| Home | My photos | Forex | My trading | Contacts |
|
|
You Can't Become Rich In Your Pocket Until You Become Rich In Your Mind | ||||
|
In contrast to GOOG, IBM is a more stable stock, and the premiums here aren't that highThis shows different strike prices and expiration months for GOOG. At the time this was created, in early November 2004, GOOG was trading at $191.67. If I am interested in buying a call on this stock, I'll start looking at the near month contracts that are in the money. Because GOOG is a higher-priced, volatile stock, the option premiums are going to be highthe higher the volatility, the higher the premium. In this case, I look at the November 180 calls, which are two strikes in the money. The premium on these is still excessive, and I need to go down one more strike price, to the November 175 calls, to meet my criterion of the premium being less than 30 percent of the overall purchase price. The amateur option trader in this case is going to buy the November 220 calls because they are so cheap at $2.55. Never mind that they will expire as worthless. For puts, I first look at the November 200 puts, but they are too expensive. I look at the 210st and they are close but the 220s are better with respect to the amount of premium I want to pay. Remember, all I'm trying to do is buy (or short) the actual stock at a cheaper price. This means I don't want a lot of premium. Looking at the next mondi out in December, these same strike prices jump up excessively in price, so I want to stay with the near month contracts and wait until expiration to roll over into December if I have to. I'll explain more about how to figure out premium shortly. In contrast to GOOG, IBM is a more stable stock, and the premiums here aren't that high. With the stock trading at $91.20, I first look at the November 90 calls, but they have too much premium (see Fig. 163). The 85s fit the bill nicely. On the put side, the first strike in the money, the 95s, work fine. Note that 1 could even go out to the next month, the December 95s, and pay only a little extra in premium. I like to focus on the near month contract in order to reduce premium. However, if the option is set to expire in less than two weeks, then I will go ahead and buy the next month out, though I may have to go even deeper in the money. Following are a few more notes of interest on options contracts: One option contract equals 100 shares of stock. Buy 10 GOOG Nov 190 calls at $12, and that will cost $12,000. To buy an equivalent 1,000 shares of the stock at $190 would cost $190,000. If GOOG rallies by 10 points, these options will move about 6 points. This depends on how far in the money they are. The further they are in the money, the more they will move dollar for dollar** with the underlying stock. Sell the 10 GOOG calls at $18 ($18,000) and pocket $6,000. Maximum loss on this trade is the option's cost, $12,000. By contrast to this last bullet point, if a trader bought 1,000 shares of GOOG at $190 and it gapped down 30 points on an earnings report, the trader would be out $30,000. Options do limit risk if they are purchased correctly. Now that we've reviewed SSFs and stock options, let's get down to the play itself. TRADING RULES FOR BUY FADES (SELLS ARE REVERSED) This is a fade play that focuses on swing positions that last a few days to a few weeks, ] am looking to sell strength and buy weakness. 1. For these plays I am utilizing a daily chart. Because these plays are meant to last a few days to a few weeks, I'm not interested in what is happening on a 5- or 15- minute chart. I want to be able to step back and look at a slightly bigger picture without all the noise found in intraday charts. 2. The only indicators 1 place on the daily chart are an 8 and 21 period exponential moving average (EMA). 