Active-Trader - Checkers and Chess

Welcome back, Active Traders.

It was a rough week in the markets for your humble blog author. Nearly everything I did in my TradeStation account turned out badly.  Things didn't go so well in my E*Trade account either when the broad markets turned nasty on Thursday and Friday. But I still have a relatively large cash position and this bit of adversity has provided an opportunity to re-evaluate my trading strategies.

The chart on the left is a case in point.  On Tuesday 6/19, GOOG had a nice 12-point move and ended the day close to the $900 level.  On Wednesday, GOOG shot up to the $903 level and it looked clear to me the stock was good for at least $910 later in the day or possibly the old high of $920 later on the week.  So I bought 100 shares with a 1-point stop loss and I was stopped out less than a minute later.  Nothing like booking a $120 loss in under 1 minute to get your day started off on the right foot!

Taking a look at my day trading rules from last week's post, I was following nearly all of them except one - there was not a stop-loss point anywhere close here and I was just easy meat for the market makers.  Sure enough, GOOG ended up rallying and briefly tagging $910.50 later that day, but not before selling off down to $897.50.

Catamaran (CTRX) is another case in point.  Based on analysis of the daily chart, it seemed clear to me that the recent rally up to the $55 area was sure to fail and the stock would close the the gap on the daily chart and trade back down to the $50.50 area.  Sure enough it did as I expected by not before I got stopped out twice in my attempts to short this stock.  

So what is the problem?  My chart analysis is correct, and the stocks are moving as expected, yet I keep getting stopped out on the slightest wiggle in the price movement. So what's the answer?

Fortunately the answer is close at hand and that is Options Trading!  As I have learned through my association with John F Carter,  there are many ways to use options to express an opinion on price movement.  And you can enter the trade with small size (1 lot) and have defined fixed profit and loss at the time you enter the trade.   Also, commissions are low just $1 per option per side on TradeStation.

By the end of the week, I was starting to catch on as follows. In this case I had an opinion about the price of Boeing (BA) that the shares would close above $100 for the week.  So I sold the weekly $100 / 97.5 Put Credit spread for 0.50.  Max gain on this trade is $50, Max Loss is $200 per contract.

The shares took a wild ride, particularly on Friday when the shares traded down to $96.0 before recovering and closing the week just a hair under the strike. Had I done nothing, the trade would have gone to max profit, but didn't want to risk assignment so I close out for about .15 short of max profit which is not bad.  I have seen this before in Put Credit Spreads,  where the shares go to the point of max loss, then recover and end up closing at the max gain.  So you have to be pretty sure that the shares are going to close against your short put before prematurely closing a position like this.  Basically, you have to be willing to let it go to max loss for the math to work in your favor on these trades.

Also, Option trading has a life style component where you can spend 15-20 minutes per day putting on positions and then just go about your business with the knowledge that your maximum loss is capped.  This way you don't have to sweat every tick and you can let the newbies try to pick tops and bottoms.  Also you are able to with stand the wild swings, as the markets gyrate around find all the stop orders.

I read an article on Futures trading a long time ago and it said something like this.  Its the job of the futures market to take the money from the weak hands and move it into the strong hands.  Its no different from the bully taking you under the bleachers, threatening to beat you up and take your money.  The market will take the price to the point of maximum pain for the participants to shake out the weak holders, the go back to what it was doing before. You can call it a conspiracy of the market makers, but its really just the markets doing what they do.

Enjoy your weekend.