LVS - update

I closed out LVS today for a quick profit. I view this as "A bird in the hand is better than two in the bush". If you can get a quick decent profit, then take it and use that margin to enter another trade rather than trying to let the trade keep on going to POSSIBLY get the rest of your profit.

Check out the chart:

The reason I took profit today was that the price was coming down to support and the 50 day moving average, where I expect to either see a bounce back up or possibly some sideways action. I'm not close enough to expiration (which is in November) for Theta to really be decaying the value of this trade yet, so the sideways option isn't that attractive.

Here's what happened with the trade:

I originally sold the November 19 Call and bought the November 21 Call on 10/12 and I received a $0.57 credit for it. Today (9 days later), I bought the spread back for $0.25.

This gives me a profit of $0.32. Whoop-dee-doo, guess I can buy Sweden now (you might be thinking). But, what you really have to do in trading is to compare apples to apples. The way to do this is by figuring out your Return On Investment (ROI).

The ROI on this trade is figured by taking the net profit divided by the margin required. $0.32/$2.00 = 16% Again - big deal. BUT REMEMBER this was in 9 days!! Let's do some basic math. If we have 30 days in a month, divide that by 9 gives us approx 3 (and change). So if we did this same trade 3 times in a month, then that would be approx 3 times 16% = 48% ROI per month or approx 576% ROI per year.

So, bottom line: don't concentrate so much on how much you make, but rather your ROI.

PENN - update

Wow, apparently the earnings were good for PENN today, check out the chart:

2 things happened today and 2 things were learned today.

Let's first go to what happened with the trade and then we'll go onto the learned (hopefully) lessons.

The first thing that I did today with PENN was to close out the short Nov. 25 Put Option that was sold back on 10/16 for a $0.95 credit. I closed out that option by buying it back for $0.30. That was a nice $0.65 profit in 5 days.

However, the price on PENN went up high enough to hit my stop at the stock price of $29.05. This sold my long January 30 Put Option for $2.57. I originally bought this option back on 9/16 for $4.40. So I have a loss of $1.83.

So, let's go over the entire trade to see what happened from start to finish so we can get a net number to determine the win/loss amount on this trade.

I bought the Jan. 30 Put for $4.40 and sold for $2.57 = $1.83 LOSS

I sold the Oct. 25 Put for $0.45 and bought it back for $0.05 = $0.40 PROFIT

I sold the Nov. 25 Put for $0.95 and bought it back for $0.30 = $0.65 PROFIT

The total NET = $0.78 LOSS

As you can see, thanks to selling those other options I was able to reduce my loss from $1.83 to $0.78. Not only should you be concerned with your gains but also REDUCING YOUR LOSSES.

From here the plan is to wait and see what happens. I still have my bearish bias on this stock and on the chart you will see that I put on a 50 day simple moving average which is very close to the closing price of today. If it rolls over from that and starts moving lower, then I'll put on a credit spread to either lessen this loss or turn it into a profit.

Okay onto the learned lessons:

1. Again I learned to NOT leave physical stops in the broker system for the market to see. (refer back to my post on the Conspiracy Theory). I was an idiot and forgot to take this one out. A simple oversight. It should not have been in there and I would have still been in the trade right now. I'd rather get out on my own and usually I'd like to see 2 days of confirmation of my stop before getting out.

2. Earnings are DANGEROUS. The correct thing to do in this situation would have been to get out yesterday and waited to see how the price would react to earnings. It's a much safer bet to get out of your positions, let earnings happen, and if you still have the same bias a couple of days after the earnings release, THEN get back in.

So for $0.78 I learned (and re-learned) some valuable lessons. However, be sure to keep an eye on this stock for the next couple of days to see where it goes from here as we might be getting back into another trade on it.

New Trade - SPY

Got into a new trade today, here's the chart:

Sorry, but this chart is super busy. This is for the SPY - which is the ETF for the S&P 500. So it IS the market essentially.

Overall, before putting on this trade, I have been looking for bearish plays because my portfolio is too bullish in my opinion. I like to have about an even split between bearish and bullish plays if possible. This market seems to be getting a little heavy and even with good earnings today, we aren't jumping higher.

So, for those reasons I wanted something bearish to help neutralize my portfolio.

I noticed on the SPY Chart a couple of items that makes me believe that a bearish play might be wise:

1. We aren't going higher on good earnings from companies

2. The daily volume is average, so no big buyers are piling in to drive up the price

3. We are getting a divergence between the Stochastic indicator and price.

Let me address #3 a bit more. Look back on the candles from 9/10 - 9/22 and you'll see the up-slanting blue line. This is showing where price was going. Now, during that same time period look down at the Stochastic to find it's slanted blue line - it was GOING DOWN not up!! So we had a divergence. Notice what happened right after that divergence? The price of the SPY went down to hit the 50 day moving average before coming back up.

