Using stock options as a safe bet for a Twitter buyout

Uncertainty around the election has resulted in declines for most stocks. Over the same time period shares of Twitter have been out performing the major indexes. This leads me to believe there may be a near term floor in shares of the micro blogging site.

past6days

 

There’s no denying this Fall has been a roller coaster ride for Twitter which saw shares go up from $18 to $25 between Sep 28 and Oct 5 on rumors that Disney, Salesforce, or Google may pursue a bid to acquire the company. The speculation which fell short of an official deal produced a quick rise and fall. Solely on rumors. However, the price of the stock before the rumors began is basically unchanged (up some) even with the major indexes taking a beating!

If you can’t already tell I’m a believer in Twitter as a company with value. For investors and those on the long side, this rumor mill has done nothing other than show us what a potential bidder may be willing to pay for the company. More accurately it has shown us what Wall Street believes the perceived value of Twitter might be is if a buy-out (M&A) were to occur. This leads me believe that shares of $TWTR are worth $25 dollars a share, the price $TWTR flew at during the high of these rumors, and possibly worth more. If unknown bad news is released this could change my fundamental outlook but because I have sold options around my core position I can withstand a 25% drop (at a $18 price).

From the beginning, I looked at the rumor as a positive sign and started acquiring shares.

twtr_costbasisowned

I didn’t want to be overly aggressive on my first trade so instead of buying hundreds or thousands of shares I use options contracts to help me reduce my cost basis from $18.31 to $13.41.

Selling Put Options Contracts: I may choose to hold these options contracts through expiration and if the stock is below these strikes these contracts ensure the counter party of this trade that I will buy their shares at those strike prices (see details below for $16 & $24 strike puts). The counter party here is the person who bought this put option I sold. I’m basically selling insurance to shareholders who fear a price decrease or speculators who are shorting the stock. Selling this insurances puts money in my pocket which decreases my cost basis. It also increases the amount of stock I might own from 300 shares to 700 shares if I don’t close these contracts before expiration because I will be obligated to buy the stock.

If the stock price is above these strikes when these contracts expire I don’t have to buy more shares and because I am willing to buy more shares at a future date I have the benefit of collecting the premium up front to reduce my cost basis.

TWTR_Puts.PNG

Selling Call Options Contracts: I also sold the $18, $20 and $23 calls for and collected a $528 credit for the promise to sell the shares if the stock is above these strikes come expiration. Selling these Calls caps my upside. You can think of this as the opposite of selling puts because I’m promising to sell my shares come expiration if the stock is above these strike prices.

twtr_calls

I bought the $24 and $28 calls for upside.

twtr_calls_debit

Putting it all together:

  • Collecting a premium in return to buy and sell the stock effectively reduced my cost basis to $13.41.
  • A move to $13.41 is a %24 drop from today’s closing price.
  • Selling call options caps my upside, however I sell options because I’m more concerned with protecting my downside than making gobs of money.
  • If Twitter’s stock prices stays the same between now and the time my contracts expire I will make money since these options expire worthless and I get to keep the premium I collected from selling the options. Then, I can sell more options to further reduce my cost basis if I choose.
  • A close above $30 come December 22 (standard options expiration date) will produce a decent size gain.
  • A close above $30 is a 71% move which is very ambitious.
  • Rather than expect a real buy-out to be a catalyst for a 71% move in the next month I like the idea of safely selling options while collecting a premium and reducing my cost basis.
  • If a buy-out happens I will still be happy!
  • Even if a buy-out doesn’t happen I can exit my position for a gain as long as the stock stays above $13.41 come December 22

On a side note, last night Facebook reported earnings which resulted in a %5.6 drop in share price. The decline in Facebook didn’t have a negatively correlated impact in $TWTR today. Not to mention the initial price action on $TWTR was positive after earnings compared to what happened with $FB.

twtrvsfb

In summary, this rumor mill has provided a gift to us traders or anyone looking for an opportunity to be part of the acquisition.

Follow me on Twitter @Jeffreytief

The TachusChord website is for educational use only. Any opinions, news, research, analysis, prices, or other information contained on this website, it’s social networks, email distributions or any other material provide by the TachusChord and associated companies, employees or volunteers is provided as general market commentary, and does not constitute investment advice or a solicitation to buy or sell any stock, foreign exchange contract, contract for difference or securities of any type.

Notable alerts from 6/16

After my post yesterday “11 tips on using alerts to boost your trading” I’ve decided to share some of the alerts that triggered today, charts, potential trade setups, and my thoughts behind each.

