Sunday Prep and Follow up May 30, 2010

Last Week:

It seemed the majority of the media and even the Bear blogs were looking for a bounce last week. It didn't bounce . The weekly spx ended around .30 higher than the previous week. I thought it would meander around in a trading range so I sold the 2 spreads in the previous post on SPY and DIA. I thought I would have earned more at this point but the VIX has stayed high while price has been up and down but so far with out threatening my positions. I will hold them until the week of expiration or I can buy them back for .02 cents.

I also entered a long position in GDX by buying a 48 Call for $2.00 and sold it 3 days later for $2.85. I agonized over whether or not to close it out when it hit $3.35 on the second day. Turns out I should have because it hit a descending trendline I had drawn, stalled then plummeted, losing all of that days gain. I was trying to stay in for more of the move (my target was 51.43). Since I was using June options in a very volatile market, I should have jumped out with a big 2 day gain when it stalled at the ascending trendline, the rest of the market weakened, and the VIX began to drop.

I also bought a WMT Jun 50 Call for $1.30 to play the expected bounce. It bounced but not enough to over come the built in volatility. It was moving very slow and broke the supporting trendline on both days even though it closed above it so I sold it for $1.19 losing $11 + $3 commissions on that trade. If it does bounce off that trendline and support around 50.25 it may be too slow of a mover to make enough profit using options. If it breaks that trend line then it will make an excellent short candidate.

This Week:

I am expecting more of the same as last week volatile markets trading within a range. My credit spreads would like to see a drop which is more possible after last week's weakness. I would not mind a bounce to get everyone thinking positive so I can load up on puts at the down sloping trend line but don' t see it getting above 113 - 113.5 on the SPY to threaten my spreads.

I will scan my 200 or so stocks with tight option spreads looking for setups later tonight. If I get a chance and get faster at this blogging stuff maybe I will post my daily watch list. Also on the to do list is to post my trading rules and strategy somewhere on the blog/diary.

May 26 -missed opportunities

Wow. Tis market is moving fast. I watched WMT not move at all - contemplated getting out and did not. When the rest of the market was moving up fast and WMT didn't move at all in a very volatile market I should have taken the hint and gotten out. My stop loss is mental and just below yesterday's low. If the after hours is any indication, I will be getting out of this one tomorrow. But then again in this market who knows it may bounce right back up tomorrow.

I watched GDX bounce against resistance of the descending trend line. I would normally have taken profits there for a great 2 day move but I was going to try and let this one run. Maybe I should only let positions run that are going with the prevailing market trend which at the moment is definitely down.

On the other hand, my short verticals are benefitting from the sideways to down movement every day.

WMT and GDX May 25

These were a couple of call buys anticipating a bounce after some serious drops. First WalMart. WMT hit a 3 year ascending trendline and stuck to it on a day when the rest of the market gaped down, dropped further, and then bounced back. The risk reward on this is good because I will know quickly if the support line holds and can get out quick if the trade moves against me. If it does break support it should be a good stock to short. The recent trend was down on Wal Mart but I am playing the long term 3 year trend line on this one. We'll know tomorrow how this goes.


GDX 1 June 48 call for $2.00

With GDX, Multiple oversold indicators and divergences pointed to a low risk possibility for a bounce in the market. My trading rules don't allow me to trade bounces up in down trending stocks and a few of the gold miners like NEM, ABX, and a couple of others had divergences in the slow stochastic, MACD so of course the gold miner ETF did as well. Playing the ETF also freed me from having to pick between all of the miners that looked like good trades. The stock immediately moved up to almost 49 by the end of the day. As it turned out, the divergence plays on the other stocks in financials and a few other sectors that I wanted to take would have been really good ones too but I stuck to my entry and money management rules. My target on this one is $51.21.

May 21 second trade

The DIA bear call vertical was in essence the exact same trade as the Spy but I got a little better credit at .35 for the 104/105 bear call vertical

5/21 trade #1

Short 3 June 114/115 call verticals for .30. Implied volatility was too high for me to feel comfortable buying a put but just right to sell some volatility and time. The market had already moved down a good amount and in a short period of time but there was still heavy down side risk and one of my rules is to not trade against the immediate and intermediate trends. In the chart below you can see that the 114 call I sold would be above the solid downtrend line further decreasing the interpretable risk. The mathematical probabilities of this trade expiring out of the money (OTM) were 70%. 114 was also above the 61.8% fib retracement line of the current downtrend and May 21 had been a big up day which I believed would retrace a little of its gains the next day.

Real Money from here out

I have not kept up with journaling my trades well at all. As of April 1, 2010 all trades taken are real money. I funded my account with Thinkorswim at just above the minimum amount required to trade.

My first 3 trades were losers. Just like all the books said I would and I swore I wouldn't, I closed out early 2 bear call spreads when they went against me a little for small loses that ended up being winners. I closed out 2 puts on HAL and MCD for small loses a couple of days later. Because of these loses and something I learned in one of my market books (up to almost 30 now)I added this rule to my trading: "Only trade in the direction of the trend. " That's fine and dandy until you start looking at charts that are in long term (1 year +) uptrends, intermediate term (2-3 months) uptrends, but short term/immediate (5 - 30 days) downtrends. So, I have to decide what constitutes a trend in my trading rules. A couple of people suggest never taking a bullish trade below the 200 MA or a bearish one above it. That was too conservative for me. I have decided that if there are higher highs and higher lows I can make a bullish trade and a bearish as long as there are lower highs and lower lows. I will play bounces off resistance in a downtrend and bounces off support in an uptrend. As I record my trades on here I will explain my method and it should become much clearer.