3. For longs, I want to see the 8-period EMA trading above the 21-period EMA. Once this upward cross happens, then I can start looking for a setup to occur 4. The specific setup I'm looking for, once the 8 EMA has crossed above the 21 EMA,. is a pullback to the 8-period EMA. 5. The initial stop is the 21-period EMA or 4 percent of the stock price, whichever is greater. Typically the initial stop turns oul to be this 4 percent level. Note this 4 percent level is based on the price of the stock, not my equity level. That is, I'm not risking 4 percent of my equity on one trade; I'm risking 4 percent in the price of the stock. I could have 10 stocks going at one time. 6. Once I'm up 4 percent on the position (I call this my watertnark level), 1 will then move up my stop to the 21 -period EMA. I will then use this 21 EMA as a trailing stop until my target or trailing stop is hit. 7* My targei is an 8 percent move in the price of the stock from my entry price. Although I focus mostly on stocks when using this play, it can also be used on the stock index futures. However, the percentages will be different. On a daily chart, instead of an 8 percent target, I just use a 1 percent target and a 0.5 percent stop to start. If the mini-sized Dow is at 10604, then my target is 106 points, and my initial stop is 53 points, or the 21 EMA, whichever is greater. On a 60-minute chart I cut this in half, using a target of 1/2 of 1 percent and a stop of 'A of 1 percent, or the 21 EMA, whichever is greater. To get these, I just multiply the price of the index by .005 for the target and by .0025 for the stop. A sample play of this nature is discussed in Chapter 18. 8. The easiest way to figure out all these levels is to quickly set up an Excel spread sheet with the formulas already in place (see Figure 16.3). 9. One way to increase the odds of success slightly on long setups is to trade only stocks where the 8-period EMA is higher than the 21 EMA on the weekly charts. This condition can last on a weekly chart for months and even years. If this setup exists on the weekly charts, then it's just a matter of waiting for an entry on the daily chart as per this setup. This process is discussed in more detail. Snapshot of the exact Excel spreadsheet I use to calculate my key stop and target levels. All I do is enter my entry price in the highlighted box. If I'm long on the stock, then I use the long box and vice versa. Once the price is in, the Excel spreadsheet calculates all the levels for me automatically. The formulas are very simple. For example, the target is calculated by taking the entry price and multiplying it by .08 (8%). The initial stop is calculated by taking the entry price and multiplying it by .04 (4%) and subtracting it from the entry. The 4 percent watermark level is calculated by taking the entry price, multiplying it by 04 (4%), and adding it to the entry price, 1 use to do all this manually, and it is a real buzz killer. 1. On August 10, 2004, EBAY crosses above its 8 EMA (see Fig. 16.5). However, since the 8 EMA is still trading below the 21 EMAt 1 am not interested in setting up a buy order just yet. 1 need to wait for the 8 EMA to cross up through the 21 EMA before 1 set up my first buy order. Note: On all these charts, the 8 EMA is the skinny moving average line, and the 21 EMA is the thicker moving average line. 2. On August 19, the 8 EMA crosses up above the 21 EMA. I'm now ready to start bidding for a long, and my entry point will be a pullback to the 8 EMA. The next day I am filled at 79.28 when the market pulls back to the 8 EMA. Now that I'm in the trade, I need to check where to place my stop. The 21 EMA is at 79.08, which is not very tar below my entry level. A 4 percent stop would be placed at 76.11. Since the 4 percent stop is greater, this is the stop I will use to start out with. My target is 8 percent up from my entry, which is 85,62. Remember, once I'm up 4 percent in the position. I will then move rny stop up to the 21 -period EMA. The initial stop and target for this play is highlighted on the chart with the horizontal lines. 3. On August 25 EBAY pushes higher and hits my target, and I'm out for just over $6 per share ($6.34). Now that I'm out, its time to start looking for the next pullback to the 8 period EMA. A trader could have also followed this same play using single stock futures or in the money call options. I will review those possibilities for this play in a moment. 4. On September 9, 10 trading days later, EBAY pulls back to its 8-period EMA, and I am filled at 87.95.1 do a quick calculation and see that my target is going to be 95.78 and my stop is 84.43.1 set my parameters and let my orders babysit my position. 5. Four trading days later my target is hit, and Vm out of the trade. 6. On September 17 the market pulls back to the 8 EMA once again, I take the trade, and I gel in at 91.74 and set my parameters. This would be a stop of 88.07 and a target of 99.08- At the time I did this chart, I was still in the trade, so it is active. I'd like to take a moment and examine the first EBAY play detailed in Figure 16.5 more closely. This play could also have been executed using single stock futures or in the money call options. It is useful to compare these trades to the actual stock trade to get an idea how this setup could have been followed on these various trading instruments. This will also give a trader an idea of the risk-to-reward parameters for each scenario. Although it's the exact same play across all three instruments, the amount risked verses the amount gained is different for all three scenarios. Let's take a look: 310PART TWO Specific intraday aivd Swing Trading Setups Buy 1,000 shares of EBAY stock at $79.28. Total cost is $79,280. Buy 10 EBAY IC September single stock futures (SSF) contracts at $79.28. Total cost is $ 15,856 (20% of $79,280). Buy 10 EBAY September 75 call options at $6.10. Total cost is $6,100. To figure out the premium on an options contract, people can look at the Delta, or, if they aren't familiar with that, just use a calculator: With the stock at $79.28. a $75 call option costs $6JO. $75.00 + $6.10 = $81.10, and $81.10 - $79.28 (the actual price of the stock) = $1.82, The option, then, has $4.28 of intrinsic (real) value and $1.82 of premium. The ratio is 29.84 percent (1.82/6.10). Now that we've looked at the total costs for each entry, let's take a look at the exits: Sell 1,000 shares of EBAY stock at $85.62, a gain of $6,340 or 8.00 percent (or 16.00 percent if bought on margin). Sell 10 EBAY IC September SSF contracts at $85.62, a gain of $6,340 or 40 per cent. Sell 10 EBAY September 75 calls at $12.20, a gain of $6,100, or 100 percent. As you can see, using this exact same setup, a trader could put up $79,280 in cash to buy the stock (or $39,640 if they are using margin), $15,856 to buy the single stock futures, or $6,100 to buy the options. The dollar outcome of the trade is very close across all three scenariosa little over $6,000. By using SSFs or the correct in the money option strike prices, a trader can risk less capital for the same potential monetary gain of the stock play. It is up to the trader if they want to just focus on stocks, SSFs, options* or a combination of the three. QCOM (Gualcomm, Inc.)August 19, 2004 1. The 8 EMA pushes above the 21 EMA, and I place my bid (see Fig. 16.6). Two days later, on August 20, 2004,1 am filled at 35.47,1 place a stop at 34.05 and a target at 38.31. By the time trading is done this day, the stock is already up by 4 percent from my entry, so I move my stop up to the 21 EMA, which is 35.34. 2r On Monday, August 23, QCOM continues to push higher, and my target is hit. I immediately sei up a bid to buy the next pull back to the 8 EMA, 3. On August 30 my trailing bid is hit, and I'm in at 37.51. 1 place a stop at 36.01 and a target at 40.51. 4. About two weeks later, on September 13, my target is hit. Note that when the stock is up by 4 percent from my entry on September 7,1 raise my .stop to the 21 EMA at 37.42, and ] trail this stop until my target is hit. As 1 did with EBAY, let's take a look at executing this same QCOM play across all three trading instruments. Here is how the entries would break down: Buy 1,000 shares of QCOM at $37,51. Total cost is $37,510. Buy 10 QCOM IC September SSF contracts at $37.51. Total cost is $7,502 (20 per cent of $37,510). Buy 10 QCOM September 35 calls at $3.10. Total cost is $3,100. To figure out the premium on the QCOM options, just take $35.00 + $3.10 = 38.10. There is $2.51 of real value ($37.51 - $35.00) and 0.59 cents of premium (3.10 - 2.51 = 0.59), The ratio is 19.03 percent (0.59/3.10). We've looked at the total costs for each entry, so now let's take a look at the exits: Sell 1,000 shares of QCOM at $40.51, a gain of $3,000 or 8 percent, or 16 percent if using margin. Sell 10 QCOM IC September SSF contracts at $40.51, a gain of $3,000 or 40 percent. Sell 10 QCOM September 35 calls at $5-90, a gain of $2t800, or 90.32 percent. Once again, using this exact same setup, a trader could put up $37,5)0 in cash to buy the stock (or $18,755 if they are using margin). $7,502 to buy the single stock futures, or $3,100 to buy the options. The dollar outcome of the trade is very close across all three scenariosabout $3,000. Now that you have the idea, I'm just going to focus on the actual stock plays for the rest of this chapter. Of course, not all stocks have options and single stock futures available on them, so some of these plays can only be executed on the actual stock. KLAC (KLA Tencor Corpl-Ouly 9, 2004 1. When the 8 EM A crosses below the 21 EM A and the price actior moves below both these levels on KLAC. I start looting for the next shorting opportunity (see Fig. 16.7). I want to short a rally back to the 8 EM A, and on July 9, 2004,1 am filled at 46.19.1 place a stop at 48.04 and a target of 42.49. On July 13, my posi tion is up by 4 percent so I move up my stop to the 21 EM A, which is 46.84. 