The company or sector symbols include: $GLD, $XLF, $AMZN, $FIT, $UNP, $NKE, $VRX, $GS, $WFC, $NUS, ES_F, NQ_F, CL_F

GLD (Gold)

Gold made a 52 week high today but had a sharp pull back during the day. I had three alerts trigger at the open from $125.96 to $125.06. Because new highs usually proceed new highs I was initially bullish on gold when I received these alerts. I don’t trade GLD very often but like it as a proxy for what’s happening in the market. At $125.06 it was a good scalp to the high of $125.67. However, there was a major breakdown in the precious metal and after making a new all time high GLD closed at $122.38. I believe this has been the single biggest 1 day decline for GLD in the last 52 weeks! GLD is well above the channel it broke out of early this year, see blog. Watch for more downside action in GLD. Im particularly interested to see if it re-tests channel high around $115 which could be a good entry.

gld

gldchart

XLF (Financial Sector ETF)

The financial market has been leading the market down over the past 5 days but staged a nice recovery today. My alert on XLF triggered 1 cent above the bottom at $22.38. I also had two alerts trigger on WFC (Wells Fargo) and GS (Goldman Sachs).

xlf

GS.WFC

I was monitoring this level on XLF to confirm further downside action in the broader market. When the alert triggered I wasn’t willing to trade $XLF on the long side but in hindsight it would have been a great trade as XLF closed at $22.76. Going forward, I’d like to confirm that this bounce isn’t a one-day wonder before taking a new position. As a side note, I may only trade about 10% or less of the alerts I set. Most of my alerts help me monitor what is happening with a stock and the market and aren’t intended to be entry or exit locations for trading.

xlf

AMZN (Amazon) dipped below the 20 day Exponential moving average when it fell below $712. This is something we haven’t seen Amazon do since late April. Amazon is a market leader. It reversed nicely off the low today and closed at $717.75. Look for AMZN to go above $730 for a bullish breakout. It may just chop between $730 and $700 for a while but if it begins to breaking down look for further market downside, especially in the Nasdaq.

amzn

AMZNchart

FIT (Fitbit) the maker of the  popular activity tracker wrist band fell 4% today. The company has had a nice run since coming off it’s Feb low of $11.91 but is inching closer to retesting this low. Should this low get retested buyers may step in and hold a bid. Only time will tell.

fit

FITchart

UNP (United Pacific Rail) was a stock I was looking to short. My alert was set at $87.48 but the stock gaped down at the open and I wasn’t sure if I had missed my opportunity or not. The stock closely follows IYT (ishares transportation index) so I like to follow both these together and look for any divergences. I sat on my hands and decided to let this one pass but it would have been a solid short trade for about 30 minutes.

UNP

UNPchart

NKE (Nike) retested a low it made on June 1st. It bounced off this level but should it break lower more downside price action is probably on the horizon, at least for the short-term. The outlook on retail has been extremely negative over the past few week as many retail stocks have taken a dump. I don’t think retail is hated enough to justify a contrarian approach in the sector so I’ll continue to watch retail and see if NKE can find a bottom and gain footing in the sector before buying any retail related stocks.The other concern with Nike is any negative news around the Olympics. Usually this is a time of year when apparel companies announce advertisements and sponsors so if news comes out that Nike lost these bids to competition it could hurt the stock more.

NKE

nkechart

VRX (Valeat Pharmaceuticals) has been a company I’ve been following and trading for quite some time. See blogs here, here and here. I stopped trading VRX on April 29th which turns out was the right decision. I am patiently waiting for a better price before I re-enter any long positions here. Today’s alert confirmed more downside action when the price broke below $23.08, which was recent support.

vrx

VRXchart

NUS (NU Skin Enterprises) was one of the better performers in the market today. The stock closed up %10 percent after announcing a strategic partnership with Chinese investors and positive update on earnings guidance. My alert didn’t incite me to take any action but it’s now on my watch list and I’ll be looking for potential entries.

NUS

NUSchart

My early morning alerts indicated that prices in the S&P, Nasdaq, and Crude oil futures were slipping to new short-term lows. I thought we’d have another down day because some key levels were broken however prices manged a reversal into the trading session and repaired the potential breakdown with the S&P and Nasdaq closing int he green. With options expiration tomorrow it will be interesting to see how the market closes the week.

Futures

Follow me on Twitter @ Jeffreytief

 

 

11 tips for using alerts to boost your trading.

When it comes to trade ideas there are almost too many choices available for traders and investors.  By my estimates there are probably over 10,000 stocks you can trade in the USA and that’s not including, ETFs, futures, or Over the Counter Pink Slips (penny stocks). Alerts are more than just a quick way of identifying potential trade setups. Just because an alert triggers doesn’t mean I have to make a trade. I probably only initiate trades on 10% of my alerts that trigger. My alerts are purely “alerts” or indicators that give me information about what’s happening on the stocks that I follow. Whether your preference is to to stick with a handful of stocks you’re familiar with or go hunting for the next setup here are some tips on how you can use alerts to optimize your trading.

