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: