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Option Trading (2014)


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Option Trading (2014)

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  #1 (permalink)
 Bermudan Option 
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New year, new journal. Looking to put in the effort to have a successful 2014 and of course make it rain.


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 Bermudan Option 
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2013 in review
Q1 I learned the hard way that time-decay is a killer. I traded solely out-of-the-money options and save for a few trades, I was not very consistent at all. Sucky, stressful time for me. I got to a point where I rooted for a rally every morning, because I would lose money if the markets went sideways/lower. Lots of stop outs due to time decay or trading illiquid spreads.

Q2 I took a month or two off, and read the majority of Options As A Strategic Investment also reread Trading in The Zone and refocused my attention. Using my new found knowledge of options, I did a lot of spreads... Mostly all diagonals and calendars. Was a much more disciplined trader than in Q1 although I didn't have much to show for it other than a hefty commission balance.

Q3 Here I felt like I was turning a corner. Although I did try some earnings trades and more spreads, I also started shifting to trading deep-in-the-money options... basically trading leveraged stock positions. Started to see more results.

Q4 Was doing good for most of the quarter and then had 1-2 bad days that gave back most of the profit from Q3 & Q4. It was not thanks to trading on tilt or being on the wrong side of a really bad trade, it was moreso about being overly bullish and multiple positions being stopped out on a 1-2 day pullback in the market. It is frustrating to stair step higher in terms of P&L and then give it back one day when I was over-leveraged. I took another breather from trading around this time again.

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 Bermudan Option 
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Present Day
After the bad 1-2 days of trading towards the middle of Q4 2014, I stopped trading for a few weeks. Towards the end of December, I started up again. I have gotten back into that groove where I make a little time after work to look at charts, and I have some scans set up that makes DD a lot less time consuming than it used to be. Because I still work full time, I don't have a lot of time so separating the signal from the noise is. It is harder to pick the wrong stock when it is automatically filtered out by scans. For example, stocks that are in a downtrend or that have an illiquid option spread cease to exist in my trading world because my scans filter them out automatically. I set my criteria in the beginning and it is automatically followed now... no second guessing on my end because the scan is automated.

The lack of extra time I have has benefited me in another way as well. Since I don't have a lot of time, I really can't afford to pay attention to the media, or everyone sentiment online. When I first started trading (and even more recently), I used to inadvertently seek out others opinions to confirm what I already knew. "Does anyone else see the head and shoulders forming?" "Is it just me or did the Russell 2000 pull back on light volume just now?" "Does anyone else think now would be a good time to take some profit off of the table?" etc. Those types of interactions appear helpful at first in the quiet solitude that the trading world offers, but after a while, it becomes addictive and counter-productive. It is harder to act on a signal you see in the market if no one else seems to notice it, and on the flipside, it is easier to rush headlong into a false signal if others see it as well.

Ok so I have established that I don't have as much time as I would like, but yesterday, while eating some leftover pizza, I realized I need to make enough time to do what I need to get done and be a better trader. I watched a few trading videos but more importantly, reflected on the progress that I had made in the past year. When I look at myself in Q1 2013, and compare it to present-day Q1 2014, it is night and day. I am much more patient and calculating with my trading. I want to put in the effort for the next 12 months so that I can look back in Q1 2015 and be even more impressed by my progress. I know that this is attainable for me, and I am ready to do what it takes to make it happen.

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 Bermudan Option 
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The market was super bullish last year. With that said, the market in my opinion is unlikely to maintain the same bullishness throughout the 2014 year. As a result, I want to have at least one long term short that I hold onto for an extended period of time.

Precious metals used to be the vehicle to put your $$$ when fear entered the market, but the precious metals play is dead in the water imo, so I think it is a prime candidate for a short position.

Looking at 99.9% of the charts for Gold/Silver related stocks, they are all in a long term downtrend. I am basically fading the pops on the weekly and looking to take advantage of relief rallies.

Here is a position I entered today… I bought Puts in Silver Wheaton (SLW) as I expect it to test and/or break below support on the Weekly in the next few months

I purchased the March $19 Puts as a result




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 Bermudan Option 
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Disappointing entry with SLW...

