Saturday, June 29, 2013

Active-Trader - Habitat for Humanity

Welcome back, Active Traders.

It was a fine week trading where (unlike last week), everything I did in my TradeStation account worked out well.  John Carter came in to the Simpler Options trading room on Monday Morning to find a very oversold market and we put on a number of trades as follows:

- Sold the IWM 92/94 Put Credit spread for a credit of 0.53
- Sold the VXX 25/27 Call Credit spread for a credit of 0.25
- Sold the GOOG 845/840 Put Credit spread for a credit of 0.70

These were the weekly options and all 3 positions went out at maximum profit on Friday without even a closing transaction.  Also, I had profitable trades in the IBM 190/185 Put Credit spreads on Friday (twice) and I had a double on the AAPL Weekly 400 call purchased for 0.21 and sold for 0.58 on Friday.  In all cases, my lot size was small so all this amounted to about a 1% gain for the week.   So that's my new trading plan, more like a chess game which plays out over days, versus a video game that plays out over minutes.

For the rest of the post, I want to talk about another formative experience I had this week. On Tuesday, I volunteered for an organization called Habitat for Humanity in Paterson, NJ.  This was arranged through my corporate job as part of their Global Community day.   I have heard of this organization before, but I did not know what they were about.  What I found was surprising and enlightening.

Habitat for Humanity builds homes for people in need.  They are funded by Federal, State, Corporate and private sources.  In the case of Paterson, NJ, they take depressed and dilapidated areas and rebuild entire neighborhoods, once house at a time.   They are a non-profit organization, but they do not operate like your typical charity and here's where it gets interesting.

Habitat does not give the homes away, they sell them.  The buyers must meet strict criteria for job status, credit history etc.  Also, the buyers must work a certain number of hours building the house itself.  This contribution of "sweat equity" gives the homeowner a sense of pride and ownership.  And the job status ensures that the buyer will meet the mortgage payment, ensuring long-term stability of the neighborhood.

Much of the labor on the house itself is done by volunteers who come in on a daily or repeat basis and this is where I came in.  I worked on laying tile on the floors in 2 bathrooms.  In the process I learned what it takes to lay tile and operate a tile saw.  My co-workers did framing and some of them laid hardwood flooring.

What is so great about Habitat for Humanity (unlike many charitable causes) is that the house build has many positive 2nd order consequences as follows:

- Habitat employs "Team Leaders" skilled construction people who lead the volunteers in their activities.  My team leader Jose showed me how to lay tile. Jose has worked for Habitat for 10 years and we joked how annoying it must be for him to train a brand new crew every day.

- When volunteers can't complete the job, Habitat brings in local contractors to do plumbing, roofing, electrical and other things beyond the ability of volunteers.

- New home construction requires purchase of all types of building material, creating demand in the economy.

- Once occupied, the house becomes a long term source of benefit for the economy, more on that below.

When the house is complete, the buyer gets to purchase it at below market value and for a zero-interest mortgage.  In fact Habitat takes a loss on the property and they estimated it costs about 200K to build the house and they sell it for between 130K and 150K.  So they take a 50K or more loss per house.  But the benefit is that the homeowner gets a brand new house that they could never afford with the approximately 30K annual income of the typical home buyer served by this organization..

What really stuck me is the positive affect that house construction has on the economy.  Feed someone who is hungry and they are okay - for about 3 hours.  Employ a skilled trade person and you turn an unemployment statistic into a productive member of the economy.  Build a house (which takes 1000's of hours of labor) and you now have a productive asset where before you had vacant land and a bunch of raw materials.

Once you have your house, it needs to be equipped with appliances, washer, dryer, dishwasher.  Then there's furnishings, window covers furniture bedding towels, dishes, etc etc.  It creates a whole new chain of demand for goods and services which has other positive 3rd order affects on economy.  Housing and home construction is truly great for the economy and feeds the "accelerator" and the "multiplier" key underlying forces leading to economic growth.

So just think for a minute how the economy could change if this same operation was repeated. Its happening right now through a chain of over 1500 affiliates across the country and across the world.  Check them out at

So take some of your trading profits and donate them to this worthy organization.  Or better yet, get out there and volunteer - you may gain some valuable construction skills in the process.  Also, you will contribute to the growth of the economy and help people in need - not by handouts - but by helping them pull themselves up by their own bootstraps.

Enjoy your weekend.

Saturday, June 22, 2013

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.

Saturday, June 15, 2013

Active-Trader - Day Trading Rules

Welcome Back, Active Traders.

Day Trading is a tricky business. There are dozens of ways to shoot yourself in the foot. You can make good trades 3 days straight, then give it all back on day 4. So a clear analysis of the circumstances behind successfully trading are important in order to become consistently profitable.

Let me say at the outset that I believe it is possible to be consistently profitable as a day trader.

