Meta-Traders - 2 Trading Setups

Welcome back, Meta-Traders.

It was another spectacular week of trading with my net worth hitting new highs several times during this past week.  The Dow Jones Industrial Average made new closing highs every day of the week but Monday and the SP-500 made new all-time closing highs on Wednesday and Thursday and gave some back on Friday.

One thing I have learned from being associated with John Carter is that good traders have a library of setups in their arsenal.  And they simply scan the markets at the key times and look for these setups.  Here, I will give you 2 setups that worked for me this past week along with some examples.

The Morning Scalp

This trade is done with options and on fast moving, high priced stocks.  I do these in my TradeStation account only since you have to be very nimble and profits could come and go in the time it takes to hit the refresh button on the browser when accessing your web-based broker.  Here's what to look for:

Set your charts to a 5-minute time frame and watch the first 5-minute bar of the day.  Be careful if there is a price gap between yesterday's close and today's open.  In the above case (which was GOOG on Wednesday), there was no price gap. Also note the first bar of the day was a large, green bar or in Oliver Velez Parlance, a "bull elephant" bar, so the bulls are clearly in charge.

Next, find the cheapest option you can find with a delta of 0.7 or above.  Use the closest expiration date you can find since you will be in and out of this trade in minutes.  In the above case, I chose GOOG 130412C765 which was the weekly 765 calls.

Next, wait for the pullback which a counter-trend move caused by profit taking by all the professional traders who take the other side of the opening price action.  Set a limit order inside the spread and wait for a fill.  Don't chase the price action and put in a market order since this increases your chances of being fresh meat for the market makers.  In my case I was filled on the GOOG 765 call at limit of 16.

Once filled, put in your stop loss order.  I chose a stop of $1 or $100 and was going for a take profit of $2 or better. Once the trade is on, only 2 things can happen, either you get stopped out, or you take your profit.  On the above trade, I came within $10 of being stopped out, just before the price reversed and headed higher, so I lucked out somewhat.

I did this trade 3 times this week:

GOOG 790 puts where I risked $100 and made $200

GOOG 765 calls where I risked $100 and made $300

REGN 200 calls where I risked $100 and lost $100.

This last one was a learning experience since the bid-ask spread on the REGN weekly calls was nearly $100.  I put my limit order in at 12 and got a good fill.  I put my stop order in and got stopped out almost immediately since the $100 was nearly the spread itself!  So be careful with less-liquid options and stick with the popular, highly liquid stocks such as APPL, GOOG, PCLN etc.  Either that or use a larger stop loss.

One last thing - if you get stopped out, stand up and high-five yourself because you followed your plan.  If you take profits, don't celebrate since (thank you John Carter) "Euphoria is the worst kind of stupid."

The Closing Continuation

This trade is done in the last 30 minutes of the day.  Set your charts to daily time frame and look for a stock which has had a big day to the upside, preferably into new high territory.  In my case this week I picked  CELG- Celgene which had a huge week along with a number of other large biotechs, BIIB, CELG, AMGN and REGN.

Anyway, check out the price action on this big green bar in the middle of the chart.  This was on Wednesday when the SP-500 had a huge day and CELG had about a 5 point move from about $116 up to about $120 and closed the day at $120.90.

In this case, I chose the CELG April 120 calls at a limit of $2.  In one account, I fat fingered the order and paid the market price of $2.10.  In the other account, I entered it properly and was filled at a limit of $2 even and held them into the close.

For this trade, we are looking for continuation of the prior days move, preferably with an opening gap in our favor.   Fortunately in this case I got it and was able to sell the contract for $3.10 on one account, and about $3.50 in the other account.  That's about a 50% gain in less than 24 hours and not bad for a day's work!

For a final example, take a look at the LNKD - Linked-in daily chart.  This stock had a huge day on Friday and closed at a new all-time high clearing the prior all-time high at $185.14.   I went into the weekend long the April 180 calls at $7.  I'm looking for a quick gap up on Monday morning and if all goes well, I will close the contracts for about $10.  Watch the open of LNKD on Monday and we'll see what happens!

That's all for now.  Enjoy your weekend, spend some time with your loved ones and get some rest.