Still in the trade but it is currently going against me. Often, it is a bad sign when the trade goes against me as soon as I enter.

I traded SLW a week or two ago and I got stopped out so this is my second shot at the stock. I was stalking the 1min chart yesterday when it made its high of $22 yesterday and sold off on low volume. I felt like I missed my shot, and so when I saw the stock falter @ the $21.40 level, I was a bit too keen to enter a position.

My rules dictate that volume (and preferably a TA pattern) is required prior to my entry. I did not see any big volume so I should still be on the sideline stalking. It doesn't happen as nearly as it used to, but in this instance, I can confirm being afraid of missing the move, and entering my position prematurely. I may get stopped out as a result, but that is the price I pay for breaking my rule. I will be ready to make up for this by working on my patience and picking my price instead of letting the market pick it for me.


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 gfmatt 
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If you want a long term short, why are you using a 1 min chart for entry? 1 minute is noise for a long term position.

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 Bermudan Option 
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gfmatt View Post
If you want a long term short, why are you using a 1 min chart for entry? 1 minute is noise for a long term position.

1 min is noise in terms of the overall long term trend, but it is not noise when it comes to determining what large volume traders are doing. Since I am trending trading off of TA patterns and volume, this is the purest representation of volume I can get outside of a tick chart/ Level 2 Screen. However, if I do not pay attention to volume (and I did not for this entry), I am definitely entering based on noise. I feel like I flipped a coin to determine whether I am profitable. Will just have to regroup and see what happens

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 Bermudan Option 
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Not liking the entry I took in SLW in hindsight. It didn't meet my entry criteria, but since I am so long term bullish on precious metals, I was afraid of missing the big move. However, if it is indeed in a long term downtrend, then there will be plenty of opportunity to ride the stock lower. As a result, I should be more patient in my entry. This applies to all the stocks I trade... they are all in pronounced trends, so I really should finesse the entries, and only enter when I see what I perceive to be value.

As for today, I am sitting on my hands. I feel pretty restless, perhaps because I didn't get a lot of sleep last night. One other factor is because my IRA is doing very well and I seem to be spinning my wheels in my regular accounts. However, when I think about it, it is better to be moving sideways in value than lower. The old me might have forced a trade but I am content with waiting for the weekend to come for me to really sit down and evaluate what are some worthwhile trades to put on. More importantly though, I need to stop focusing on my P/L and just trade the charts. I got mesmerized by my Roth IRA value earlier this morning, but that is not going to help me manage my positions at all.

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 Bermudan Option 
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Stopped out of SLW. I learned two lessons in the trade:
  1. Do not enter positions until you get the confirmations that your setup requires
  2. If a trade is entered without adhering to my set-up, then there is no theory that is being tested by me in the market. If I do not have any logical reason to be in a position, I should exact immediately

Overall, can't complain though, the markets are chopping sideways but my main account is treading water for the most part. Looking to do some more in depth review over the weekend. The fact that I am out of SLW gives me the strength to look at the chart objectively again and try to figure out where I want to potentially go short again. Might play GLD though since it is more liquid and the potential pay off is much larger if my options end up ITM.

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 Bermudan Option 
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During the weekend, I do most of my DD for the upcoming week. When I see a stock that I like, what I normally do is set an alert for the price I am willing to pay and then forget about it. If there is a pullback in the stock, but my alert isn't triggered, then I never get in on the stock and c'est la vie. If the pullback is deep enough to the price I am willing to pay, then ideally I enter when buyers/sellers perceive the price level as valuable and enter/exit positions.

With SLW, I received the alert that the trendline was being tested, but that initial trendline has not held. Additionally, I never received a strong confirmation via volume. As a result, price has drifted higher on average/mediocre volume and I watched the 1-min charts for a few days to find an entry point.

However, because I have not had a concrete new level of support/resistance that would illustrate that the trendline theory trade has been invalidated (the Weekly trend-line in retrospect has been is pretty vague/subjective because there was a lot of large wicks that can drastically alter where the context within which I view the overall trend). I definitely want to finesse the trade, but trendline bounces are notoriously hard to capture when compared to regular horizontal support/resistance areas. It feels much more subjective and harder to prove to myself when a trade idea has been invalidated. For example, I could theoretically still enter a position in SLW if I wanted to because it is still in a long term downtrend and the trendline is still in effect.