If you look at our most recent price action of the candles vs. the Stochastics you'll see almost the exact same set up . I believe that we're going to pull back to the vicinity of that 50 day moving average again. I'm still overall BULLISH in the market, but the market has to breath in and out. We're due for a little exhale before we can move higher in my opinion.

So, I did a real simple trade. I bought a January 115 put which is an in the money option for $7.92. Yes, a bit pricey compared to what I normally do. But, this purchase helps to even out my portfolio (thereby giving me some protection to the downside) and I can sell an option against it to help offset the cost if the SPY does not make a decently quick move down.

I'm going to slow things down at this point until I take some trades off the table. I feel very good about the balance of the portfolio and amount of trades.

So, from here, we just manage the positions.

New Trade - SMH

Here's the chart on today's new trade:

Looking at this chart you will see the blue box where I entered today's trade.

I entered because we recently had a temporary break above resistance (the horizontal purple line above). We didn't stay above that resistance long, but it tells me that we have some buyer's strength. Also, if you look back a few weeks you'll see a low near support, then there's the temporary resistance breakout, then the stock went to a HIGHER LOW.

Today we closed ABOVE THE HIGH OF THE HIGHER LOW - i.e. our entry signal.

You'll see the indicators below the chart are a bit mixed. The Stochastics is going lower, but it is about 1/2 way between the highs and lows that it makes - so I'm not too worried about that. However, the MACD lines are moving up, so that's good.

But, indicators aside, the main reason is because of that entry signal of today's close.

So, today's trade is BULLISH.

I entered a November Bull Put Spread. I sold the November 26 Put and bought the November 25 Put for a credit of $0.35.

Now, if you just look at that number $0.35 I know that it doesn't seem like a lot. But there is one HUGE DIFFERENCE with this trade, the strike prices are only $1.00 wide. This means that the margin that must be set aside is only $0.65 per contract. This is huge!

Let me make this easier with a theoretical example on SMH:

Today I sold the 26/25 Put Spread for $0.35, my margin requirement is $0.65

I could have instead sold the 25/20 Put Spread for $0.41, my margin requirement would be $4.59 (typically on less liquid stocks the strikes are $5 wide instead of $1 wide).

To figure margin: Take the difference between the strike prices and subtract out your credit.

So, in the:

first spread above my broker holds $0.65 to make me $0.35

second spread above my broker holds $4.59 to make me $0.41

As you can see, getting the liquid stocks and ETF's with $1 wide strikes are much more advantageous than stocks where strikes are $5 wide.

The reason that the strikes are only $1 apart is that this stock is actually an ETF. SMH is a Semiconductor HOLDR and has tons of open interest with it.

Check out the open interest on these:

I highlighted the 26 Put Option that I sold - it's open interest is approx 9,000. The 25 strike that I bought has an open interest of approx 46,000. That's just an AWESOME amount. The more liquid it is, then the tighter the bid/ask spread and the easier it will be to get out of the trade.

So that's it for now for this trade. I'm really looking for it to move up higher soon. If it just wanders around this general area for awhile then great - I'll let Theta knock it's value down.

**TRADING STYLE NOTE:

I'm going to start focusing more on these ETF's for trades. This is because I can really start loading up on the contracts while keeping my margin low.

Most BIG MONEY TRADERS will use these for the same reason. They can sell tons of options and get the most leverage for their money.

New Trade - FAST

Here's a new trade that was put on 10/15/09:

I've been watching this stock for a little while now and you'll notice the lines drawn on it. You can see that resistance has been fairly the same while support is getting higher. Technically, this is called an "Ascending Triangle" and is bullish. I'm anticipating a breakout to the upside.

I decided to enter a bullish trade at this point for the following reasons:

1. The MACD black line just crossed from below the red line to above it while the histogram is going higher - this is bullish.

2. The Stochastic black line looks like it's ready to cross the red line from below it - if so, then this will be bullish as well.

3. The price has been staying up closer to the resistance as compared to down below at the support.

4. We just had an earnings announcement and the price did break ABOVE the resistance temporarily. There are sellers up there, but that was a nice move a bit above resistance. This tells me that there are buyers and they are stepping up their game, even though sellers are up there, the buyers seem like they are getting stronger.

