The Crazy Market

by Jeff on November 11, 2009

tog_logo_bw_new_iconWhadyah do? Bad news comes out and the market goes up. Good news comes out and the market goes down. I have alerts going off and then I check my position and it has already reversed. Crazy, man!

I had to exit WYNN. I was behaving nicely, following my downward trend line just like in all the books. Then on 11/9 – WHAM! This baby is on steroids and it gaps up 5.5% and I can’t find anything in the news. Maybe because of the Hyatt IPO? Does that even make any sense? Well, I bailed and lost a chunk of money on that one (-52.8%). I spent some time attempting to repair it before I closed it and just figured it wasn’t worth it.

Then BIDU did the same thing (why am I always tempted to do bearish trades on this stock?). It made a similar move on me the last time I did a bear call on it. Knowing that this stock can move very quickly, I bought my short Call back and hung on to the long Call. That worked out just swell as I closed it on the 11th for a huge gain – +33.7% as a matter of fact. I needed that for my confidence.

When GOOG broke ITM on my Bear Call at 560, I waited one day to make sure the move was real. It proved to be real and I was already a few grand into the hole so I looked for a way to repair the trade rather than just take the loss. On 11/10 I added a Bull Put spread at 550/540 at a 2:1 ratio to the the Calls to adjust for the bullish move on the stock; and I also bought a few DEC 560 Calls with that credit – but I still had some out of pocket expense on those calls.

So right now, as long as the stock stays above 560, I can’t lose any more than 1,260 AND with those DEC 560 Calls, well, the sky’s the limit! Everyone go out and buy Android phones, please.

I also did a Straddle on PCLN. I opened the trade on Thursday the 6th. Earnings were after the market close on Monday the 9th. I only did one straddle at 170 (it was ATM at the time) and it paid off very nicely and put 890 into my account on Tuesday morning when I closed it. The stock is still in orbit (not Orbitz) and may be ripe for a NOV Bear Call at 210. It’s paying quite nicely at this time for so late in the NOV cycle. It’s currently on my On Deck list for the 12th.

Nine days to expiration. Hold on to your shirt! Keep your power dry! Oh, and I feel a video coming on.

Thanks for reading. Your comments/suggestions/corrections are always welcome.

- Jeff

Tagged as: Adjusting Spreads, bear call spread, bull put spread, Strategy

  • Bruce

    The stock I can’t believe is AMZN. I was hearing so much positive news before earnings, I was tempted to break my own rule and buy before earnings.

    After looking at the fundamentals I just couldn’t justify it. That was 35 points ago! I’m glad I also resisted doing the bear spread following its day after earnings run up.

    I don’t know anything anymore. Which way is up? Is it ^?

  • MR

    why not do the spreads with the written option strike a few percent (say +/- 10%) from the current stock market price? Sure the premium from the spread is lower but you do have some margin of safety… or are you doing this already for the majority of your trades? Just wondering…

    • Jeff

      You could do it that way and depending on the stock, strike spreads and volatility, the premium could be lower or higher. I just don’t do it that way. I use Probability of Expiring and I look for strike prices that have a 80-85% probability of expiring OTM. The Probability calculation includes volatility and days to expiration for the final figure. For instance, if I wanted to do a DEC Bear Call Spread on GOOG, my strike price at 10% would be 624. The DEC 620/630 would be a credit of 0.90 and the DEC 630/640 would be 0.57, neither of which would meet my minimum of 10% return on risk. Using the 80-85% Probability rule, I would do a DEC 610/620 that has a 1.32 credit and meets my 10% rule. The 10% Return rule is in there to allow enough credit to adjust the trade and hopefully stay profitable and also to allow for an attractive risk/reward profile.

      It comes down to using a consistent methodology and if it stops working, adjust the plan and move on.

      - Jeff

      • robl

        Jeff,

        Corredct me if I am wrong but aren’t you also looking at support and resitance lines as well? Wouldn’t you take less than 10% of you needed to move a little to get above or below a suport/resistance line for safety?

        • Jeff

          Rob,

          Oh yes, I certainly am – the Probability and Return are not the only things I look at. If you look at my Trading Plan you will see the minimum factors that I look at in determining what I will enter a trade on and when. So, you are right. If the short strike is not at or outside support or resistance, I tend to look for something else.

          - Jeff

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