Normally, once the trendline is tested, I look for volume to confirm the shift in sentiment. However, because the context that the trendline gives me is vaguer than support/resistance, I really don't have the proper context within which to zoom in to the 1-min timeframe to stalk an entry. In instances like this, perhaps the best bet would be to use an intermediate timeframe to find support/resistance levels to pinpoint where value can be perceived. Something like the 2hr timeframe ideally.

Two stops in SLW in a few weeks. Technically the trend is still showing but I think that I have a more liquid way to take advantage of the precious metals downtrend by reverting back to a good ole fashion trade on GLD. Will keep an eye on the ETF, and apply what I have learned about SLW to create a trade that I am more confident in even if it results in a stop out.

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 Bermudan Option 
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On the way to work mornings I occasionally read lessons of The Daily Trading Coach. I have had the book for years but still haven't made it past the first 20 lessons or so. I always get distracted during the book and put it down. For what it's worth though, I am in no rush to read the entire book. I get the most out of the book when I focus on applying the lessons so I have to remind myself of that instead of skimming through as many lessons as possible. I have read the first 15 lessons a good 4-5 times already and I appreciate them more each time.

One of the lessons that is recommended is that every day/week, you have a goal that you are working towards. Doing this will create a context for improvement and give each trading day meaning outside of "make more money than I lose". Also, it allows me to reinforce my skillset as a trader because I am becoming better each day/week by completing my goals. Doing this allows me to shift how I gauge my competency as a trader: originally I established whether I was a good trader by my overall P/L, but if I implement goals that I am working towards, I can judge my competency based on the completion of the goals I set (and in the long run, the goals will make me a more profitable trader anyhow)

Steenbarger says that the issue with most trading goals are that they are either:
a) Often based off of results which we can't control instead of process that we can control. For example, if your goal is simply to double your account value, that doesn't give you any concrete parameters that you can work on on a daily basis. There is nothing wrong with having a goal that is monetary, but there needs to be subgoals within it that work on what is necessary to achieve that goal.

For example, Peyton Manning might have had the overall goal of winning the game against the Patriots today, but he had to break down that goal to give him areas to work on throughout the week/in the game. Peyton focused on WR making double moves down the middle of the field because the NE safeties were known to be slow when it comes to returning to cover the middle of the field, Peyton also focused on exploiting man-coverage on Demarious Thomas once the key cornerback for NE was injured, etc. While the overall goal was 'win the game' the execution of various subgoals was what made the overall goal a possibility. Too often as traders, we focus on the overall goal, but do not give ourselves a road map with which to achieve the overall goal.

The question Steenbarger says to ask yourself when setting goals is, "What is the difference that will make the greatest positive change in your trading" Here are my subgoals
  • Concrete targets: I have a target every time I enter a trade, but as a swing trader, my positions sometime take a while to develop. When this happens, I run the risk of watching price action and hoping the stock goes 'to da moon' instead of managing risk with regards to my initial analysis. Moving forward, I want consistently plot my target price on charts so that I always have that context when I review my position.
  • Focus more on trading well & less on P/L: No one likes losing money, but recently I have noticed that I have been slightly stressing over 1-2 positions that have gone against me. In Q1 2013 I attempted to tackle this, but it resulted in reckless overtrading as opposed to indifference towards Account Value. Since then, I have evolved mentally and I have little/no qualms accepting a stop out if it was a strong theory. I do still have issues being stopped out on trades that in retrospect were not very sound, or trades that were initially profitable but that retraced. Additionally, I have caught myself focusing too much on intraday P/L as opposed to just taking it a day at a time. I am more accepting when my account takes a slight dip on a market-wide pullback, but I become unnecessarily concerned when I notice that my account is above/below the initial funded amount. I can reduce the stress I feel regarding by doing the following:
    1. Taking partial profits when the stock nears the target price level
    2. visualize stop-outs prior to entering positions. Completely accept the fact that stopouts are a fixed cost of the trading lifestyle.
    3. Remember that stop outs tell you important information about the health of the stock/market.
    4. If the trend is still intact, I now have a chance to get into the trade at an even cheaper price point.
    5. Put stopouts in the proper context: As long as you limit it to the expected amount, it has already been accounted for in my strategy. That is why my risk is 1/3 of my reward. That way, I only need to be right approx. 33% of the time to breakeven
    6. By always being aware of my price objective thanks to my other goal, the approach to the trade becomes more calculating, and less arbitrarily optimistic
  • Choose your price: Only enter the market when the stock sets up exactly as I'd like. Since my trades are often contrarian (in regards to the short term timeframe) I really want to get a clear signal that there is a perception of value prior to entering a position. The markets create new opportunity on a daily basis so I can accept that I will not be a part of every rally that occurs, but I will be ready to take advantage of the few that meet my criteria.