1. Alerts to notify you:

Probably the most obvious reason to set an alert is because you cannot monitor the price action of a stock every single minute of the day. Alerts can trigger and notify you through email, text on through the trading platform when the stock is at a point where you’d like to buy or sell. However, investors and traders who cannot quickly act alerts are at a disadvantage. One remedy to this problem is to use a conditional orders which will execute for you when a stock meet your price objective. I’ve found that conditional orders are limited, clunky and don’t always execute in an orderly fashion. In my recent blog update I notified you that my partners and I are developing a software program which will let more people actively participate in their trades without having to monitor the action each and every minute of the day! We believe this solution will give people a better experience than any alert or conditional order can offer.

2. Alerts to identify your exit point: 

I HATE setting real stop losses. A stop loss is an open order, or as I like to put it, a public announcement saying “I will sell here”. Market makers see stop losses and if they want can push the stock lower to take your shares then buy them right back up! This has happened to me more times than I’d like to admit which is why I don’t set stop losses. Getting whipped out of trades is not fun and rather than showing my hand by setting stops I prefer to have an alert that tells me the stock is at price where I  want to sell. On a side note, for more info on how Market Makers control the price spread check out my blog here.

3. Alerts to identify breakouts:

Alerts that trigger above prior points of resistance may help notify me before a breakout develops. This is a good way to get into a trade before a big move ensures. If a breakout occurs I can take a position and set a new alert at the next resistance level where I will take profits or add more depending on market conditions.

4. Alerts to identify support:

Setting alerts at multiple support levels is one way I identify potential entry locations. When an alert triggers where I believe a stock has bottomed I can take on a position and then set another alert below that. If my second alert triggers than I might be wrong and should get out of the trade. However if I’m not sure where the bottom will form I can set several alerts around the location where I think the stock will bottom. Each time one of my alerts triggers I can lightly scale into a position until I have on a full trade.

5. Alerts to identify market tone:

The more stocks you set alerts on the better idea you will have about the direction of the overall market. This can help you understand whether your alert triggered because of a unique move in the stock or because the broad market breath is trending higher or lower. If several of stocks I have alerts on are triggering at the same time it’s usually the broad market strong moving in one direction or the other. So before jumping into a trade, make sure you can decide if your alert is unique or because market forces are pulling/pushing all stocks in a similar fashion. Another way to measure this is by looking at the $ADD (Advancing vs Declining stocks) or $TICK. See link for more info on these.

6. Set alerts to selectively choose which stock you should buy or sell short: 

Part of my homework every nigh when I review stock charts is to set alerts at key levels. Having multiple alerts set on a variety of stocks gives me more trading options when the market opens in the morning. A majority of my alerts will trigger in the morning and I can choose which trades make the most sense based on the alert.

alerts2

7. Alerts for technical indicators and calendar events:

If you’re looking to optimize your alerts beyond price action many trading platforms let you set alerts on technical indicators like the MACD oscillator, Volume, Bollinger Bands, moving averages, etc. And calendar events like dividends,  earnings, etc.

 

8. Alerts for portfolio metrics:

Many traders will also choose to set alerts on metrics like Net Liquid Day Change, Margin Requirements, Portfolio Delta, and more.

9. Alerts over time:

Once I set an alert I usually don’t remove it just because the price has changed. If I set an alert at a critical juncture on a stock I will usually keep that alert in tact even if the price has moved significantly above or below the price where I set my alert (see AMZN chart below). Many times this comes in handy for stocks that I haven’t monitored in a while. When these alerts trigger, those stocks are then added to my watch list.

Alerts

10. Alerts shouldn’t be noisy: 

Although I’m encouraging you set alerts on multiple stocks it is good to clean up your alerts and only have them set at meaningful locations. Too many alerts may cause you to forget the reason behind why you wanted to monitor that stock in the first place.

11. Alerts should be checked against news:

For alerts that trigger because a stock as increased or decreased beyond the average price range of a stock it’s important to understand why that stock has moved more than usual. See Average True Range for more info on this indicator. The increased volatility in the stock may have been induced by company specific news such as a downgrade or earnings event. In these cases its good to re-evaluate the reason why you set that alert and decide if it’s still worth the risk.

Follow me on Twitter @ Jeffreytief

 

 

4 Key Pillars to Successful Trading

 

In this blog I will discuss. 

  • My current status update.
  • How to generate income over time by day-trading.
  • 4 key pillars to being a successful trader.
  •  4 core tenants for planning a trade with a recent real world example.
  • How to start overcoming psychological problems traders face.

It’s been a while since I’ve posted. Partly because I’ve been swamped with work but also because I haven’t been inspired by much of what’s happening in the broad stock market. The continual upward trend on light volume and weak structure has not given me an abundance of confidence. The bull’s sentiment backed by dovish Federal Reserve banter means there’s a good chance the S&P 500 makes new all time highs soon and that has me questioning being overly short. Contrary to this, I do not feel comfortable putting money to work on the long side for more than a few weeks. Why? Much of the economic news has not been good; i.e. Q1 earnings results, interest rate uncertainty, Brexit fears, China, high student loan debt, employment rate declines, and increasing default rates on subprime auto-loans (similar to the housing crisis in 2007). If the news gets better surely my outlook will change but for now I’m going to play it safe and stick with day trading.

