Sold 1 KMX Nov07 25 put for $4.90

I bought this put on 10/16 for $3.70.

One of my original exit orders was to enter a trailing sell stop on the option if the stock traded below $20.  Today the stock went as low as $19.79, the trailing sell stop was automatically entered, and then it triggered as the stock rose back up.

This option was somewhat odd in that 3 weeks before expiration, it had absolutely no time value left.  I don’t think I’ve ever seen the time value go down to zero that far from expiration.

As I mentioned before, I made one mistake on this trade.  I should have bought 2 options since the option was relatively cheap, and I’m not just saying that because it was profitable.  Given the assumption that trading on a particular signal produces some probability of winners, and that I can’t know which trades are going to be winners and which are going to be losers, it’s important to make all the trades roughly the same size.  Otherwise, the smaller trades could end up being the winners while the bigger trades end up being the losers, skewing the results.  In the future, I will try to get all of my trades as close to each other in value as I can.

Here’s the chart.  You can see that once again, I discovered a new support line after I had entered the trade.  In this case, it wouldn’t have changed my exit strategy too much, although I probably would have set the exit to $20.25 and it would have exited last week, potentially with some time value left in it.

Week ending 10/26/2007

Weeks like this make it very difficult to stay disciplined.  Here are all the odd things that happened this week:

• The market opened low on Monday morning and then climbed back up.   I had an order set to sell my KMX put if the stock traded below $20.  The stock went down to $20.02 and then went back up.
• Because VSEA was going to report earnings this week, I was nervous about staying in the position and having it go down, so I tightened my sell stop to just below break even (the option was actually up at the time).  Monday morning the stock gapped down, my sell stop triggered for a loss, and then the stock went right back up.  This was a swing of more than $200.
• MSFT released earnings Thursday night.  I had a feeling that it was going to move big to either the up or down side and had my finger on the trigger just before close to buy both a call and a put to try to take advantage of a big move to either direction.  I backed off at the last minute because the trade wasn’t justified by my system, and today I saw that any money that I put into that trade would have quadrupled.

With all that said, though, I think I executed very well this week.  There’s nothing I could have done about KMX missing the sell stop by $0.02.  With VSEA, the mistake I made was in buying an option on a stock that was about to release earnings, but I still think tightening my sell stop was the right decision.  And as it turns out, the stock has completely tanked after releasing earnings so I would have lost a lot more money if I was still in it.  As for MSFT, even though I would have made money, it would have been a bad idea to take that trade because it was more like gambling than trading on a system.  Once my portfolio grows to a more considerable amount, I may set aside 1%-2% for more risky trades, but now is not the time for that.

Overall it was a good week for me.  Even though the market had lots of large swings up then down and back up, my trades have done really well.  I especially like having a combination of calls and puts, because they tend to balance each other out.  For example, yesterday my calls were down, but my FDX put was way up and I was able to get out for a net profit on the day.

I’m feeling good about my trades, and I really think this website is helping me to stay focused.  I haven’t made any major mistakes, and certainly haven’t traded on emotion even though I came close to it a couple of times.  However, I also need to keep reminding myself that I need to do many more trades to show that these techniques are actually profitable long term and there’s no reason to get overly excited over a couple of successful trades.

Sold 1 FDX Jan08 110 Put for $9.10

I bought this put for $7.40 on 10/16.

This position went from being way in the green to being way in the red several times before I finally got out today for a decent profit.  Two days ago the stock gapped down to around $102 and then climbed back up.  It was after that that I realized there was another supporting trendline that I hadn’t noticed before that gave it support at around that level.  So I changed my exit order to exit if the stock dropped below $102 again, but I thought that I had most likely missed my chance.  Luckily it dropped down to that level again today and my exit order got me out before the stock again recovered most of its losses.

Here is the graph with the support level that I missed before drawn in.  My exit order should have been at $102 or thereabouts right from the beginning.  I got lucky on this one but I’ll have to be more careful in the future.

Compared to my original chart, which shows a lot more room for it to go down before reaching support:

Bought 1 PEP Jan08 67.5 call for $5.50

This stock has been in upward channel since the beginning of 2005.  In addition, there is a short-term trendline within that channel since August, as well as another line within the channel that used to be resistance and is now acting as support.  The stock has come down and bounced off the point of interesection of these two trendlines within the channel.  The MACD and stochastics indicators also confirm the trade.  The stock is at $71.50.  Support is around $70.25 and resistance is around $75.75.

Exit strategy:

• Market order to sell if the stock trades below $69.50.
• Stop loss on the option at $2.00.
• Trailing stop loss if the stock trades above $75.

Bought 1 SGP May08 25 call for $5.80

The stock has been in an uptrending channel since last June.  It has tried to break out above the channel a couple of times and failed, but it continues to use the lower trendline as support.  It has again come down to support and bounced.  MACD and stochastics are very low, though they haven’t turned up yet so this isn’t really a confirmation.

The stock is currently at $29.46 with support at $28.25 and resistance around $33.  There is also a secondary resistance line from the two failed breakouts that is also at around $33.

I did something different with the expiration on this one.  I normally just go 2-3 months out.  However, the options on this stock had very little time value, and I only had to pay $1.00 more for May contracts than what I would have had to pay for Dec.  I figured I would give this a shot, and see how it affects my returns.  Presumably, if the move happens within the next 1-2 months, I will still have plenty of time value left and will be able to sell for a bigger profit than normal.