I can sit down and think of a few other areas that I can improve on, but I want to pay a lot of attention on a small amount of goals rather than a little attention on a large amount of goals. These three goals will hold me over for the next month at least, and potentially until Q2 2014. I am going to stick a post-it note in my apartment so that I am mindful of the goals I am working on.

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 josh 
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So it looks like you bought the puts for somewhere around $0.47 or so... and you got out at maybe $0.26 or so. Nothing wrong with exiting if you feel it is not a worthwhile trade. But if you read your original premise, you are talking about long term, even months. So 2 days' worth, and about a $1 move in the stock, is enough to shake you out, when you were looking weeks/months down the road, and when it has to move down $2.50 from your entry just to break-even (assuming you are looking close to expiration since you said "months")? Sure you have lost some time premium, but it's not like it really rocketed against you. Maybe it will wind up being a good move to have exited when you did, but your time horizon initially stated does not match the action you took.

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 Bermudan Option 
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josh View Post
So it looks like you bought the puts for somewhere around $0.47 or so... and you got out at maybe $0.26 or so. Nothing wrong with exiting if you feel it is not a worthwhile trade. But if you read your original premise, you are talking about long term, even months. So 2 days' worth, and about a $1 move in the stock, is enough to shake you out, when you were looking weeks/months down the road, and when it has to move down $2.50 from your entry just to break-even (assuming you are looking close to expiration since you said "months")? Sure you have lost some time premium, but it's not like it really rocketed against you. Maybe it will wind up being a good move to have exited when you did, but your time horizon initially stated does not match the action you took.

Good guess. Pretty much spot on w/ the pricing:


With regards to my position, I agree that time decay was minimal at best. However my $200 risk per trade (including commissions) was hit so the position was yanked as result. I do not think I was overleveraged or anything though, because the trendline and the $21.80 resistance area were both broken convincingly.

Also, I do think that the trade is still potentially worthwhile, but it was no longer adhering to the initial criteria that was the basis of me entering the stock: the long term trendline/resistance level will cause heavy selling in the very near future. (Technically, the criteria that I use for entry was not even used in this trade, so I should have exited immediately. I entered the position and then looked for volume when my strategy involves entering after stop volume occurs)

I expected the stock to move lower, or at the most, move higher a percentage point or two. I entered @ $21.30 and the stock reached $22.60 so technically it is just over a buck, but in the context of the trade, that is a +6% move against me, and a break above key intermediate term resistance on the 2hr timeframe and the trendline I drew (which in retrospect was not that ideal to begin with). This shows that the bullish traders are putting up more of a fight than I can currently withstand.


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 Bermudan Option 
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Stalking Citigroup for an entry. I am watching Citigroup test a lower low and I know I want to wait to see whether volume enters before I enter but there is a small voice in my head telling me to jump in. I realize now that I need to reread my ideas on volume analysis. I haven’t reviewed my reasoning on volume in quite some time, and so the small seed of doubt is starting to slowly grow. On the plus side, I am aware of it, and just typing this post has allowed me more objectivity than I had five minutes ago.
It is unlikely, but I may eventually tweak my criteria for entering a position. I will review what I believe about Volume during after-hours. However, until that happens, I need to stick to what I originally agreed upon: volume confirmation.