5. Related to #4 above, we just had earnings. So, hopefully we won't have any news on this stock for awhile. Nothing can ruin a trade as news can.

So, with those reasons I decided to make a bullish play. I kept in line with the revised style of trading that I'm now doing and entered a Bull Put Credit Spread.

I sold the November 40 Put Option and bought the November 35 Put Option for a net credit of $1.47.

*Important note: I sold an ITM (in the money) put option. Normally I won't do this, as they can be more risky, but as long as you have a solid game plan and closely monitor this position, then it can be worth the risk for the reward.

I like this particular ITM put I sold because:

1. The credit for the 40 that I sold is much greater than what I could have sold the 35 Put strike for.

2. I believe that this stock will get a good quick move to the upside to pop above that resistance. So, it won't be ITM for long.

3. The Theta on this is higher than the 35 strike - so time is even more on my side in decaying the value of that 40 Put Option that I sold.

So now, it's time to keep a good eye on this trade. Keep checking back for updates.

PALM - update

I had to do a bit of work on PALM this past week, here's the chart:

I still have my bullish bias on this stock. We're currently trading sideways and I'm anticipating a breakout to the up side. Some technicians would call this pattern (with the converging blue lines) a "pennant".

I originally sold the Credit Spread on 10/12 for $0.57. However, we got a day away from the October Expiration and my short leg of that spread (i.e. the $17.00 October Put Option that was sold) was in the money. What this means is that if I let Friday go by and I don't close the trade first - then I'll have to buy 100 shares of PALM for $17 (even though it's trading lower). So, this is bad.

Instead of having to buy those shares, I instead closed out the trade by buying the option I sold and selling the option I bought.

I closed out the trade for $0.77. So, I had an initial loss - boo, hiss.

I sold the spread for $0.55 and bought it back for $0.77, which is a $0.22 loss per spread sold.

However, the trade is not done. Instead of just taking a loss, I looked back over the trade and I'm still bullish. I still think I'm right and that it's going to breakout to the upside.

So, I "rolled out" this spread to the next month. If you look up "rolling out" for an option online, then you'll get more info than I'll provide here.

I rolled out this spread and sold the November 16 Put Option and bought the November 15 Put Option for $0.40 credit per spread.

So, I had an initial loss of $0.22, but then brought in $0.40 on a new spread. This gives me a net credit to date of $0.18.

I now am looking for PALM to move up and break out of that pennant. When it does, I'll close my trade down with a net profit.

Keep tuned for more updates on PALM.

PENN - update

Okay, I'm a bit behind in the blog here, and there's been a bit of action due to the October Expiration which was Friday 10/16/09. So first is the PENN trade update, here's the chart:

Two days before expiration, 10/14, I bought the October 25 Put Option that I initially sold back on 9/18/09. I sold it for $0.45 and bought it back for $0.05. So, I made a profit of $0.40. I highlighted it on the chart with the blue box.

Two days after buying back that sold option (not highlighted), I then sold a November 25 Put Option for $0.95. I did this in case the stock starts going against me, or if we just kinda drift sideways a bit.

If the stock goes against me, then that option that I sold will go down in value. If the stock just drifts sideways, then Theta will start eroding it's value.

That's it for PENN

New Trade - LVS

Just put on a new trade today - a BEARISH one. I like this because my other positions are bullish and in case this market turns around and starts dropping quickly on us, I'll have some protection with this trade.

I got into LVS, here's the chart:

First of all, we're into earnings season now, so it can be a wild ride. However, the earnings on this stock is not out until after the trading day of November 10th, so we've got some time for this to work.

Looking at the chart you see that it had a nice run up and the high was that black candle. If you just think about what that candle means, along with the huge relative volume that accompanied that day you'll realize that:

1. The price gapped up from the previous day

2. However, after the gap up, it only went a little higher than the open

3. Then the rest of the day it traded down down down

4. This was done on big relative volume

So, by looking at that candle we can see that after it opened, the rest of the day the sellers stepped in and kept selling this stock lower and lower. Then six trading days later the sellers pushed the price back below the recent support level around $18.30ish. The price then dipped down to approx $14.40ish, went back up to that old support/new resistance level and is now looking like it's rolling back down from that new resistance level.

I'm looking for this stock to get back down to the $14.40ish level or lower.

In addition to that price action, I looked at a few other items to help determine the bearish bias I have on this stock, these are:

1. The stochastics indicator is high and is rolling over - pointing to a possible drop in stock price.

2. The Point and Figure Chart on www.stockcharts.com puts the target for LVS at $8.50

3. Stocks in the same industry group are getting weaker as well, such as: WYNN & MGM.

I don't think the stock price is going to drop to my target within 2-3 days, but that would be splendid if it did. I think it'll probably just float down there as there might be some good market strength due to earnings in general. So, I didn't take an aggressive trade.

