Greed – the downfall of many a trader. It breeds arrogance and over-confidence – the “I can beat the market” attitude. On the other hand, it gives us messages and lessons that, if listened to, can improve our chance for success.
The Tale of Two Trades
I’m going to relay to you a short story about two trades in the July expiration cycle. One was successful and the other is currently underwater and may be a big looser. I always like to handle the bad news first – so here goes.
Freeport-McMoRan Copper & Gold (FCX)
Right now the so called Guru has an open JUL Bear Call spread with the short at 65. I entered this trade on 6/30. Go and look at a chart and tell me what you would do on this date. Go ahead, I’ll wait…
I remember exactly what I was thinking. I let my market bias allow me to take a risk that, if I had been able to breach that bias, I would not have taken. You see, I should not have entered this trade if I had been following my trading plan. Here’s why:
- It’s too close to expiration for a short vertical. This forced me to have a short strike too close on a volatile stock. The Delta on the 65 was .30 and on the 67.5 it was 0.16. In order to make a decent profit, I had to use the 65 as my short.
- The short strike is below the previous high. Heck, even a novice should know that!
- My thinking at the time was that the market was heading for the crapper and any negative delta is good. That, in my thick head, justifies high risk.
- I wanted (needed?) to trade that day. Always a dangerous emotion.
I’m still in this trade and as of Friday, FCX has 46% chance of finishing for a profit. I am down $322 right now. My plan is to get out on Monday – it’s expiration week anyway and I only have two other JUL cycles open (AAPL, IBM) both of which have very hefty Theta’s. If the market moves down I will luck out and limit my loss. If it moves up it could have a significant impact on the Guru’s performance for this expiration. That’ll teach him!
Google, Inc (GOOG)
Even while I still had a JUN 530 Bear Call open, I recognized considerable weakness in GOOG and was able to enter the JUL 520 for a very nice credit $2.40. I don’t believe my Bearsih market bias affected my decision, and here’s why:
- GOOG had a very nice 7 candle Bear Flag with convincing confirmation.
- There was a Person Pivot Bear indicator 2 days prior to entry.
- The short strike is way above the previous high and at a May resistance of 520.
Normally I would wait until the short strike was worth a nickle or less before I close this trade, the strong move on 7/7 convinced me to take my money off the table. This ended up a very nice trade and allowed me to retain 95% of the original credit.
Conclusion? Multiple choice:
A) Nobody can be right 100% of the time B) Be true to you plan C) Even the pros make mistakes D) I am only human E) all the above
Conservative Account
As usual, at this time of the expiration cycle, I am rolling Call strikes that are ITM out to next month. I still have KFT and NYX to roll, provided they are still ITM or close on Monday. Anything that is OTM will be rolled Thursday or Friday. Why roll them? Well, there is no commission if the short is under 0.05 (and it probably will be) and although it may be a wash, the AUG options will have more premium this week than after expiration this Friday.
I am a bit troubled by QCOM. This is a stock that was a darling of the late 90′s upon which I made a lot of money. But now? I have been wondering what possessed me to add this to my conservative account. The dividend isn’t all that good and the stock is not a good performer – down over 20% since I entered. I am not hesitant to dump losers, so I may do that soon. Earnings on 7/21. They beat the last two but still gaped down each time. Hmmm.
◄ Jeff ►
