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.
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