2. On July 14 KLAC gaps down and opens through my target, I'm filled at the open at 41.61, 88 cents better than my target for a nice gain. KLAC is still trading below its 8 and 21 EM As, so 1 set up my next short, which would be a rally back to its 8 EM A. 3. On July 20 the market rallies back to the 8 EM A, and I'm filled at 41.81. My stop is 43.48, and my target is 38.47. On July 22, the slock is up by 4 percent from my entry, so I move my stop down to the 21 EM A. which is 42.84. 4. On July 26, my target is hit, and I'm out for an 8 percent gain. I start looking to short again at the next rally back to the 8 EMA. 5. On July 29 I'm back in short at 39.33.1 place a stop at 40.90, and my target is 36.18. 6. The next day KLAC gaps up on positive news and rallies to my stop. I'm out for a 4 percent loss, I note that the 8 EM A has not crossed above the 21 EM A. I sit back and wait, because if KLAC trades and closes back below its 8 EM A, I will set up an order to short the next rally back to its 8 EM A. 7. A few days later on August 3 KLAC closes below its 8 EM A. I set up an order to short a rally buck to its 8 EMA, and on August 4 I am filled at 39.93.1 place a stop at 41.53 and a target at 36.74. The stock pushes higher, and on August 5 it comes within spitting distance of my stop, but doesn't make it and closes well oft its highs. 8. On August 10 I have a 4 percent gain registered, so 1 move my stop down to the 21 EMA, which is 40.29. On August 11 KLAC gaps lower and pushes lower all day. hitting my target. 9. KLAC is still trending lower according to the 8 and 21 EM As, so I set up another order to short a rally to the 8 EMA. On August 17 KLAC rallies, and I am filled at 37.15.1 place a target at 34.18 and a stop at 38.64. 10. The market chops back and forth for a while, and on September I 1 am stopped out for a 4 percent loss. QLGC (QLogic Corp)June 14, 2004 1. On June 14, 2004. the 8 EMA on QLGC crosses below the 21 EMA, setting up a situation in which I could start taking new plays (see Fig. 16.8). I place an order the next day to short a rally back up to the 8 EMA, and I'm filled at 28.14.1 place a stop at 29.27 and a target at 25.89. 2. On June 16 QLGC dry heaves and pukes for a nice down day. It gets close to my target, bui noi quite. Since Tm up over 4 percent on the play, I move down my stop to the 21 EMA, which is 28.22. The very next day my target is hil at 25.89. I'm now flat on QLGC, and I begin looking at new entries. A new entry, of course, would mean a rally back to the 8 EMA, 3. I place my order and am filled on June 22 at 26.68.1 place a target at 24.55 and a stop at 27.75. 4. QLGC continues to rally, and on June 25 I'm stopped out for a 4 percent loss. 5. The day after I'm stopped, QLGC moves back below its 8 EMA and closes below it. This is the trigger I'm looking for before I set up my next trade. I need to see a close back below the 8 EMA in order to start setting up orders for a new short position. The next day I set up an order to short a rally back to the 8 EMA, and I'm filled on June 28 at 26.86. My stop is 27.93. and my target is 24.71, QLGC starts moving my way. and on July ! 1 am up by more than 4 percent on this position. At this point I move up my stop and start using the 21 EMA as a trailing stop, starting with 27,12. 6v QLGC continues to bleed like a stuck pig, and on July 6 1 am out at my target. I set up an order to short a rally back to the 8 EMA. 7. On July 9 my order is hit, and I'm short at 25.85.1 place a stop at 26.88 and a target at 23.78. On July 14 QLGC comes close to my target, but close only works when you are throwing a grenade. My target isn't hit, but 1 do move my stop down to the 21 EMA, which is 26.03. 