Other than my 401k and IRA, I’ve been mostly in cash, using some capital to day-trade and put on small short-term trades that last a week or two. This isn’t investment advice but a transparent disclosure of what I’m personally doing.  I’m sorry I haven’t been able to share some of my short-term trade ideas but I’m happy to say that my win/loss ratio is well above 50%. An example would be my silver trade (SLV) which I initiated on May 31st and closed out on Friday, June 10th for a 50% gain! I’ve also been cutting my losers quick, perhaps a little too quick as you can see by my volatility trades for 2016.

I’m currently working on a project which I hope will give people an opportunity to participate in my day-trade and short-term ideas. My partners and I are developing a technology that we believe can let more people actively participate in the market without having to monitor their trades each and every minute of the day! It’s been challenging, exciting and fulfilling to get past the concept phase and into testing the software in a real time trading environment with actual money on the line. For now, that’s all I can disclose about this project but I really just wanted to let you know that this work is part of the reason I haven’t had time to post my blog articles.

Chart of Silver from May 31-June 10 (2016)

SLV.PNG

How to generate income over time by day-trading.

I believe day-trading (if done right) can generate more income than investing in the long-term. Average “investors” look to beat the S&P 500. This means that if the S&P goes up 5% in a year and they make 6% they are doing well, or if the S&P 500 goes down 3% in a year and they only lose 2% they are doing well.  As a day-trader, I seek to make between 25%-100% on an annual basis not matter what! This isn’t to diminish long term investing. They are totally different and each has it’s merits. Since the market tends to go up over time most people (reasonably) prefer a long-term buy and hold investing approach. It’s much less risky, but also much less rewarding. Some of the challenges new day-traders face is the ability to do more than just predict the short-term direction of a stock. It is an extremely emotional, psychological and difficult endeavor and one most people fail at. Without a process it can be a futile endeavor. I have had much success and failure in this area and after 13 years of trading have begun to understand what it takes to implement a successful process. I’ve said it before, day-trading is the hardest thing I have EVER done. That is why I want to share with you a process that may help you discover some success in this area.

4 key pillars to being a successful day-trader over time…

  1. Every trade you make is unique and independent of all your past and future trades. Just because a stock has acted a certain way in the past, doesn’t mean it will act the same again.
  2. You must have a plan before you enter a new trade.
  3. You must be correct greater than 50% of the time (I can write another blog on  this point alone but will save that for another day).
  4. When you’re wrong you must not lose more money than you make when you’re correct.

These four keys may be very obvious but implementing them is not as easy as it sounds. Trust me on that! There are many barriers (including subconscious barriers) which prevent even the best traders from implementing what they know to be true. In the next part of this section I am going to walk you through a trade I made, the psychology behind my decisions and the satisfaction I experienced even though I could have made a lot more money than I did. Then I will finish by explaining how this trade was a small piece of a longer term process and how using the four key pillars to being a successful day-trader really work.

On Friday, June 10th I sold short CAT (Caterpillar). This means I was betting the stock would go down. There was nothing special about this trade. In fact, if you look at the minute by minute chart of the S&P 500 ETF SPY (left side) and CAT (right side) they are very similar (see charts below). CAT did however close down more than SPY on a percentage basis. Subtle differences between the price action on CAT and the broader market provided me with clues and an edge, but I probably could have picked any DOW or S&P 500 stock and had similar success simply by implementing the four keys to being a successful day-trader.

CAT&SPY.PNG

Justifications for shorting CAT:

  1. CAT has had a tremendous run and was due for a pull back (42% rise from Feb low to April high).
  2. The broad stock markets around the world were falling, which meant that it would be hard for large cap stocks like CAT to go up without any game changing company specific news. Big companies like CAT usually (emphasis added) go down on days the broad market goes down and up on days the market goes up, so shorting was the most likely direction to be successful for the day.
  3. At the opening bell, CAT had a deeper sell off than the rest of the market.
  4. CAT is closely tied to commodities like oil which was pulling back sharply.
  5. CAT is closely tied to the US dollar and when the dollar goes up, commodity related stocks tend to perform poorly.
  6. An alert I had previously set triggered which implied that Cat had risen to a level which I believed was a good entry and location for a short trade on a market down day.

*disclaimer – I am fully out of this trade and have no intention to go long or short of it again until market conditions justify a trade.

Despite these justifications, I needed a solid trade plan before I established a position. Remember, this is a day-trade so having a lengthy, detailed, mapped out plan is not really a viable or realistic option. The plan should only take a couple minutes to formulate in your head however, the plan needs to be comprehensive enough to consider all possibilities.

