Archive for May, 2006

Book Purchase of Option Volatility & Pricing

Thursday, May 25th, 2006

Tonight (early Thursday morning) we purchased Option Volatility & Pricing by Sheldon Natenberg. Perhaps after reading and applying the ideas contained therein we will promote ourselves to The Intermediate Trader.


Stock Sell of STKL

Tuesday, May 23rd, 2006

After our STKL stock showed 3 red arrows a few days ago, we decided to sell it for a $0.01 profit at $9.21. That’s a %0.1 profit in 1 month. Not that great but anything in the black is better than being red. What happened here reinforces our original strategy: we are looking for short-term momentum plays. This stock was held too long; at its peak the price was up 33%. Are we saying we should have sold at its peak? No; that’s impossible too tell. What we should have done was have an exit strategy. Decide ahead of time at what point to sell. For stocks, 20% would have been ambitious. For options, we will typically set a limit to cash out at 100%. Finding points of resistance or support will weigh in to our exit strategy.

Option Purchase to Open AKDFZ

Monday, May 22nd, 2006

Today was another amateur day. We purchased the June $32.50 call on Advanced Micro Devices Inc. (AMD) at $3. Last Friday Dell announced that they are planning to replace some of their higher-end servers with AMD chips, in place of Intel’s. Their stock shot up with 3 green arrows with 4X average volume. These 4 technicals were great, but what should have kept us out of this play were the facts:

  • Slight down-trend of the 30-day moving average. (Today it has flattened out.)
  • Down-trending industry group.
  • Bearish sentiment on the markets as a whole.

We are not going to exit this play yet. Since the price is above average, the trend is turning, and may bounce off the 30-day m.a.

We were torn between paper-trading and purchasing the options, so we invested a smaller percentage into this speculative play.


Option Sell to Close UVART

Wednesday, May 17th, 2006

Today a limit order at $2.20 sold us out of the UVART position, resulting in a 100% return in 2½ days. The limit order to sell was placed the same day the option was purchased (Monday), since a 100% return seems to be a significant enough move where any more may result in an over-extended position, unless the news is exceptional to justify it, which in this case it was not. No doubt the record drop in the markets today, with the Dow Jones having a loss of 214 points, the worst in three years, accelerated our strategy. To compare, NVDA dropped 4.0%, whereas the NASDAQ on which it is listed dropped 1.5%. News agencies attribute the widespread sell-off to the consumer price index rising 0.6%.

Option Purchase to Open UVART

Monday, May 15th, 2006

This morning (after the opening bell) we purchased June $26.25 put options on NVidia Corp (NVDA) for $1.10. Thursday of last week Nvidia released positive Q1 earnings, but received negative prospects of future growth by analysts. 3 red arrows, mediocre fundamentals and more than double sell-off volume indicates institutional selling. The question is how many institutions are bearish on this stock.

The VIX hit a 3-month high this morning, which is a mixed signal here. The news is also mixed. If there is no significant downward movement this week, we may sell.


Option Sell to Close DLQRE

Friday, May 12th, 2006

Our DLQRE options were sold near the end of the day today at $1.20. We made 4% on this 4-day trade. We wanted to get out of this trade as soon as possible (without incurring a loss) since we had lost so much of our leverage when it was originally purchased. The $1.20 limit order was set earlier in the week.

The main points learned from this trade are:

  • Never submit a market order prior to the opening bell if there is a significant chance of abnormal trading on the security.
  • When trying a new strategy (try to) paper trade it first. On the Dell option we ignored 2 of the fundamental indicators (macd and stochastics). Given the number of opportunities that come about, there is no need to compromise these indicators for the trade that motivated opening this option play.


Option Purchase to Open DLQRE

Tuesday, May 9th, 2006

Today we traded like an amateur. Last night we placed a market order for the June 2006 $25 put option on Dell Inc. (DELL), and it was purchased just after the opening bell this morning at the peak-high price of $1.15. DELL opened at $24.64. That means the instrinsic value of the option at that time was $25-$24.64=$0.36, which we paid $1.15 for. Not a good deal at all. Moreover, on a day of heavy trading the stock closed up at $25.20, meaning we are now out of the money. So why did we purchase this option? Good question. The short answer is that we acted emotionally, and didn’t stick to the system. Longer answer:

  1. After the closing bell yesterday, Dell announced that it will fall short of hitting its first quarter profit target.
  2. The stock is already down-trending, according to the 30-day moving average.
  3. The stock is in a down-trending industry group (Technology/Computer Hardware).
  4. Weak to average fundamentals.

What did we learn from this? Kind of early to say – let’s see what happens in the next few days or weeks. Fortunately we didn’t invest as much into this speculative buy.

Other notes for future reference:

  1. Dell stock fell 5.8% to $24.90 on Monday during after-hours trading after the announcement. So a fair amount of trading already occurred after the announcement and before our option purchase.
  2. Today’s volume on DELL is 84M, average is 25M.
  3. Today’s volume on DLQRE is 13,333, open interest is 23,898.

There is one thing that we learned from this so far: Be cautious when placing overnight market orders for securities that may be in high demand. The price you buy it at may be temporarily inflated by the demand. In this case the $1.15 price is the current all-time high for this option.


Option Purchase and Sell of AEQRU

Monday, May 8th, 2006

Been lagging in updates due to a small vacation. Last Thursday May 4 we purchased Adobe Systems Inc (ADBE) June 2006 $37.50 put options at $3.10 a day after the company announced lower expectations in Q2 results. At the time ADBE had heavy volume on 3 red arrows:


Today in mid-day we sold the options at $3.65 for a 17.7% gain in 2½ days. However it seems we sold too early. ADBE had a strong support at $34 for the past few days; see first image below for a 5-day view. Since we were already up with a healthy profit, and didn’t want to risk a pull-back, we sold. Part of the speculation was that the news wasn’t very strong — it wasn’t like the actual earnings were posted as it was for the Motorola option play. Part of what gave the impression of the strong support was the scale of the 5-day image — when the chart includes the large jump that produced the sell signals, it also scales the graph so that other fluctuations seem small. This is a pattern to learn from.


Option Sell to Close MOTQE part 2

Tuesday, May 2nd, 2006

All MOT options were automatically sold this morning at the market value of $3.50, a 40% gain from the purchase price of $2.50 7 business days ago.

Below is a 6-month graph of MOT with the resistance line drawn in black. This is drawn from connecting the lowest closing prices, and extrapolating forward. It may very well go lower in the immediate future, but this option play should not assume it, as this rate of return is good enough.

We will be looking for more option plays like this. The key features here that motivated this play are the following, based on the day with the right-most 3 red arrows:

  • Broke down through 30-day moving average
  • MACD turned negative
  • Stochastics crossed down through 75% mark
  • Heavy volume (at least 150% of average)

In addition to these technicals, there should be 1 other outside influence adding force to the play, without anything else significant that would push it in the other direction. In this case the outside force was the down-trending industry group.


Option Sell to Close MOTQE

Monday, May 1st, 2006

This evening we submitted a market order to sell all of our options of MOTQE that were purchased on April 21. It will be fulfilled tomorrow morning. We are changing our intial strategy – the level of resistance identified at $20.50 was too optimistic, especially when seen in greater detail on the 6-month graph below. Drawing a line from the 2 lowest closing prices last February and March brings us to where we currently are now. Given the risk to begin with of simple put option strategies such as this, we are comfortable with our gains and are choosing to risk selling too soon rather than too late.