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 Bermudan Option 
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Perhaps, save for extreme cases, stop volume can only be determined in retrospect? I have to think that one through. I don’t want to reduce the analysis to: ‘the stock went higher so I should’ve taken the trade’, but it is interesting to see that the stock did go higher and the area that I perceived to be support held.

I definitely don’t feel bad about not taking the trade though. There will be plenty of other opportunities for me to get involved in trending stocks


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 Bermudan Option 
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Stalking GLD trade on a pop higher

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 Bermudan Option 
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Grabbed some Citigroup after it put in a lower low today:

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 Bermudan Option 
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Bermudan Option View Post
Stalking GLD trade on a pop higher

Jumped in GLD on a failed test of 122. Stop @ $122.50

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 Bermudan Option 
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I have realized recently that I do have some negative thoughts to weed out still when a position goes against me. I still have not fully accepted the idea of entering a position with 100% acceptance of potentially losing my money.

I am still too affected by the outcome of the trade as opposed to the reasoning behind the trade. The two are not related in the short term so I have to accept when things go against me and focus on the long run. Easier said than done but I can workshop through it. The first step is being aware of the error and the second step is changing my thought process.

Let's git 'er done!

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 Bermudan Option 
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Filled on CX trade as well. Front month calls. This one is going to be less than a month though because I want to exit this trade prior to the earnings report in February. Sitting on hands for the rest of the day more than likely.


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 Bermudan Option 
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Stopped out of Citigroup and CX.

GLD is hanging in there. Market went against me at the open but I believe there was a spike in IV and my position lost next to nothing as a result. Currently the gap higher is being faded but we will see if it lasts.

One thing that I need to remember is that I will likely be stopped out more than I will have a winner. That is ok as long as my wins are many times larger than my losses. I have been doing well at keep my losses relatively small. There was some slippage in CX but overall I have been cutting losses quickly.

I am becoming more accepting of the idea of letting a long term trend unfold and being indifferent about the short term volatility that occurs against profitable positions. To a small degree, this post in PandaWarriors journal reminds me about the long term trend:

Sayounara View Post
Building an equity millipede @ Forex Factory
it's a thread describing and discussing the building and holding of large forex positions for a very long time.


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 Bermudan Option 
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Took a shot @ some MTG on a very deep pullback. Still feels weird to buy when everyone is selling.I suppose I will find out if I am right quicker than anyone else in the market though


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 Bermudan Option 
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I realize now that I haven't been analyzing my trades like I should be. Tradervue has been collecting dust (and a monthly payment from me) for the last few 2-3 months. I am working on utilizing the great program more moving forward.

After aboout 1 month of trading, it has been a bumpy start to 2014:


