OPTION TALK: Trading to the Plan
Email This Article
Print This Article
SubscribeMOST POPULAR ARTICLES
- Kaeppel's Corner: Twisted VIXter
- Closing Wrap-Up, July 29
- Morning Watch, July 30
- Market Trends: Platinum Probability Bands
- Economic Watchdog, July 29
- Midday Action: July 29
- Morning Watch, July 29
- Growth Stock Swing Option: July 28, 2010
- Closing Wrap-Up, July 30
- Real-World Trading: Using Calendar Spreads in Sideways Markets, VII
- Real-World Trading: Using Calendar Spreads in Sideways Markets, VII
- Kaeppel's Corner: Twisted VIXter
- Real-World Trading: Using Calendar Spreads in Sideways Markets, Part VI
- Real-World Trading: Using Calendar Spreads in Sideways Markets, Part V
- Fundamental Focus: Insuring Your Portfolio
- Trading Calendar Spreads with Options
- REAL-WORLD TRADING: Five-Minute Success Formula
- Midday Action: July 30
- AU Editorial: Money and Holidays
- Hot Shots, July 30: Straddling a Breakout Performance from Within
- Economic Watchdog, July 29
- Market Trends: Platinum Probability Bands
- Midday Action: July 29
- Growth Stock Swing Option: July 28, 2010
- AU Market Review: Market Action
- Midday Action: July 28
- Real-World Trading: Using Calendar Spreads in Sideways Markets, VII
SPONSORED LINKS
June 8, 2007
In the past two Trading Tactics newsletters, I wrote about a strangle on News Corp (NWS on ASX) and a calendar spread on Autodesk (ADSK on NASD). For this week’s article I will revisit these trades and illustrate how important it is to not only have a trading plan but to stick to it.
The support ($29.14) and resistance ($31.80) identified in the article ‘The Latest In News’ proved to be very strong, with News Corp range bound between these two prices for over a month. On February 26 the May 30/31.50 strangle was sitting on a loss in excess of $400, down over 30% on the trade cost of $1260. An emotional trader may have thought this loss was too much to handle and looked to exit the trade. A professional trader would stick to his or her trading plan, which had a loss stop date based on May 4.
On May 2 News Corp gapped down and opened at $28. The trade could have been exited by closing out the May 30 put for a credit of $2.05. In doing this a profit of $790 would have been realised, yielding a return on investment of 63% (790/1260) in 36 days. This is an excellent return for a strangle trade. The 31.50 call leg was left as a bonus should News Corp rally. As it turns out the call expired worthless.
In my most recent article, Autodesk Analysis, a bullish bias was identified with a target price of $42.53 by May 18 (expiration day) or earnings. Earnings were scheduled for Thursday May 17 after the market closed. Since this occurred before expiry, the trade is exited as planned on the 17th.
Why exit before earnings? ADSK has an earnings history of price movements of around $4 over the past year and a half. A $4 jump on earnings would see the current position at breakeven. Chart 1 below was taken from ProfitSource and shows the earnings periods with the letter ‘e’. This hi-lite can be applied if you have the ValueGain plug-in. The ABC Pressure point tool (available through SITM plug-in) illustrates the key milestone levels. You can see that the stock has reacted to these.
Chart 1 – ADSK Daily Bar Chart
Closing the trade on May 17th can be achieved through selling the calendar spread back to the market for a credit of $130 (shaving 5c), resulting in an overall profit of $45 ((130-85)/85). This yields a return on investment of 53% in 34 days.
Chart 2 – Autodesk OptionGear Risk Graph
We have all heard the old adage ‘fail to plan, plan to fail’ but making the plan is only part of the journey. The hardest part, especially for new traders, is to stick with the plan. Traders who do this have a much more objective approach and are able to remove some of the noise that is created by our human emotions. Hope all our readers have an enjoyable long weekend.
Make it happen!
Guy Halpin
Trading Tutors
© Copyright 1995-2010 Optionetics. All rights reserved. This material is for personal use only. Republication and re-dissemination, including posting to newsgroups, is expressly prohibited without the prior written consent of Optionetics. Optionetics is a registered trademark of Optionetics, Inc.