1) Is this trade based on a setup at the daily or larger time frame?   Examples of daily setups we consider action worth include:

Bounce off support/resistance, or retest after bounce
Breach of support/resistance
Key Reversals 
Bullish/Bearish engulfing
Close above the high of the low bar 
Breakout to new all time high
Bullish or bearish elephant bar

2) Is the trade consistent with the general direction of general market that day, up or down? Not applicable to the Fade the Gap trade. If not take a pass.

3) How far away is the stop, and is that amount small enough a loss for you to be able to live with if you're wrong.

4) How far away is the target and is the 2 to 3 times the stop or more?

If all that lines up and the material is right, execute according to plan.

Enjoy your weekend.

Friday, June 7, 2013

Active-Trader - Pattern Day Trader

Welcome back, Active Traders.

It was a pretty active week in my TradeStation account and I am now considered a Pattern Day Trader.   The downside of this is that I have to keep $25,000 of equity in my account, which is not so bad.  The upside is that my intra-day margin level is set to 4 to 1 so for a 30K account I can now swing up to about 120K in stock on an intra-day basis.  That's enough to trade 100 shares of just about any stock out there including GOOG where 100 shares would cost about 89K on a strictly cash basis.

All that said, day trading isn't exactly my game, its just one more tool in the toolbox. But when it works, it works great as shown the chart on the left.  I entered REGN at 9:35 AM after the first 5-minute bar at the market price of $256.38 and sold at 9:53 AM at $260.42.   I did the same thing later in the day where I took out just over a point in 6 minutes time between 2:48 and 2:56 PM.

As for what else worked this week, the Iron Condor in SPY covered in last week's post went out worthless which means it went out at max profit.   For this trade, I made $98 on a 2 lot trade for a total risk of $300.  But this trade was not without stress and it went better than half way to max loss in Thursday's nasty sell-off just to come roaring back into profitability on Friday's rally.

As for what did not work, I put on an AAPL 440/435 Put Credit spread when AAPL was trading close to $447.  At the time, this seemed like a low-risk trade.  The trade took in a credit of $50 for a max potential loss of $450.  This is a pretty horrendous risk/reward ratio, but I did it anyway.  Well AAPL took me for a wild ride trading down below $435 at one point and threatening a max loss.  I closed that one out for a loss of $227 on Thursday and that was a low point of the week.

The trade of the week had to be the following.  On Wednesday 6/5, we had an horrendous sell-off and the $TRIN (described in my post here) closed well above 1.5 and just under 2.0.  This was a classic setup for the "Crescendo Trade" from Hubert Senters.  It goes something like this:

If $TRIN closes < 0.5, go out short the general market expecting a sell-off the next day.

If $TRIN closes > 1.5, go out long the market expecting a rally the next day.

So I went out long DIA on Wednesday on both my taxable and 401K accounts in E*Trade.  I took some heat in the trade on Thursday, but stuck with it through the Friday rally and enjoyed the huge rally in DIA on Friday I am still long.  

This simple setup in $TRIN has an excellent history of picking short term top and bottoms in stocks, so pay attention to the closing value of $TRIN going forward.

That's all, enjoy your weekend.

Sunday, June 2, 2013

Active-Trader - Signs of Distribution

Welcome back Active Traders.

The markets provided little opportunity for upside and downside breakouts this past week. Most of the price action was within the context of prior activity with the exception of Tesla (TSLA).  Some members of the Simpler Options trading room made some good money on TSLA calls.  I didn't take that trade and instead spent much of the week waiting for funds to clear in my TradeStation account. Those funds are now cleared and I am no longer shackled by margin rules limiting my trading activity.

As for the markets generally, we are seeing signs of distribution, aka selling.  I used this weakness to exit a few losing positions (CTRX, FB) and exit some winners as well (DNKN, ABC, HMSY, IWN, NEOG, TARO).   As this point, i'm over 50% in cash which has been my highest cash position all year.

I put on my first Iron Condor position in the SPY this past week as follows, BTO means Buy to Open, STO means Sell to Open.

STO SPY Jun 7 162.5 Put
BTO SPY Jun 7 161 Put
STO SPY Jun 7 167.5 Call
BTO SPY Jun 7 169 Call

The trade was for a credit of about .45 per contract with a max loss of about 1.5 per contract.  For the trade to go max profit, SPY needs to close next Friday between 162.5 and 167.5.  Its my first trade of this type so I kept the size small (2 contracts).  Its going to be interesting to see how it plays out.

As for broad market analysis, we are showing many signs of a top.  The weekly chart above shows this is only the second down week of 2013.  It is also the first week when we have had a close below the prior week's low which shows just how incredible a run to the upside this has been.

The daily chart also shows some distribution with the markets unable to take on the high put in last Wednesday 5/22, a top that was firmly rejected on an intra-day basis.

The 5-minute chart shows almost 3 whole points of range for the day which is about double the Average True Range of about 1.5 which equates to about 15 S&P points or about 70 Dow Points.  Most of the selling came in the last hour of the day which possibly signals that those who trade on end of the day and end of the week signals use the lower close on the weekly chart to exit longs.

It will be interesting to see next week whether we can get some follow-though to the downside.

That's all for now, keep  your powder dry and have a great week ahead.