4 Core tenants of a good trade plan…

  1. Determine your time-frame for the trade.
  2. Determine potential entry and exit points before you trade. Entry and exit points may be based on the amount of money you are willing to lose compared with how much you believe you can make. This can be based on a percentage increase/decrease, or a specific price point for the stock you’re trading. For me, this tenant is somewhat dependent on tenant #1.
  3. Determine how many entry points you want to have. For me, I typically do not use all my cash available for the trade on my first entry. I don’t want to clue High Frequency Traders (HFTs) to what I’m trying to accomplish. I also want to save some dry powder to see if I can get a better price. When you play poker do you shove all your chips into the pot when you think you have a decent hand? Probably not, if so please tell me where you play at!
  4. Determine how much capital you are willing to use for the trade.

Once you know these four things you can begin implementing the trade idea.

Implementing my trade plan…

  1. Between 7:43 and 7:46 AM (pacific), I sold short 1000 shares of CAT @ $76.42. I divided my first 1000 shares into two separate trades. I usually like spreading out my trades because I don’t want HFTs to catch on to what I’m doing. There is an extra trading cost associated with this strategy but it gives me some extra time to see if I can get a slightly better price, and to see if I really like the trade. If I do get a better price it covers the cost of the extra trade. In this case my first two trades were at $76.40 and $76.44.
  2. The 1000 shares at $76.42 tied up approx $76,500 worth of day-trading buying power (margin), half of what I was willing to place on this trade.
  3. This was a scalp trade from the beginning. I didn’t want to be in this trade for more than 30 minutes. 30 minutes is a personal preference. There is an opportunity cost if our capital is tied up and we cannot put it to work on a trade generated by our trading software program.
  4. With the initial 1000 shares I was looking for a 2:1 win/loss ratio. My stop zone was $76.62 and profit taking zone was around $76.02. So, if CAT hit my profit zone I would gain $400 but I was only willing to lose $200 if CAT hit $76.62.

CAT_t1&2

Within minutes the stock started to move nicely down in my direction to $76.27. I had two separate orders to buy-to-close the 500 shares @ $76.21 and 500 shares @ $76.17. The idea was to take profit early and maybe re-enter the trade on a bounce. At $76.27 my 1000 shares showed an unrealized profit of approx $150 dollars but suddenly the stock bounced up and my profit was gone faster than it had arrived. This is where the ability to adjust your trade plan can increase your chances for success. Remember, some of my priorities are to be in the trade for as little time as possible, realize a decent profit and move on to the next trade.  My target range of $76.02 was not a hard set number. I imagined it as an “ideal” place to take profits. I believed that it could easily reach that number. One thing I’ve leaned about beliefs (the hard way) is that they often interfere with my ability to make money. When your belief is so strong about the future price of a stock and the direction it should go your brain will subconsciously block any negative information that contradicts your belief. This is because our brains are hardwired to avoid pain. Preconceived believes about the direction and future price of a stock will emotionally and psychologically cause traders the most pain because it’s not until they’re in a bad loss that they realize the data has been indicating all along that they were wrong. Instead, we should strive to understand this dichotomy by interpreting the data and accept that our beliefs may be wrong!

Back to the trade at hand…When the stock surged back up to $76.43 I added 1000 shares to my position bringing the total dollar amount of the trade up to $155,000. This was the max amount I was willing to utilize for this trade, which was the plan from the beginning. However, adding 1000 shares changed the dynamic of my trade in two ways…

  1. I was required to re-think my win:loss ratio. Was $76.02 still my sell target and $76.62 my stop zone. If so then the dollar value of my potential gains would be greater than before but so would the dollar value of my potential losses.
  2. Was my time frame still 30 minutes?

There is no right or wrong answer to these questions. It’s depends on the trader and their appetite for risk. For me, taking money off the table and freeing up capital for the next trade was a top priority. I decided because I was adding more exposure, and taking on extra risk, that I would immediately sell the 1000 shares I bought regardless of what direction it went next. For example, if the stock went above $76.50 I would sell half and take a $70 loss but if it went back down to $76.27 I would gladly sell half for a $150. By tightening my profit and loss zones my ratio of 2:1 never changed and neither did my potential gain or loss. Also, after the surge back up to $76.43 my belief that I was right didn’t change. I didn’t let fear change my perception but I also would be carefully monitoring any new data that might suggest I was wrong.

Sure enough the stock dropped back down to $76.28. I tried buying back the shares at that price but I think High Frequency Traders (algorithms) were not letting me get filled so I settled at $76.30 for a $120 gain. $120 in one minute is a great time/profit ratio (for anyone) so I was very please to take half of my trade off the table, free up cash and be more patient with my $76.02 target.

After thirty minutes CAT was still trending down in my direction but the price hadn’t decreased enough for me to realize much more profit than I had previously taken. I decided to be a little more patient and see where the price would go. After 37 minutes I took off another 500 shares at $76.20 and then after 45 minutes I took off the final 500 shares at $76.05. I made slightly over $400 on the trade.