This trade is also different because I don’t have a perfect confirmation from the MACD and stochastics indicators, and because the stock fell very quickly from resistance back down to the support line.  I feel OK about that because the support line predicted exactly where the fall would stop, and it has since bounced off of it.  We will just have to see how it turns out.

Exit strategy:

• Market order to sell if the stock trades below $27.30.
• Stop loss on the option at $1.50.
• Trailing stop loss (by $0.15) if the stock trades above $32.50.

Bought 1 SII Jan08 60 call for $9.10

The stock is an uptrending channel that has held up since the beginning of 2007, and the MACD and stochastics are both low and turning up.  It has come down and bounced off support, and is currently at $66.77.  It was actually closer to $66 when I bought the call.  Support is at around $63.25 and resistance is around $78-$80, depending on how long the stock takes to get up that high.

Exit strategy:

• Market order to sell if the stock goes below $62.
• Stop loss order at $4.50 on the option.
• Trailing stop loss (trailing by $0.25) if the stock goes above $77.50.

Sold 1 VSEA Nov07 45 call for $5.80

I bought this call on 10/8 for $6.20. 

I mentioned before that I really tightened my sell stop on this position.  It had already gone from being $150 down to $150 up and back down to about even.  Earnings is going to be released this week, and I don’t like to hold on to an option when that happens because there’s no way to predict what will happen.

Therefore, I tightened my stop loss so that if the stock falls, I will get out having basically broken even rather than having to make a decision on Wednesday about whether to sell for a loss or hold on and wait for the best as earnings are released.  I entered the stop loss order at $6.30, but for some reason it did not sell until it got down to $5.80.  In any case, it’s a small loss as opposed to holding on to something that’s very uncertain.

It may turn out that the stock will shoot straight up either before or after earnings are released.  However, I view that as gambling rather than trading.  I got into this trade in order to profit from a bounce off support which so far has not materialized.  Anything that happens this week will be more due to earnings than a bounce off support, and that is not my reason for being in the trade.

Lessons Learned

I need to figure out what to do when trading around earnings time.  I entered this trade about 2 weeks ago, so I had a little under 3 weeks until earnings would be released.  I had hoped that would give the stock time to make at least a partial bounce, but that was not the case.  I ended up having to take a small loss rather than hold on to it through earnings, which is unfortunate because it may go on and complete the bounce now.  I think I will avoid trading on a stock that has earnings due out within a month for now.

Chart

You can see that the stock has basically just hovered around support since I got into the trade.

Week ending 10/19/2007

The indices mostly just went down this week, and that was good for my puts.  They are up about $100 a piece since I opened them earlier this week.

My call on VSEA was up-and-down all week, ranging from $150 down to $150 up to now being just about even.  I updated my stop loss on it to sell if it drops below this level because earnings will be released next week and I want to close the position out before then if possible.

All in all I’d say I did well this week as far as execution goes.  I searched through my watchlist of stocks every day looking for stocks that fit the patterns I’m looking for.  When the buy opportunities on the puts presented themselves, I bought them and placed exit orders according to my plan.  One mistake I made is that I should have bought two put contracts on KMX instead of just one given its low price relative to the other options I’ve bought.  Unless I try to buy roughly equivalent amounts on each position I enter, the end results will be skewed.

I also still have to watch out for those emotions.  I did OK with staying relatively unemotional while placing my trades.  In fact there were a couple of trades that I wanted to take early but forced myself to wait for confirmation, which never came.  Both of those trades would have been losers if I had entered them, so it was a good thing that I followed the system.  However, I kept getting excited whenever I’d look and my positions were up.  I constantly have to remind myself that these positions might be up simply due to random chance.  They could just as easily have all stopped out for a loss by now.  Until I do many trades in each category and can analyze them as a set, there is no information to be gained from whether a single position is up or down. 

This website has now been up for a full week and I have to say I’m pleased with how it focuses my trading activities.  Just knowing that I have to report on everything that I do really helps me concentrate on doing things according to plan.

Bought 1 FDX Jan08 110 Put for $7.40

FDX is an a downtrending channel established in July.  The stock has come up and bounced down off resistance and is headed back down.  MACD and stochastics are both high and heading lower.

The stock is currently at $105.01.  Current support is around $99, and resistance is at $107.50.

Exit strategy:

• Market order to sell if the stock trades above $107.50
• Stop loss order at $2.40 on the option
• Trailing stop loss (trailing by $0.25) if the stock trades below $100.

Bought 1 KMX Nov07 25 Put for $3.70

KMX is in an established downtrending channel.  The stock has recently come up and hit its resistance level and is headed back down.  The MACD and stochastics indicators act as confirmation because they are both high and starting to turn down. 

The stock is currently trading at $21.53.  My target is for it to reach $19.50, which is the current support level for this channel.  That will give the option an intrinsic value of $5.50 with a profit of at least 49%. 

My exit strategy is:

• If the stock trades above $22.90, exit with a loss.  This should limit losses to $1.60 at the most.
• If the stock trades below $20, enter a trailing stop loss order.

Here is the chart.  The trendlines aren’t as clean as I would like, but they have held up for about 4 months now.