Here's the trade I entered:

A November Bear Call Credit Spread. I sold the November 19 Call Option and bought the November 21 Call Option for a credit to my account of $0.57 per contract.

The nice thing about credit spreads is that I have quite a bit of flexibility when it comes to price action. Here's some possible scenarios:

A) The stock drops like a rock to $14ish within a few days - I would exit and take profit

B) The stock drifts down to $14ish taking a couple of weeks - I would exit and take profit

C) The stock just drifts sideways between 20 - 15 - I would let time decay kill the values and take profit once I realized 80% of the initial credit (i.e. I could buy back the spread for $0.11 per contract)

D) The stock goes completely opposite of what I thought and blasts through the 19 price that I sold - initially I would have a loss (and then would have to do some other trading to "fix" it)

As you can see, there's flexibility in credit spreads. 3 out of 4 scenarios benefit me, where as if I just flat out bought a put option, then time decay would be working AGAINST me rather than FOR me.

We'll see what happens from here...

New Trade - PALM

I warned you a few days back that we're going to start trading some different stuff and this is the first one.

I'm taking a bullish position in PALM.

Here's the chart:

So here's how I came across this trade. Everyday as part of my trading routine I go to www.finviz.com for basically 2 things: 1) I want to see if there's been any insider trading - specifically insider BUYING, and 2) I do stock searches on there - mostly I'm looking for big volume spikes.

Back around 9/23 or so, I seen on Finviz that there was some MAJOR insider buying on PALM on 9/22. The insiders bought a ton of it at $16.25. Coincidentally, this was the same day as that big white bull candle on 9/22. I did some prior research on PALM and found these exact same insiders bought at the bottom back in March - they know something, hence "insiders".

So, I put PALM on my watchlist. I wanted to make sure that the price stayed above the $16ish mark. This would tell me that $16ish would be a good support level. As you can see by the chart, price did test that area a bit, but support has held.

You'll also know that today we had a close above the most recent prior day's highs - meaning: buying pressure has overpowered selling pressure and it's time for this baby to pop up.

Usually when you get a huge move like PALM did on 9/22, it takes the stock awhile to kinda take a breath and regroup before making the next leg higher. And, I believe we're ready for that next leg up now.

So, today I actually placed a "Bull Put Spread". This is a type of "Credit Spread". If you are not familiar with these type of spreads then please stop here and look them up online.

Briefly, a Bull Put Spread is a type of Credit Spread (I'll get to this later). In this spread you sell a put option and simultaneous buy a lower put option. Sounds stupid, but it works well. You believe that the stock price is going to go higher and therefore both the option you sold and the option you bought will decrease in value. Once they decrease, then you want to buy back the option you sold and sell the option you bought (exact OPPOSITE of what you did when you entered the trade). Still sounds stupid, I know. Stay with me.

When you first entered the trade, the amount that you sold the put option for was greater than the amount you paid for the other put option that you bought. So you got a "credit" to your account - hence "Credit Spread".

Now you want 2 things to happen to help the option values drop: 1) you want price to go higher (bullish) and 2) you want time to keep on ticking by. The sweet part is that you already have #2 covered. If time stops then we got bigger issues than trading.

Remember some time ago I explained Theta and how it increases as we get closer to the expiration date? Well, the trade I'm taking is for the OCTOBER expiration, which is in 8 days. Also, I have 2 weekend days in there as well - remember, Theta happens EVERY SINGLE DAY whether the market is open or not. So, at this point Theta is just smoking right now, these options are losing tons of value every day from time.

So, I sold the October 17 Put Option in PALM for $0.65 and simultaneously bought the October 15 Put Option in PALM for $0.10 which gave me a credit of $0.55. So now, as long as the stock doesn't go completely against me I'll have a winning trade AND Theta is ripping value off those options each and every day.

To close this trade, I'll either buy back the October 17 put and sell the October 15 put, or if the stock price is well above 17 then I'll just let both options expire worthless and keep the entire $0.55.

Here's a screen shot of the broker filled trade:

Conspiracy Theory????

This may sound like some sort of crazy conspiracy theory but just ponder it over, and after reading this just watch your trading to see if you come across it.

Many times you'll feel like the market is "out to get you". You be in a trade, then the price will go against you, it'll hit your stop, you'll get out of the trade for a loss, and then it will turn back around and eventually hit your target!!! This has not only happened many many times to myself but to other traders I have spoken with as well.