8- The next day QLGC moves higher, and I'm stopped out for a loss of -18 cents. One question 1 usually get in a situation like this is, Hey, since the stock was so close to your target, why didn't you just take the profit? The main reason 1 don't is that by bringing that human judgment into the equation, you do two things: First, instead of this being a relaxed system to trade, it now becomes an intense system because you have to watch the moves closely on an intraday basis in order to decide when to get out. Second, I've found that most traders, when they are in a trade, lose all objectivity. By actively managing this trade, many people will close it out as soon as it starts to go against themt or they'll start taking profits too soon. In this respect, you might as well be day trading without a plan, which is the most common reason traders lose money. Choose your setup, choose your parameters, and stick to them! How else can you measure the effectiveness of a system unless you stick with the parameters? 9. On July 16 QLGC closes back below its 8 EMA, so I set up another order to short. I'm filled on July 20 at 25.10. My stop is 26.10, and my target is 23.09. 10. QLGC bleeds lower, and my target is filled on July 28. Remember, once I am up by 4 percent in the position, 1 start using the 21 EMA as a trailing stop. 11. On July 29 QLGC bounces back up to its 8 EMA, and I'm filled on a short at 24.09. My target is 22.16, and my stop 25.05. On August 5 I am up by 4 percent in the position, so I move my stop down to the 21 EMA, which is 24.23. 12. On August 12 my target is hit, and I'm out for an 8 percent gain. CEPH (Cephalon, Inc.)May 3, 2004 1. On May 3, 2004, the 8 EMA on CEPH crosses below the 21 EMA (see Fig. 16.9). 1 set up an order to short the next rally back up to the 8 EMA. On May 5 my entry is hit at 57.42. My target is 52.83, and my stop is 59.72. 2. On May 7, in addition to celebrating my birthday (after you rum 21, what's the point?), CEPH moves down by over 4 percent so I adjust my stop to the 21 EMA, which is 57.30. This now becomes a trailing stop that I update at the end of each trading day. 3. On May 19 my target is hit. This is a pretty typical swing trade, where I'm in the position for a little over two weeks, and my daily management of the trade is at the absolute minimum so I can focus on other things. A pure day trader who was flipping in and out of CEPH during this time could have easily done 30 trades and had nothing to show for it except a pile of commission costs. SBUX {Starbucks Corp)May 24, 2004 1. As long as there are day traders, Starbucks will be able to charge as much as it wants for a cup of coffee. There is no bid and ask when it comes to a Grande Latte, Traders will take that one at the market On May 24, 2004T SBUX has its 8 EMA cross up above its 21 EMA (see Fig. 16.10). This is my signal to set up a bid to buy the next pull back to the 8 EMA. On May 25 my order is hit, and I'm filled at 38.64. I place a stop at 37.09, and my target is 4173. 1. On May 27 SBUX moves up by 4 percent from my entry, so I move my stop up, using a trailing 21 EMA. My stop on this day is moved up to 38,71. The stock continues to push higher, and on June 3 my target is hit, 1 start to set up my next bid on a pullback to the S EMA. 3. On June 14 SBUX pulls back, and I am filled at 41.%. My stop is 40.28, and my tar get is 45.32. The stock grinds higher from this point, and on June 18 it hits my 4 per cent watermark. I tighten my stop, using the 21 EMA as my guideline. My new stop is 41.51. On June 25 and June 30 the stock pulls back very close to the 21 EMA. and obviously very close to my stop. However, it doesn't hit, and I'm still in the trade. 4. On July 2 SBUX firms, and my target is hit for a gain of +$3.36 or 8 percent. GS (The Goldman Sachs Group, Inc.)August 24, 2004 1. On August 24, 2004. the 8 EMA on GS crosses up above the 21 EMA (see Fig. 16.10). 1 start setting up bids to buy the next pullback to the 8 EMA. On August 25 I am filled at 87.75.1 place a stop at 84.24, and my target is 94.77. 2. On September 7 this position is up by 4 percent from my entry, and I adjust my stop to reflect the current position of the 21 EM A, in this case 89,06. 3. I update and change my stop at the end of each day, reflecting the movement in the 21 EMA. GS pulls back and hits its 21 EMA nine trading days after 1 start using the trailing stop. I am out at 91.05 for a gain of +3,30 or +3,76 percent. This is another good example of a low-maintenance trade that lasts the better part of a month. This is a very manageable type of trade for people who work full time. I should know, because these are the main types of trades 1 did when 1 was doing my stint in the corporate world. |
|
|||||||||||||||
Previous Issues
|
| ©2007 Olesia | Home • My photos • Forex • News • My trading • Contacts |