CAT remainder

Not long after I had sold my final shares did the stock reach my $76.02. I guess in hindsight I could have been a little more patient. The stock went as low as $75.38 which would have been a $2000 gain had I covered all my shares near that level. One takeaway that I’ll try to apply next time is to keep a small position which doesn’t tie up much capital. That way if the stock does make a big move in my direction I can reap the benefits or if it goes against me I can cut it without regret and still have plenty of dry powder for the next trade.

The point of this story is not about how much money I could have gained. Nor is the point of the story to impress upon you a 30 minute time frame like the one I applied here. Actually, for most traders, it would probably be wise to be more patient than I was and let the trend play out. The point of this story is to show how I applied the 4 key pillars to being a successful day-trader. I didn’t base this trade on past CAT trades (or any trades for that matter). I didn’t let any preconceived believe about the direction or future price of the stock affect my decisions. The big point is that if I can repeat this process successfully over 50% of the time I will be be profitable in the long run as a day-trader. Consistent winners add up over time, even small ones. The more trades you can make using this strategy the better your results will be. This is exactly what we are trying to accomplish through the technology we are building, and that’s exactly how you can day-trade to generate income over time.

4 key pillars to being a successful trader over time…

  1. Every trade you make is unique and independent of all your past and future trades.
  2. You must have a plan before you enter a new trade.
  3. You must be correct greater than 50% of the time.
  4. When you’re wrong you must not lose more money than you make when you’re right.

Follow me on Twitter @ Jeffreytief

1 minute chart of CAT on June 10th, 2016.

CATday.PNG

 

Home Run trade on Home Depot

In this blog I will explain my thought process and reasoning why today I scalped Home Depot for a home run.

New All Time Highs

Home Depot ($HD) recently made a new all time new high this week, Monday, March 4 at $136.23. You may know a similar saying, “new highs are likely proceeded by new all time highs”. That’s more of a side-note than the basis for my trade.  What was compelling was that it pulled back over the last couple days with the market. The current profile showed more bullish strength and it was a good opportunity to get in on the action!

HD_Daily

Stock Market Bounce

The market recently pulled back two days in a row. I was looking to see if the $SPY $204 level would hold. Given my skeptical view on this rally, and as depressingly resilient this market has been for bearish trades, there is a lot of volume distribution at $204. A solid break below $204 would signal a liquidation break and a more bearish stance however the pivot point held at $204. At a pivot point you see that the greatest amount of trades happened in this range. I use the Volume by Price indicator to show me where this range is. The key importance here is that these places in the market profile are where traders have to make decisions whether to sell or to buy. These ranges in the market profile are back-stories for us to see on the chart and show multiple dimensions; time, volume and price.  When these three things line up in the market profile it can be a good place to enter a short-term trade. Volume and price showed recent accumulation around $204 (For Home Depot there was good accumulation between $133-$134). When the price didn’t break below these levels in the first 5 minutes of the day traders quickly had to decide to buy or sell.  It was game on for the traders and the long side scalp paid off.

SPY Chart Below:

SPY4.6

Another intermediate indicator I used was the 15 minute 100 exponential moving average. This is the green line on chart below and shows that every dip below has been bought up.

HD_15min

The scalp this morning turned into a pretty decent gain as momentum was strong and the market rallied.

Full results below:

HD

 

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Is the Market Triple Barrel Bluffing?

Some of you know that my primary focus is day trading and I usually don’t hold large positions overnight. Day-trading has many advantages over holding a position over several trading days, weeks and months. It allows me to be in cash overnight, rest easy, and reset fresh every morning. When I choose to hold a short term trade for days and weeks my day-trading buying power (margin) gets used . It’s a sacrifice and opportunity cost in trading.

For me, a short-term trade is one I’m willing to hold for several days or weeks. When I think a good short-term trade  setup starts developing I may scale into a position and set myself up for the counter trend move. Scaling in allows me to maintain my day-trade buying power while building a short-term trade. Timing a counter trend move is a contrarian point of view. The simple definition of being contrary is going against the trend. The problem is that the trend can continue much longer than one expects. The psychological decision to run with or against the crowd is about timing the counter-trend move and establishing good location. This is exactly what I’ve been trying to achieve since I started scaling into the $SDS and $VXX puts, see open trades.

These trades are bearish and the market needs to reverse down for them to work. Right now I’m at an impasse because the market keeps pushing higher. The longer this trend maintains it’s upward trajectory the harder it is to hold this position. The potential reward is outweighed by compounded losses and the fact that my day-trade buying power decreases. I consider this a double loss because my diminishing buying power is an opportunity cost. I’m unable to use as much margin day-trading because it’s tied up in a loosing position. Hand-cuffing myself to this trade is something I need to really evaluate in terms of risk/reward.

