Thursday, April 22, 2010

Analysis on New Trades

I was really busy today and did not have the time to post the analysis for the 3 new trades that I added today.

1) PFE

This is a stock that I tried to play via long calls but got stopped out but noted in my post about the trade that I would be interested in selling puts should the stock continue to pull back further (Click Here to see Origninal Post). Needless to say I was stopped out of my long calls. Since then I have been stalking the possible put sales as I eyed Support levels at 16, 15.40 and a bigger level at 14. My bet is that the 14-16 range holds for this stock. So today I sold the 5 Jan '11 $15 puts for $1 which would put my breakeven at $14. So lets answer the questions in order:

Here are some questions that I want to answer: Is there an exit strategy should the stock rise? Why Jan 2011? You've never held anything that long. That's a maximum possible $1/$14 = 7.14% return for 9 months if you held until expiration, that hardly seems like the type of risk/reward that fits your trading style. You're tying up $7000 for a max reward of $500 9 months from now. So first let me address the return you calculated. Remember I calculate my risk/reward based on how much I am willing to risk vs. my reward. So for this particular trade my stop is set at 15.30, which gives me an estimated loss of about $215 on a reward of $500 or Risk vs Reward of 1:2.32, which in my opinion is acceptable. Next the capital tied up on this is not exactly $7,000. I know that there is a potential $7,000 commitement and I am willing to take possession if something catastrophic happens and I get exercised early, otherwise I will just get out of the trade if my stop is hit. So really the only capital tied up is the intial margin of about $1,400 (Put Price + Maximum((20% * Underlying Price - Out of the Money Amount), (10% * Strike Price))) to put this trade on. So really my return if I were to hold for the entire 9 months on a margin account would be 500/1400 = 35.7%. Which like we disccused last night could fluctuate a bit as the price moves up and down. I think that addresses your questions. Let me know if I missed anything and if it makes sense.

2) SPY

I bought 5 SPY puts to because I think that the maket is ready for a few distribution days. I liked IWO's analysis of the Lower Highs but wanted to be more aggressive with a straite put buy vs a put spread. So I looked for a position that would yield the same risk with the same stop but more profit potential. I am not making the bet that this rally is over only that it may be ready to rest and test some lower support levels. But I will stop out if 121.57 is breached + about .15 of wiggle room. I am ultimatley looking for a move between 116-118 as a downside target. Which gives me a profit range of 700-1400 with a risk of about $230.

3) DRYS to come

1 comment:

  1. Sorry a little dislexic. Higher lows above in SPY analysis should be lower highs.