Short Term Option Plays

Eman posted on 06/15/17 at 03:17 PM

Short Term Options Plays can be tricky. Sometimes goals are met and sometimes they aren't - like today with AMD. I changed from the 13 to the 12.50 to the 12 strikes respectively for calls on AMD. Then disaster hits when I'm already unhappy that I didn't take my profit when AMD was at 13.28. At that point my Options House account was flirting with about $ 1,000, but had been lower than that. Through successive trades due to the disappointing price action with AMD, my account is below 400. So what can be learned here? Either I didn't assess things right - no I don't think I did - (when at 13.28, bullish moving averages seen and no cross overs intraday when I looked at it), or I had too much time in trade and didn't quickly take profits. So let's analyze the goals. Fred McAllen talked about 3 - 5 days for how long it takes for a price reversal to happen on a short term time horizon. I'm not sure if it was in his 1st or 2nd books, but its in one of them (Charting and Technical Analysis or Trading the Trends). From lows to highs, we can't necessarily expect price to go to the stratosphere on the bullish side or crater to the downside. In the 6 month chart for AMD as an example: We saw a 15.55 high - at end of Feb; If anyone placed any kind of bearish play on here - you would have impeccable timing! If you missed that move; perhaps you saw the 14.68 high on March 13th. Maybe you missed both, but started noticing weakness for AMD and Earnings was coming up as well (the last earnings was 1 penny in the red). So you saw a couple of days of successive highs at the same price level - March 31st - April 5th. At any of those tops near 14.75 price level you could have place a bearish trade and have been proved right with a potential profit depending on what you did after entry. One last try was at 13.755 right around earnings; if you had made a bearish trade at that point, you would have only been disappointed twice in the 3 month after the drop on 2 spaced apart rallies with the buzz about the tech conference things in early June. On May 1st we had a slightly less high of 13.63 right before the big drop on earnings news. The price gap goes from 13.25 to 11.76 (the top of the big red candle that ensued). Then I saw opportunity near 9.86 to low 10's. That was perfect for a bullish entry since the big drop already happened. However, the Intel licensing thing with AMD was a RUMOR and someone was anxious to make a quick buck on AMD with heavy volume happening as well. That bullish move had price go to a whopping 12.77 high on May 16th as after market trading was at 12.70+. However, since that was after market, mostly, an exit on a bullish options trade would have had to happen sooner. before the close. Next lows after a big drop from 12.77 were: 10.62 and 10.56 respectively and thus weren't as low as the low 10's where my other entry was. The interim price action was distressing after the big move on the RUMOR. Then we had something more solid with the tech conference stuff and AMD going into a new MAC OS for APPLE. June perhaps was brighter. Got a high of 13.40 on June 9th and you could have easily made a good decision around 13.28. I unfortunately didn't see it. Price blew through 12 where the 65 day moving average was on the 3 month chart and down through the 15 day moving average of 11.61. These are 2 confirmations for bearish behavior as the 3 month price action should take a little more credence than closer in. Especially with the time horizons on those moving averages being within the 3 month chart of around 90 days. The 200 day moving average is now at 10.35 on the 3 month chart which is up from the 10.15. What I am getting at is that if you are doing slightly out of the money OTM or NTM trades either with calls or puts (without being part of a spread), a 0.50 to 1.00 gain is reasonable and when enough profit shows even if you haven't completely got to the full extent of your goal given time in trade - you can take a voluntary profit! Why? For a few reasons; we can't expect price to go huge in either direction as I said before - so having a realistic range to have in mind from the 3 month and / or 6 month charts is a start - you say to yourself - 'here is where AMD has been on its price action' - sometimes there is events associated with various extreme price moves - like the one I was blindsided by with the Fed interest rate hike that I knew was coming but didn't listen to ultimately in time - ahead of the event which massacred Nasdaq in the short term. In the 6 month chart before Feb 28th / beginning March we were mostly bullish; after that point, we went bearish. overall. But we can be bullish or bearish within that scope. Range on 6 month was 9.42 on Jan 18th to 15.55 on Feb 28th. So if we went outside of that price range, something else is happening either bullish or bearish and you'd have to stretch to longer term charts. Now from Feb 28th till now, we are within 15.55 high and about 9.85 low as of May 3rd. So with those ranges, we need to develop a sensitivity to price probably within 0.25 increments. The Options Chains either allow for $ 1 apart or 0.50 apart. I like the Options Chains for 0.50 apart for slightly out of the money (OTM) calls or puts.and usually about 45 - 50 day time horizons to give me about a 10-15 day look. When those types of plays are made, we have to be really right on direction as the Najarians would say - since we started out OTM, going ITM (In the Money) is what we want, but how much can we realistically expect? Perhaps we need some patience to have the position work especially if our entry wasn't exactly perfect like maybe you got filled when AMD was at 10.03 for instance on a bullish trade, but missed it when we were at 9.85 / 9.86 for a very brief time. For that 10 strike , you should have been fine for calls when that occurred. Now if you have more money available, you might start with ITM options for calls or puts with a given delta. Perhaps you are so afraid of being wrong like you could have been today on the Nasdaq reversal to the downside. That's ok - just know that you have more intrinsic value and some time value (IV and TV) rather than just TV, but you couldn't buy as many contracts, however. That's ok too, because your ITM option is weightier than those OTM hopefuls. Pete and Jon Najarian showed the INTC example in their book, "How we trade options", but the time horizon was longer than I would do. So they were willing to wait for a doubling of money with probably a 6 month time horizon although I don't completely remember the details of the trade. I think they made it simple too, and just showed 1 contract and how price was affected given the chart analysis. As for MACD, we are close to the 0 and are coming off of the bullish tear on a 3 month chart. And the Fast stochastic is bearish but near the 40. MACD should be a bit more important than the stochastic, as price could still move down despite the paring of losses today. I'm looking for another sudden drop or at least further weakness in the COMP - Nasdaq Composite - take your pick on a play. My switch and entry on the 11.50 strike for July 28th was distressing and the paring of the losses to a minor extent doesn't help. But maybe what I see now will pay well when some sudden drop occurs or we head to more bearishness.

Edited by Eman at 06/15/17 at 03:38 PM

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Posted by Eman on 06/15/17 at 03:17 PM

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