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Using Options for Swing Trading


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Using Options for Swing Trading

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  #51 (permalink)
Market Wizard
Chicago, Illinois
 
Experience: Intermediate
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These are the stats of my trading in Q2 2013


Definitely room for improvement but ironically this was a lot better than Q1 2013 if I remove the HNZ trade. That is a positive to take from the stats. This was my first quarter using spread trades, and I made some mistakes that I have learned from.One thing I want to mention is that I was up over $1000 on PNC and up a sizeable amount on a Ford trade as well. However, thanks mostly to greed, I was not taking profits off the table or reducing my size as the market pushed higher, and so when the market had a wide range and sell off on May 22nd, I was stopped out, or gave back a chunk of profits.

Things to work on
  1. Trading illiquid option chains meant that I encountered a lot of slippage. This quarter, I have committed to trading more liquid options where I can, and being more cautious with my stop placement for illiquid options.
  2. My average winner was not 3x (or even 2x) my average loser. In fact my average winner was smaller than my average loser. That is a quick way to blow an account up. In Q3, I am focusing on verbalizing where my target price is in my analysis.
  3. Holding onto an entire position increases the likelihood of illogical trading decisions When I had a position that fluctuated +/- $200/day, it was harder for me to recognize and manage risk. Now, I am more concerned about locking in profits this time around. So far in Q3, I have already taking some profits (and risk) off the table by selling bits and piece of my position earlier.
  4. Choosing the right strike price: I realized this in Q3 2013, but it took place in Q2 2013. I was too aggressive in my strike prices and it really was not advantageous to my bottom line. Because I was choosing Deep out-of-the-money options, I was directionally right often, but I was not capitalizing in an efficient manner. For example, I might have bought 12 option contracts deep out-of-the money @ $0.25/ct instead of buying 6 contracts at the money for $2.50. The money that I have to invest up front is much lower when the contracts are out of the money, but a) it is harder to get a return unless the move is damn near parabolic and b) even if I double my money, I invested less, so my overall take home will be less as well. Deep out of the money options are advantageous if they end up in-the-money eventually, or at-the-money quickly, but other than that, I am transitioning to trading at-the-money options and slightly in the money options for cheaper stocks so that I can set my stops better and make better profit off of those days the stock moves 1 to 3% higher instead of only the days it moves 5 to 10% higher

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  #52 (permalink)
Market Wizard
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Experience: Intermediate
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Breakdown
AAPL Vertical Spread

My reasoning for the Trade
Here is the visual explanation:


Reasons for concern
Earnings Report around the corner might bring volatility

Trade Overview
I was spot on in this trade which was a good thing AND bad thing. I expected AAPL to reach resistance, but for it to consolidate and/or head lower after consolidation. Instead, AAPL reached my resistance level and did not stick around.


I did not realize that the target had been hit until I did DD today. I remember being up nicely to start Thursday morning though.

Entry & Exit plotted


Thoughts
Microsoft and Google disappointing on their Earnings kinda guaranteed a move lower. I would have gotten out sooner, but the initial gap higher threw me off. I could've sold into that as well since technically there was not much more upside to the position at that point anyways.

Numbers
Net P/L: Lost $170.81

What I did that I can be proud of
I took some profits on Thursday and closed out 1/3 of my position. Since Friday was filled with such uncertainty, I probably should have closed out 2/3 of my position and left one to ride. Still an improvement over the last quarter of trading. Also, I lost less than $200 on the position.

How I can become better for future trades
I like the trade idea, the next time though, I will be more attentive with a weekly option. I have been trading LEAPs and options with +2 months until expiration. I was not mentally prepared to watch an option closely and it showed with my handling of the position. I can/will set alerts for price targets so that I have an reminder of what my objective is. Also, my gross loss in the position was actually only $123, but commission bent me over and had its way with me. One reason for this is because I made a mistake and sold the last two vertical spreads separately when I intended on selling them at the same time. I plan on only using ThinkOrSwim for complex options and margin heavy trades, so I will be paying substantially less in commission moving forward.

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  #53 (permalink)
Market Wizard
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I am kicking myself about missing the MSFT Earnings Trade. It doesn't take a genius to know that Surface RT tablets are worthless compared to Surface Pro tablets in terms of capability and so they will sit in warehouses forever.

Here are some more Earning Trades that follow the similar logic that I feel towards Microsoft, "Yeah, your company stock did good last quarter but your company is still an industry laggard bro"


JCP (Earnings Play)
Strategy: Diagonal Bull Put Spread (executed Friday)
Options Bought: 5 JulyWk4 $16 Puts
Options Sold: 5 August $15 Puts
Implied Volatility 15th percentile
Initial Debit/Margin Requirements: $13 per diagonal spread (I have five total spreads) & $500 in margin
Stop-loss stock price $15 before the end of the upcoming week
Target stock price ???
Reasoning: The overall trend is still down and I don't anticipate them to turn it around anytime soon.

I am betting that the price of the stock will not go lower than $15.5 this week, but that after the earnings report, it picks up momentum to the downside. Two of the last earnings reports had big moves of up to 16%. With this trade, there is a debit up front. I was hoping to get a credit so that I own the options for free after the end of this week, but the strike price would have been too deep out of the money imo.