My theory is this: there are many small traders like myself (we're called "retail" traders). Most of us have been taught by some sort of educational system - like Investools or similar. Many of those educational systems use similar set ups for entries - like the way I enter. And also, they use similar stops.

So, if there are quite a few people trading the same way and having the same stops (or basically in the same general area) then it would be beneficial to the market maker that IF the price got close enough to all those stops, then maybe the market maker could manipulate the price JUST ENOUGH to trigger those stops. If he/she could do that, then they would realize a great profit from all those stops (your loss, their gain).

I know that market makers can't move the market by large price amounts, but I do believe they can move it a little. And, a little is all they need.

Refer back to the last post with STZ. Look at the candle where I got stopped out. Now, look at some of the candles before that. Do you see how the price stayed above $15.25? Then on the day I got stopped out the stock opened and the price dipped all the way down to $14.77 then it bounced back that same day to close at $15.15. After that day it started trading higher.

Now, if you got into a position in STZ at some point shortly after 9/16/09 don't you think that where the bottom tail of that candle where we got stopped out is located would be where MOST people would place their stops?

When you place a stop in the brokers system, then it's there for the market maker to see. They can see where all the stops are located. And besides that, market makers are PROFESSIONAL traders, they are some of the best of the best - so it wouldn't take much of their market intelligence to figure out where most stops would be.

Go back and look at some charts and see where you'd get in and where you'd put your stops and see if you can find examples like this. Also, just keep this in your mind to see if you encounter this at a later time.

At this point in time, I have no real solid way of beating this repeatedly. But, if you can watch the market every day (even if it's at the end of the day) then maybe you don't put your stop in the system just in case a candle tail would stop you out. Just a thought.

Now, let's talk about Bigfoot...

STZ - closed

Here's a chart of STZ:

We took a loss here. This is about the worst thing that can happen to you in a trade, so we might as well get this example out of the way early so hopefully we won't run into it too much anymore.

The left-most blue boxed candle shows you our bullish entry. The next day was a small candle, then the following day we had a big bearish candle that went against our trade. The big question you should be thinking right now is "Why didn't you sell an option for protection/income?" Good question!!

The reason I didn't sell an option was because the price moved against us so quickly (within 1 large bear candle) that our stop was relatively close. There would not have been enough "room" to move down to capture a decent amount of profit from a sold option. Most likely, if it would have gone down a decent amount just 1 more day, then I would have been out of both trades. Due to the "bid/ask" spread from the market maker I most likely would have been even on the sold option.

After that big down day against us, the price just kinda floated sideways (just like most of the market at that time) and instead of bouncing up, it hit my stop - Oh, and THEN IT BOUNCED BACK UP. Murphy's Law.

You'll find that many times a stock will come down, touch your price, get you stopped out for a loss, and THEN RESUME IN THE DIRECTION YOU THOUGHT. More on this in the next post, but for now let's just concentrate on our loss.

So, on the right-most blue box I was stopped out for a loss. I sold the option back to the market for $2.80.

I initially bought the option for $3.60 and sold it back for $2.80, so my loss was $0.80, not a killer but still a loss is a loss.

PENN - update

Check out our chart:

As a reminder - we got in at the blue box thinking the stock price would go down to our target of $20.75. However, as soon as we got in, the market went against us and we sold an October 25 Put Option for $0.45

Since that time the price has drifted lower. This has made both the option we bought and the option we sold go up in price. So, we have our bought option helping us and our sold option hurting us.

But there is good news and that is - time has continued on and has not stopped, therefore Theta has been working FOR US in our sold option.

We sold that option for $0.45 and we can buy it back today at $0.40. So we've made a simple $0.05 even though the price has gone against us in that trade. Currently Theta is helping us by $0.04 per DAY. Not a huge amount, but if you analyze the numbers a bit this means that Theta is currently knocking off 10% of the value of the option PER DAY (weekends included) even though the price is going against us.

Thanks Theta

Moved

There's been some recent major price action in the market since the last post. Ironically, it was during this exact same time that I moved to a new residence and basically could not trade. Figures. At least I had some stops in place to protect me.

Remember this - when ever you are going to be unable to trade during a specific time period due to: vacation, moving, or whatever - then make SURE that you have your stops in place and can automatically get you out if the market goes against you.

Also, if you are going to be gone for an extended period of time - like 2 weeks or so, then close out your trades before you go. It's better than having an unexpected surprise waiting for you when you are finally be to check the markets again.