was $49. I took the profits a bit shy of the target because we have been going up and up and haven't had a pullback. Looking over multiple stocks and the market in general it seems that we are a bit "toppy" and are due for a pullback (even if slight) at some point in time.

If we did pull back, then we would most likely continue even higher after the pull back, but I would lose quite a bit of time in the process. Don't forget about "Theta" which is the amount of time loss we are losing each day. So, instead of going through all that, I simply made the decision to take out my profits right now by selling my option back to the market - "A bird in the hand..."

Here's the chart showing the most right blue shaded box where I sold the option back to the market.

As you can see from the chart, we basically have been going straight up. We did have a couple days of small or sideways movement, but in general our stock just took off wonderfully in our direction.

Once I decided to get out of the trade and capture my profits, I sold my November 40 Call Option back to the market. Look at the left side of the screen at the yellow highlighted line and you'll see the "bid" price (this is what the market will buy the option back from you) is at $8.40.

So, I sold my option back to the market today for $8.40.

Now, let's go over the trade to see how it did. Remember, this was a "live" trade - we didn't know for sure what was going to happen. But, we did have a good solid plan and traded well.

We initially bought the Call Option back on 9/3/09 for $5.50 and sold it today, 9/14/09 for $8.40. This gave us a profit of $8.40 - $5.50 = $2.90 per contract (or $290 per contract).

Our Return on Investment is:

$2.90 / $5.50 = 0.527 x 100 = 52.7% return in 12 calendar days.

I'm not so naive as to try and tell myself that this is annualized to somewhere over 1,200% return on investment per year and have false hopes. But, if I can capture this kind of profit even somewhat consistently, then that's what it's all about.

Right now the market is a bit overbought. I've gone over many set ups today and there's just nothing to my liking currently (yes, I'm very picky, it's my sandbox and I play by my rules not the market's rules). So, we'll practice patience for now until the next trade sets up.

Market update

Above is a chart of the current market (I usually refer to the S&P 500 when I talk about the market, as compared to the DOW or Nasdaq or Russell or ...).

Look toward the middle of the chart at the lowest prices and you'll see all those white bullish candles that put us into the general area where we are trading currently. There's just no way the market could have continued at that drastic pace, so it took a breath and just traded sideways for awhile. This was very healthy because it gave both the buyers and sellers time to trade back and forth at this level and to basically accept the value of the market at that level.

The purple horizontal lines represent the multiple levels of support/resistance. We are now coming up to a resistance level. Remember what "resistance" actually is: it's simply a price area where there's a bunch of people who believe that the price is a good area to sell and take profits.

Looking at that highest resistance line on the chart you'll see that we spent quite a few days up at that level. There were tons of sellers and the buyers simply couldn't overpower the sellers to get the price to go higher and break through that resistance level. So, the buyers took a breather and let the prices fall back down. Buyers then came back in because the price was nice and low, in their opinion, and they started aggressively buying again and thus driving up the price.

Now we are back up to that resistance level again. So, I imagine that we'll either stall out a little and move sideways for a couple of days and then break up through that resistance OR we'll go back down again, but this time not as far down as last time and then we'll go up and try to break through that resistance again.

Sometimes news will give the market enough of a boost to get through those resistance levels. So, we'll have to see what happens from here.

BDK update

BDK has been a great trade so far - check out it's chart:

We got in at the blue shaded box, so it's been nothing but up since - sweet. I do think we'll hit some resistance now, since this was where it pulled back last time. There were sellers up at this area and we might run into them again. I imagine we'll either pull back a little bit, or will kinda go sideways for a couple of days before breaking through that resistance.

The nice thing is that the option that was purchased does not expire until November - plenty of time.

At this point we're just waiting to see what happens. I'll keep the updates coming and if any more trades develop I'll post those as well.

Here we go - BDK

I've had BDK on my watchlist for awhile now.  It's been on there because it has been making higher highs and higher lows - so we have an uptrend.

