Watch Lists Advantage

by Jeff on December 29, 2009

tog_logo_bw_new_iconMany of you know that I have a watch list of about 50 stocks/indices/ETFs (I call this bunch equities) that I constantly monitor for potential trades. Yes, I can do scans or look for price/volume gainers/losers, movers, hot lists, etc., but why? The list that I have has been developed over many years of trading and contains equities that I have found to either make good moves up or down, or that tend to have long consolidation periods. This is a living list in that I do occasionally delete equities because I don’t like the option strike spreads or that have lost a lot of volatility. When I drop a candidate I spend some time looking for a replacement and when that happens I then spend a considerable amount of time getting familiar with the patterns, trends, option chains and yes, maybe even some fundamentals!

My last post was about going back to the well on AFL and I have been to the well several times. So you will see other equities appear on my In Play and Closed list repeatedly. It works for me.

Guess what? I’m back at the well with First Solar (FSLR). This stock has beat me up a few times in 2009 but that won’t stop me from playing it when I see setups like I saw today. The chart below explains why I entered a JAN Bull Put Credit Spread at -125/+120 today. As you can see, since its drop in September it has been on a short-term bull run. The secret is being patient and waiting for the optimum time to enter (which I wasn’t too good at earlier this year). Today fit that requirement. After a 6-day bull flag pattern and 2 confirmation days I jumped in. I ended up with a very nice $70 credit with only $430 of risk for each combo. That figures out to a 16.3% gain if the stock is above 125 on January 15th – just a little over 2 weeks from now. The green shading is my maximum profit zone from today to expiration and actually runs up to infinity for price.

20091229-fslr-chart

Having a small list of equities that I constantly monitor enables me to become very familiar with every equity on that list. I scan all of them every day and if patterns are developing that make them potential trade candidates, I put them on a list that I call “On Deck” and that is the list that I check first after the market opens. Each one has both a long and a short term trend identified so it’s easy for me to see that patterns that I look for.

Happy New Year

- Jeff

Tagged as: bull put spread, options, Volatility

  • Mike

    Ok, so I guess I need a little better understanding of the last minute plays on credit spreads… I saw FSLR going down over the last couple of days, so I put a contigent order to close my spread (the same as yours) if the underlying went to 125.10 or less. It did so today, the day before expiration and I lost about .80 per spread (I got in for .63). Was this strictly due to the increased volatility from such a big move? I thought by today, I was pretty safe and/or max gain above 125.00.

    Would a potentially better idea have been to only close my sold side today and wait for the other tomorrow?

    • Jeff

      Mike,

      Some of it has to do with the increased volatility, but mostly it’s due to the price of the stock when you entered the spread versus the price now. For instance, when I entered mine, the stock was at 135.49. The idea behind a Bull Put Spread is to have the stock rise, but if the stock stays above your short strike you will still make max profit at expiration. I exited my trade on 1/12 when I saw the price move below the 20 ma and my trade entered negative territory; I lost .43 per. The price of the stock was below the price when I entered by almost $1. My previous statement is still true – if the price would have remained above 125 at close today I would have made max profit.

      To see how this works (if you have TOS) enter this simulation on your “Analyze/Add Simulated Trade”: DIA FEB 103 Sell Vertical (FEB -103/+102 Put). Then go to the analyze tab and under “Positions and Simulated Trades”, change the date of the graph to 2/18/10 (the day before expiration). You can see that if DIA is at 103.84 or less your position will show a loss. But, if at the close on Friday it is above 103, you will make max profit.

      When I ran this scenario today, the price of the underlying is 107.03. If the price remained there or rose, then I would exit around 2/12 since I would have been at 80% profit or more. On 2/12 if the price of DIA is below 105.02 the trade would be losing. So the key is the price of the underlying versus the current price and how close to expiration.

      That is why you always want to enter after a flag/pennant for a better chance that the price will only move in your direction after that – but not guaranteed. In the case of FSLR – well who knows? Germany is reducing their state incentives for solar. Did that do it? How about some press on growth issues? Nobody really knows, but it sure moved unexpectedly down and looks like today it will be well below 125.

      There are times that buying back your short option and hanging on to the long will work out, but in this case it’s just too close to expiration for that. Unless your short goes ITM very quickly, you will just lose more money. I like to close all my trades before expiration – especially if they are making me nervous.

      Thanks for asking this question, Mike, since it made me think about some things that I hadn’t before.

      - Jeff

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