The rest of this week will be crucial for me in determining what next steps to take. My options are really limited to three, not simple, choices.

  1. Take the loss and free up my day-trade buying power. Possibly re-enter the position at a better level.
  2. Sell half of my position to free up some of my day trading power. Possibly re-enter another half position at a better level.
  3. Hold strong

There are a lot of similarities in Texas Hold’em Poker and the stock market. I won’t take time to go into all of them here but want to share something I found on YouTube. The following link is a video of poker start Phil Ivey, winner of 10 World Series of Poker bracelets and Tom Dwan. In this short video Tom’s risky but brilliant poker play forces Phil to fold the winning hand. The move is called a Triple Barrel Bluff and the strategy is simple…don’t stop betting! That’s exactly how Tom won this hand. You see, even though he had the losing hand he showed a lot of strength by betting every time a new card was turned. This pretty much sums up how I feel right now about the US stock market. I’m Phil Ivey and the market is Tom Dwan. I could have the winning hand but it’s really hard for me to justify holding because I don’t know what two cards my opponents has. Even a pair could beat me at this point. There is still one more card left in the deck but as market forces seem to be willing and bid the market higher it becomes more difficult to hold this position. Watch video to see final outcome.

philivey2

I could saturate this blog with reasons that don’t justify the markets’ continual climb higher but I’m not going to because it just doesn’t matter. The market will do what it wants to regardless of what I or anyone else thinks. Plus, I could just be flat wrong! I think the market is stretched to the upside and just like a stretched rubber band it will snap back. If the snap back is coming soon then my location for this trade will be stellar! A look at the chart below will shows how incredible this move off the February lows has been and where I’ve entered my short position. A snap back down to even 200 on $SPY will yield a nice profit for this trade but.

SPY3.22

Note: I wrote this blog Tue 3/22. On Wed 3/23 I had my full position. On Thurs 3/24 I closed some of this position. The market has shown weakness but the $SPX (S&P 500) needs to stay below $1940 for me to be highly convinced.

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The Concept of Imagination and how to Defeat Greed.

 

In the blog I outline my SPY put options trade:

If you’re new to trading stocks and are looking for some online education I would highly recommend checking out the Shadow Trader guys on TastyTrade.com. I particularly like Peter Reznicek and Brad Augunas for their daily commentary on what’s happening in the market. Today I was imagining a break below $198 on $SPY and envisioning the dollar signs as we fell to $197 but we never got there and I needed to change my plan quickly and adapt to what the market was saying in order to have a successful trade.

Key points of emphasis from today:

  1. Envisioning a target based on greed is bad.
  2. It’s okay to envision a target but you need a reason why.
  3. Shorts were right at the open but a the market was moving lower it was classically obvious that the downside tempo was slowing.
  4. Understanding the temp of the market is extremely important for day trader.
  5. Market breath is KING and the market cannot become overly disconnected from up volume and down volume.
  6. Every day the data will change and it is important to be agile and adjust your trades based on new information!

In my Monday update I re-hashed my SPY put trade and have continued trading these contracts. Here it is from beginning to present.

Trade 1: March 4, 2016

  • Symbol: SPY (S&P 500 ETF)
  • Contract: Bought-to-open the  $199, March 18th put
  • Entry Price: $1.95
  • Price at close $2.47
  • Trade Type: Aggressive
  • Directional bias: My bias is that the market will go down in the next two weeks
  • Trade Plan: Take profits quickly/reduce losses quickly
  • Time-frame: 1-5 days
  • Blog analysis here and here.

Monday 3/7 Update:

  • I sold 20 @ $2.18 for a 12% gain, then bought 20 more and sold at $2.34 for a 19% gain. I’ve scaled down  to half my original position because these options will decay quickly if I don’t get the move I expect soon.

Tuesday 3/8 Update:

  • I sold 10 @ $3.15 for a 61% gain, then scaled in and out of more contracts (see chart) for a decent gain. I could have done better but I’m happy to take profits off the table and maintain my $SDS puts that I sold on 3/6 and 3/7.

SPY3.8trades

SPY3.8chart

My first sale was not an easy decision to make but it was the right decision. As the Shadow Trader guys, Peter Reznicek and Brad Augunas discuss in this video, it was clearly a turning point for the day and the right place for shorts to get a bit squeezed!

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Open positions and trade plan for this week

As we head into a new week the S&P 500 ($SPX, $SPY) has gone up three consecutive weeks, approximately  10%. I am anticipating that we either consolidate for the rest of the month and wouldn’t be surprised if we get a pullback this week.. As such, I have positioned myself using options, and am sharing my trade setups here in this blog.

I’m putting myself on the line writing this so please keep in mind a few things: This is for educational purposes only and is not intended as a solicitation to buy or sell any of these positions. These positions may be closed, added to or changed by the time you read this blog. I will update this blog to share my end result.  Follow me on Twitter @Jeffreytief.