Here's the 1 year chart:

You'll notice on this 1-year chart I put on a Fibonacci Retracement, which is shown with blue lines.  I know, you're probably saying what in the heck is that??  It's a tough one to explain, but the reason I use it is solely because so many OTHER TRADERS USE IT - especially the big money (hedge fund managers and the like).  It shows them levels to where the stock might encounter support/resistance.  For me, I'll use it the same way which helps to determine a target for me.

Here's a link to give you more info on Fibonacci Retracements.

The horizontal purple lines show support and resistance, and of course you'll see the higher highs and higher lows via the green circles.  

Here's a 3 month chart to help see our trade better:

Notice today's close was above the high of the most recent low day in our uptrend.  This is our trigger to get into a bullish trade.

I've put a couple of indicators on here.  They are below the chart.  The first one is called the Money Flow (MF).  This basically shows you the money coming into/out of a stock.  As you can see, money has overall been coming into this stock - which is making it rise.

The bottom indicator is a Stochastic.  Which basically tells you if a stock is overbought (i.e. has had many buyers and could be due for a pullback) or oversold (i.e. has had many sellers and could be due for a bounce up).  Looking at this indicator, you will see that we are below that red 25 line - this means we are oversold and according to this indicator we should have a bounce coming sometime soon.  

Indicators are useful but remember that they are only secondary helpers to your trend, support and resistance.  PRICE ACTION DISCOUNTS EVERYTHING ELSE!!!!  (Follow your chart and what it's telling you).

Here's a link for info on Money Flow.

Here's a link for info on Stochastic.

Looking back up at the first chart you will notice that I do have a level of resistance overhead around $46.  My target would be the next level of resistance after that around $49.  When I got into the trade, the stock was trading around $43.46, so even if we hit the first level of overhead resistance at $46 and stay there  - I'll still have a winning trade.

Before moving forward at this point, I want to make sure that I'm skewing the odds in my favor.  I don't like playing fair with the market.  It doesn't play fair with me, nor anyone else, so I gotta make sure we play by my rules or I don't take the trade.  How do I do this???  By making sure that I can make more money than I can lose, this is called the "Risk to Reward Ratio". 

The Risk to Reward Ratio takes what your monetary risk is and puts it in a ratio to what your possible monetary reward is (your target is your reward).  In this example, my risk is my entry minus my stop.  I entered at $43.46, my stop will be $41.81 (see below for more explanation).  So, $43.46 - $41.81 = $1.65 is my risk.

To figure my Reward I need to take my target minus my entry.  $49 is my target, $43.46 is my entry.  So, $49 - $43.46 = $5.54 is my reward.

My Risk to Reward = $1.65 : $5.54 or roughly 1:3 

I'm risking $1 to make $3, and that's how you skew the odds to your favor.  I NEVER take 1:1 trades.  I MUST HAVE 1:2 or higher, preferably higher, the higher the better.  

After seeing this trade set up and the trigger that happened today, I then went to find which option would be best.  Here's the screen shot of that:

Here's what I was looking for:

1.  Time - I want 90-120 days until expiration.  In this case I could either go with November or January Call Options (since we are bullish/uptrend).  I chose November, but either one would be good.

2.  Delta - I want as close to .70 as possible.  The 40 strike price's delta was .69, which was the closest one.

3.  Open Interest - I "ideally" want 500 or more.  The 40 strike has an open interest of 910.

4.  Bid/Ask Spread - I want $0.30 or under.  The 40 strike had a spread of $0.20 ($5.40 - $5.60).

So, the November 40 Call Option on BDK was my choice for taking this bullish trade.  I got filled at $5.50.  I always try first to get filled in the middle of the Bid/Ask.  In this case I got it.  Sometimes you won't get filled and you'll have to adjust your offer in order to get filled.  This is something that is worth your time to try.  Just put in your offer between the Bid/Ask and leave it there for a few minutes, if you don't get filled, then put it at the Ask price.  In this case, it saved me $0.10 - "a penny saved".

After getting filled, I then put in my stop order.  In this case the low of the low day was $42.06, so I subtract $0.25 from that which gives me my stop of $41.81.  So, if the stock price hits $41.81, then I will automatically sell back this option to the market.  My other stop is $2.75 (50% of $5.50).