GRPN (Earnings Play)
Strategy: Diagonal bull put spread (executed Friday)
Options Bought: 6 JulyWk4 $8.5 Puts
Options Sold: 6 August $7 Puts
Implied Volatility 11th Percentile
Initial Debit/Margin Requirements: $3 credit x 6 spreads ($900 tied up in margin)
Stop-loss stock price Break below $8 prior to the end of this week
Target stock price ???
Reasoning: GRPN rallied because they changed their CEO. The man is not a miracle worker though, and I think that things will have to get worse before they get better because the current CEO has to unwind the mess they are in and do damage control first.
Special Notes: This trade is counter-trend trade.

If the #s disappoint, I feel like one of two things will happen... either a) strong money continues to accumulate shares like they have been doing so a move lower is absorbed quickly or b) smart monet realizes what a dump this is and starts dumping all the stock they have accumulated. Seems like a lower probability of success going against the trend, but a higher chance of reward if it is a really unexpected #


VALE (Earnings Play)
Strategy: Diagonal bull put spread
Options Bought: 13 JulyWk4 $14 Puts
Options Sold: 13 August $13 Puts
Implied Volatility 64th percentile
Initial Debit/Margin Requirements: $1 credit for each spread (Ties up $1117.20 in margin)
Stop-loss stock price Close out the order if the stock goes below $13.59
Target stock price ???
Reasoning: Looking back I am not quite sure. I think I got trigger happy because of JCP and GRPN.
Special Notes:Not quite sure why I am in this trade. I will potentially close it out this Monday unless the stock rallies. I am already down on this position because it sold off 3% after I entered on Friday morning. Mining companies are expected to do bad, so the upside potential is probably greater than the downside potential. With that said, if this rallies, I will potentially own the puts for nothing

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  #54 (permalink)
Market Wizard
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BP (Earnings Play)
Strategy: Calendar Spread (Scheduled to go live Monday)
Options Bought: 16 July Wk4 $44.5 Calls
Options Sold: 16 August Wk1 $44.5 Calls
Implied Volatility 31st percentile
Initial Debit/Margin Requirements: $136 (no margin)
Stop-loss stock price AON trade
Target stock price ???
Reasoning: Theoretically, I think that BP can reach $44.5 by the end of this week at the rate that the energy sector is going. I think a good Earnings report will be a catalyst to break out of the symmetrical triangle on the Weekly and head higher.

Special Notes: This play uses two Weekly options and is a pretty cheap way to make a leveraged bet going into the Earnings. Only a few days after the Earnings Report until the Long options are set to expire though. I have learned my lesson from the AAPL trade and will be watching the stock like a hawk if/when the short options expire worthless.

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  #55 (permalink)
Market Wizard
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Nice pop on VALE to get those short options out-of-the-money again. I will hold onto them as long as it doesn't make a lower low this week.

GRPN is rallying but I am hoping it gets dunked lower as it tests the $9 level:


The closer it is to $8.5 by the end of the week, the better my shot at my puts being ITM on a disappointing earnings.

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  #56 (permalink)
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I have bee reading this thread with interest, thank you for sharing. Do you also trade non-directional structures around earnings?

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  #57 (permalink)
Market Wizard
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Cogito ergo sum View Post
I have bee reading this thread with interest, thank you for sharing. Do you also trade non-directional structures around earnings?

I have a Roth IRA with some LEAPs in it and I am thinking about buying some short term options to turn them into long Strangles in the short term to prevent downside losses.

Other than that, the main non-directional play I would anticipate using would be an extension of my current diagonal trades by adding a diagonal bear call spread to my normal strategy of a diagonal bull put spread. That would turn it into a double diagonal.

I am gonna be looking at CSCO and HPQ when I get home because those are two more underlying that I think can disappoint but I will contemplate the double diagonal to see if it is viable. Also, they have weeklies so that allows me to bring down my cost basis repeatedly before the E.R. That way, I might start out with a front week weekly and the weekly/monthly option that the ER is in.... Instead of a diagonal though, I can throw a double calendar spread, and then keep rolling back forward the short option to bring in profit/bring down cost basis.

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Market Wizard
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TAN (ETF for solar stocks) is looking primed for a potential move higher in August


I am currently holding GTAT and STP (and JASO in my Roth IRA)

However, w/ GTAT and STP both are August expiration. Since that trend shown above is on the Weekly, I might need more time to take advantage. I am looking to close out my existing positions on both options during an intraday pullback sometime this week and then roll them forward to the September expiration. I am gonna be buying ITM options for a higher delta because I have a clear idea of support that I want to jump out if it is broken.

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  #59 (permalink)
Market Wizard
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Google Finance just screwed me over. It reported MTG's earning report as being on July 29th (and still currently says that if you'd like to check here). I scooped some In-the-money shares up earlier this morning on the pullback and planned to sell my position going into the earnings report later on.

Turns out the earnings report is tomorrow morning. FML.

I've got about a grand at risk right now w/ a delta of 0.96. Yikes. I am gonna grab a pizza and watch a movie to decompress. I will sell some shares short in my ToS account to hedge my position as much as possible

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  #60 (permalink)
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Bermudan Option View Post
Google Finance just screwed me over. It reported MTG's earning report as being on July 29th (and still currently says that if you'd like to check here). I scooped some In-the-money shares up earlier this morning on the pullback and planned to sell my position going into the earnings report later on.

Turns out the earnings report is tomorrow morning. FML.

I've got about a grand at risk right now w/ a delta of 0.96. Yikes. I am gonna grab a pizza and watch a movie to decompress. I will sell some shares short in my ToS account to hedge my position as much as possible

I would also look at Yahoo.
US Earnings: Company Earnings Calendar - Yahoo! Finance

Matt

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