In outlining these positions I will share with you the symbol (ticker), option contract, entry price, current price, trade type, directional bias, trade plan  and time-frame. Also note, if the contract is a buy-to-open and the current price is higher than the entry price that means I am positive on the trade, if the contract is a sell-to-open and the current price is higher than the entry price that means I am negative on the trade. In sum, if I sell-to-open I want the price to go down from where I entered the position and if I buy-to-open I want the price to go up from where I entered the position.

Bearish Positions

Trade 1:

  • Symbol: SPY (S&P 500 ETF)
  • Contract: Bought-to-open the  $199, March 18th put
  • Entry Price: $1.95
  • Current Price $2.47
  • Trade Type: Aggressive
  • Directional bias: My bias is that the market will go down in the next two weeks
  • Trade Plan: Take profits quickly/reduce losses quickly
  • Time-frame: 1-5 days
  • Blog analysis here and here.

SPY3.4

Trade 2: 

  • Symbol: SDS (Proshares Ultrashort S&P). This is a 2x’s inverse ETF which means that SDS will go up twice as much when the market ($SPY or $SPX) goes down, and visa versa.
  • Contract: Sold-to-open the $20, April 15th puts
  • Premium Collected: $0.59
  • Current Price: $0.73
  • Trade Type: Conservative
  • Directional bias: My bias is that the market will go down or stay flat
  • Trade Plan: Hold position until 4/5 or more premium has been realized. Close or roll if below $20.
  • Time-frame: TBD
  • Blog analysis here and here.

sds.3.6

Trade 3: 

  • Symbol: VXX (S&P 500 VIX Short-Term ETN with exposure to VIX short-term futures)
  • Contract: Sold-to-open the $21, March 18th puts
  • Premium Collected: $0.68
  • Current Price: $0.55
  • Trade Type: Moderate/Aggressive
  • Directional bias: My bias is that volatility will go up or stay flat
  • Trade Plan: Hold position until 2/3 or more premium has been realized but close or roll if  VXX goes below $21.
  • Time-frame: 2 weeks or less

vxx3.6

Trade 4: 

  • Symbol: PCLN (Priceline)
  • Contracts: Sold-to-open the $1310 call, and bought-to-open the $1330 call for May 20th
  • Premium collected: $920
  • Current Price: $950
  • Trade Type: Moderate/Conservative
  • Directional bias: My bias is that the stock will go down or stay flat
  • Trade Plan: Hold position until 4/5 or more premium has been realized.
  • Time-frame: TBD
  • See blog: Priceline Short Idea for more analysis

pcln4.6

Trade 5: 

  • Symbol: AMZN (Amazon)
  • Contract: bought-to-open the March $580 put
  • Entry Price: $15.27
  • Current Price $16.45
  • Trade Type: Aggressive
  • Directional bias: My bias is that the stock will go down in the next two weeks
  • Trade Plan: Take profits quickly/reduces losses quickly
  • Time-frame: 1-5 days

Trade 6: 

  • Symbol: AMZN (Amazon)
  • Contract: bought-to-open the March $575 put
  • Entry Price: $14.64
  • Current Price $14.03
  • Trade Type: Aggressive
  • Directional bias: My bias is that the stock will go down in the next two weeks
  • Trade Plan: Take profits quickly/reduces losses quickly
  • Time-frame: 1-5 days

amzn3.6

Trade 7: 

  • Symbol: FB (Facebook)
  • Contract: bought-to-open the March $110 put
  • Entry Price: $2.46
  • Current Price $3.04
  • Trade Type: Aggressive
  • Directional bias: My bias is that the stock will go down in the next two weeks
  • Trade Plan: Take profits quickly/reduces losses quickly
  • Time-frame: 1-5 days

FB3.4.PNG

Bullish Positions

Trade 1:

  • Symbol: XLF (SPDR Financial sector ETF)
  • Contract: Sold-to-open the March $21 put
  • Entry Price: $0.39
  • Current Price: $0.10
  • Trade Type: Conservative
  • Directional bias: My bias is that the ETF will go up or stay flat
  • Trade Plan: Take 2/3 profit after 66% gain, hold 1/3 to realize more gain closer to expiration or close on a pull back.
  • Time-frame: 4 weeks or less
  • See blog: Financials, a Positive Sign for The Market for more analysis on why I entered this trade.

xlf.3.6

 

Trade 2: 

  • Symbol: USO (United States Oil ETF)
  • Contract: Sold to open the April 15th $9 put
  • Entry Price: $0.63
  • Current Price: $0..36
  • Trade Type: Conservative
  • Directional bias: My bias is that the ETF will go up or stay flat
  • Trade Plan: Take 2/3 profit after 66% gain, hold 1/3 to realize more gain closer to expiration or close/roll position if USO goes below  $9.
  • Time-frame: 4 weeks or less

uso.3.6