From here, I simply wait.  Either my target is going to get hit, or one of my stops is going to get hit.  However, there is one other thing that may happen, and if it does then I'll address it at that time.  We've had enough for this entry.

Moving Forward

From this point forward, I'm going to be putting my live trades on here.

****Please note:  I am NOT telling you to take the trades that I take.  Any trades that you take are done completely at YOUR OWN RISK.  I am NOT a broker, I am NOT an advisor, so again, anything you use from this website is done AT YOUR OWN RISK***

My suggestion would be to paper trade these for yourself.  This means FAKE MONEY.  Do this in order to get a good feel on how this trading style works.

Also, as I'm trading, I'm going to just start putting other info on this blog.  This info will consist on what I watch for indicators, what else I'm looking at in order to help me trade, and possibly trades that do not necessarily line up with this style.

I'll also be getting into quite a bit of "Diagonal Calendar Spreads" from my initial entries.  Be sure at this point to look up Diagonal Calendar Spreads online to become familiar with them.

I know we are kinda in a choppy market right now, but the market is never "perfect" so you just gotta trade what the market gives you.

Strap in tight, here we go.

Entries - example 2

After getting into our bullish trade, here's what happens:

We got into our bullish trade, then the stock went a little higher and then started pulling back.  Our stop (i.e. line in the sand) was $22.68, which on 6/22/09 (highlighted in the red box) the closing price was $22.42 therefore triggering our stop.

We have a loss on this one.  Let's now look at what our option price was via the screen from that day:

The highlighted yellow line shows what we can sell our option back to the market for on 6/22/09.  We can sell it back for $1.70.  Notice that we did NOT hit our 50% stop which was $1.50.  You ONLY have to hit one stop OR the other - NOT BOTH.

We initially bought this option for $3.00 and got stopped out at $1.70, therefore our loss was $1.30.  

Don't focus so much on what you lost.  You MUST be willing to take those exact set-ups time and time and time again.  Because if you get gun shy and don't take one, then that will be the one that makes the most money for you.  The professionals will always tell you to "take your losses quickly".  As long as you have proper money management, then you should not get hurt by some losses.  It's all part of trading.

Also, here's what happened after the stop was hit:

If you did not take your loss at your pre-determined stop, then you would have lost way more money.

LESSON:  TAKE YOUR STOPS - ALWAYS!!!

Entries - example 2

Let's do another example of an entry.  Here's our chart:

As you can tell from our higher highs and our higher lows, we have an uptrend.  We are then looking to place a bullish trade on this stock.  As you can see via the blue box, this day we closed above the high of the low day on 6/4/09.

You can't see it from the chart above, but our target is $27.00 and we enter when the price is $24.02.  Therefore we're looking for this stock to move about $3.00 up.

So, now we'll look at the specific option characteristics on this screen for 6/4/09:

Let's go through our specific parameters to make sure we get the trade we are looking for:

1)  Stock Volume - We have 2.8 million (we want at least 500k).

2) Delta - We have .69 (we want .70 or higher, but the next closest one is .76, so this will work for us - sometimes you have to bend a little here and there).

3)  Open Interest - this screen doesn't show it, but we do have more than 500 (you would see it via another view).

4)  Bid/Ask Spread - ours is .30 (we don't want to go over .30 - so we're good).

5) Expiration Month - ours is October, which is 134 days away (we ideally want 90 - 120, again sometimes you have to bend a little here and there).  

Putting all that together, we can see that the yellow highlighted line shows the best call (bullish) option for October, which is the 22 strike and costs us $3.00 per contract.

We enter this trade by buying that option and then put on our stops. 

Our 2 stops are:

1)  $0.25 below the low of the low day.  In this case it's $22.93 - $0.25 = $22.68.  So if the stock closes at $22.68 or lower, then we will get out of this trade and take our loss.

2)  50% of our original investment.  $3.00 x 50% = $1.50.  If our option price gets down to $1.50, then we'll get out of the trade and take our loss.

The next entry will show you what happened.