Oh, What a Joy

by Jeff on January 24, 2010

tog_logo_bw_new_iconIn my last post I mentioned how much I like it when a stock makes a big move, especially for a good reason and one that can be counted on to hold the stock long enough to capitalize on the move with a high probability, high return spread. Intuitive Surgical is on my watch list and jumped out at me while I was paging through the charts for that list. Well, a couple more jumped out at me today.

First, let’s briefly discuss Joy Global (JOYG). They announced earnings on 12/16 and didn’t create any excitement to speak of and posted negative revenue growth for the first time since July of 2003. Notice how the stock didn’t take a digger on that news but continued to inch higher. It actually broke out of a short double top but failed to sustain a continuation pattern.

Then on 1/22 the company was downgraded from Buy to Neutral by Goldman and BAM! Down she went. Look at the 1/21 price action. How many people do you think knew about the Goldman announcement? There are a lot of people working at Goldman and the government is full of their ex-employees – just saying…

20100124-joyg-chart

Be that as it may, I plan to take advantage of that early this week and do a tight Bear Call. Hopefully it won’t run away from me on Monday morning so I can get my FEB 55 in at a decent premium. Then all it has to do is stay below the red box until 2/19/10.

Amazing MA

Here’s another one from my watch list that captured my attention. I must say that I need to send myself to the wood shed on this one because I have been missing the plethora of Bull Flags for the last 5 months. What am I talking about? Why Mastercard (MA), of course. Talk about a chart with perfect moves to illustrate Flag patterns. I have all of the Bull Flags market with a red trend line, and the confirmation days in a green box.

20100124-ma-chart

I ran each of these in thinkback as Bull Puts, starting with the confirmation 9/4/09, and they all would have expired OTM for max profit – and I could have exited early on many of them. So here it is showing us another Bull Flag; and us, just waiting for confirmation to get in with a Bull Put.

I’m now ready for this week, are you?

- Jeff

Tagged as: bear call spread, bull flag, bull put spread, Strategy

  • Mike
    Thanks for the reply. You've just about answered all of my questions. I agree, my last question was poorly worded. I was trying to ask what strikes you would have entered on those trades since you said they all would have been OTM.
  • Jeff
    Mike,

    Gotcha. My objective wold be to have the short strike at or below the previous low. Most trades would not have met my 10% return rule, but I bend that rules on a hot stock like MA. Using the TOS thinkback tool, here is what I would have done with MA based on my rules in my trading plan:
    9/4 SEP 195/190 Bull Put - Credit 57.50
    10/7 OCT 200/195 Bull Put - Credit 55.00 (according to my plan I should have entered with a 195/190 but there was not enough premium)
    11/5 NOV 210/200 Bull Put - Credit 62.50
    11/23 DEC 220/210 Bull Put 220/210 - Credit 125.00
    12/10 DEC 230/220 Bull Put - Credit 30.00 (I would pass on this one because I already have an open DEC spread and it would be too expensive to roll and it would increase my risk)
    1/14 No play - it's too close to JAN expiration and too early for FEB expiration - plus earning are in FEB and I don't like to hold through earnings.

    There you have it. A total premium of $330 times the number of spreads and never putting more that $70 at risk for any one month per spread.

    As of now, I have removed MA from my 'On Deck' watch list until after earnings on 2/4. Hope this is what you were looking for.

    - Jeff
  • Mike
    Thanks for the detailed response(s). That's definitely what I was looking for. I'll have to read it a little more closely when I have some more time.

    -On another note, is it possible to sort the comments on these posts in a oldest to newest/top to bottom format? As it is, reading multiple comments with replies (which are automatically below the original comment) requires a bit of zig-zagging.

    Thanks again,
    Mike
  • Jeff
    Mike - Sorry, I don't have the knowledge to rearrange how the comments appear. I have been thinking of moving to DISQUS to manage comments but I haven't don it yet.

    - Jeff
  • robl
    are you using wodpress? If so there is a setting in the admin to sort comments by time or by conversation. Conversation is the default

    Rob
  • Jeff
    Rob,

    Thanks for the help. I am using WordPress but it's self-hosted and I am using the Thesis theme. I am unable to find the option you mentioned - my only choice is older/newer first.

    - Jeff
  • Mike
    I'm new to "Bull Flags" so I searched and came up with this quote:

    A bullish signal occurs when the price rebounds beyond the upper trendline of the Flag formation, and continues the original upward price movement. This is considered a pattern confirmation.

    From (http://www.trending123.com/Chart-Pattern-Scan-S...)

    Do you consider the confirmation to be different? When looking at your MA chart, only the very last green "confirmation" you've illustrated crosses the "upper trendline of the Flag formation."

    My more specific question, would be (trying to ignore hindsight), where would you have placed your trades based on the red trendlines?

    Thanks for all of your insight.
  • Jeff
    Mike,

    Thanks for the comment. According to that definition, you are right in that the last green confirmation is the only one that meets that definition. But, my entries are defined as the second reversal day after the initial formation of the flag in my trading plan. If I were to wait for the price to break the low/high at the beginning of the flag, I would lose too much time value as this may take several days or never happen at all. All I need is the confirmation that the price is continuing its trend. Granted, if I was buying stock and didn't have to worry about time, then I would wait for the breakout.

    Here's a bit more explanation. If you looked at the chart closely, and I was to wait until the price closed above the previous high, more than 50% would have been bad trades because the price almost immediately started to form a new flag. When I enter a vertical credit spread, I like to set my short strike below the previous low. Waiting for the classic definition would set the short strike way too far away from the current price to give me any decent return - and in some cases no premium to speak of.

    Hindsight is always 20/20 and not all trades are going to work out. Finding a balance between risk and reward is the secret.

    I'm not sure I understand your last question.

    - Jeff
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