Takeaways
  1. I need to consistently review my trades: If not, then:
    1. I won't have a context to view my trading and it is harder to determine where I should be focusing my efforts as a result. My recent questioning of my volume analysis entry is a somewhat related example of this.
    2. If I do not review a large subset of data (ie results in a month/quarter/year), then I focus too much on the short term which is full of noise. I become only as happy as my last trade.
  2. Changes in strategy require changes in expectations: Last year I traded based on the 2hr chart. However, because of my success in my IRA account, I am transitioning to trading based off of the Weekly chart. The effect on my expectations is two-fold:
    1. Trading OTM options instead of ITM options means a lower delta. If a position moves in my favor, it will require a bigger move than previously to become profitable.
    2. I will have to be mentally prepared to deal with declines and uncertainty in positions for extended periods of times as stocks will often have week(s) of retracement/consolidation after a strong directional move that often shakes out shorter-term traders
    3. My percentage of winning trades may take a hit. I think that in the long run, I might be able to avoid this, but that is to be determined...
  3. Changes need to be structured prior to implemenation: I committed trading stocks in 2014. I like that I saw opportunity in stock trading again, but moving forward I need to create a more structured approach towards it. I jumped into some charts that I liked and was stopped out. If I had used options on the stocks, I would have been stopped out as well, but I did not have a concrete timeframe that I was going to hold for so the trade was doomed from the get-go.
  4. Analysis creates Mindfulness: I listen to a lot of online radio/podcasts to kill time. Harvard Business Review: Ideacast and London School of Economics are two of many Podcasts that I follow and both links above talk about the relationship regarding stress and mindfulness. In trading, mindfulness to me is being aware of heuristic biases and patterns (good and bad) that are occurring subconsciously.
  5. I need to (re)review the following:
    1. Volume confirmation during trend reversals: I am due for a refresher course to reinforce my convictions.
    2. Volume confirmation of high probability trend continuation. I know what to look for, but I have been overlooking it in my recent trades
    3. Zooming in on intermediate term timeframes to determine price of value prior to zooming into short term timeframes to determine entry.
    4. Setting stops w/ OTM options. I set my stops using the delta as a rough guide. I think, but need to verify w/ 100% certainty that this is a viable strategy. Here is how I break it down: If I want to set a stop that is 30 cents away, but the option's current delta is 0.44, then that means that the option moves approx. $0.44 for every $1 that the underlying moves. It tracks the underlying @ roughly 44% so the stop on my option contract only needs to be 44% of a stop on the underlying stock. So $0.30 x .44 = 13.2. This means that although the stock price is 30 cents away, because of the delta, I can size my options position as if the stock is only $0.13 from breaking support/resistance (ceteris paribus of course). Smaller stops = larger positions and potential profit

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 Bermudan Option 
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The Gold Trade:
I have been bearish on the Precious Metal trade since early 2013. I first started taking a stab at the trade when GLD was in the $150's and SLW when it was around $36. However, I sorted the data so far on the trades and they have been unprofitable thus far. I have not given up on my bearish sentiment, but the data is a reminder that although the idea may be sound, the execution has room for improvement. This is partially due to errors I have made, but also due to the volatile nature of precious metals. They doesn't trade smoothly and are known to gap higher/lower on a regular basis. They are losing their correlation as a risk-off trade, but it still exists to a degree so when fear enters the market, this can push price higher temporarily.

Here are my results after a year of Precious Metals trades:

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 Bermudan Option 
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Stopped out of MTG on a deeper than expected pullback. There was a subsequent bounce back above the opening price but c'est la vie.

Jumped into ETFC but going to be sitting on my hands other than that.

GLD is doing well so far. If it clsoes below 121 then that is a great sign and might lead to a gap lower to open tomorrow morning:

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 Bermudan Option 
Chicago, Illinois
 
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Looking to potentially enter a long term trade on ZION tomorrow if the price action is right:

Looking at a stop $0.80 - $1 away.

Can't decide if I want the July $34 or the April $33. Leaning towards the July $34 for the extra time it gives me... I suppose the lesson I learned around this time last year is that Time > Size almost every time.


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 Bermudan Option 
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^^^ Missed the pullback in ZION but looking to get involved on a shorter term pullback on the 1hr/2hr chart.

I realized what people on numerous boards were telling me... I need to throw that damn 1-min chart out the window for now. It was too hard for me to tell what is strong overall, vs what is strong volume relative only to the current intraday volume. I had a few stop outs on the deep pullback the market had in January.

It did a slight number on my confidence. I had to hold my nose and buy stocks recently because I was so certain that it would be another stop out. This time though, I focused more on the 2hr chart putting in higher lows prior to my entry which seems to have improved my positions so far. Currently I have option positions in the following stock:

MTG
RVBD (just purchased today)
RF

Also, I have a stock position on KWK

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 Bermudan Option 
Chicago, Illinois
 
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Hey all. I am still alive. My portfolio is doing reasonably well. I haven't traded as much as I used to which I think is why my account has been more consistent. I did open 2-3 new positions in the past 1-2 weeks thanks to what I perceived to be a weak pullback in an uptrend.

Current Holdings
HLF diagonal bear put spread: Short September $35 Puts, Long November $30 Puts


MSFT: Long Oct $45 Calls


XRX: Long Oct $12 Calls


NLY: Long Nov $12 Calls


BRCD: Long Oct $10 Calls


TSO: Oct $67.5 Calls

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