Price Direction: A 50/50 Probability?

If you buy into the idea of probabilities and statistics and the fact that direction is a 50/50 probability. Then you would also agree that with enough occurrences that the up days vs down days should be about 50/50 (same concept for weeks or any other time frame). In the quick analysis I put together below it is evident that direction on any given day or week follows a normal distribution and JNJ’s current price run to the upside is an outlier way out on the right tail of the distribution curve with 17 consecutive up weeks.

Analysis Based On Weekly Closes (10 year data set)

Just on up weeks vs down weeks alone we are looking at a 5-6 standard deviation move which only happens 1/100 times. This coupled with the fact that price to the upside has also made similar moves away from the mean is what makes this trade so attractive. It’s just a numbers game.

Good Luck Trading!

In The Money Trades


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Anatomy Of A Trade

Last week for all of you who are following I finally traded my first futures option on the /ES. To bring everyone up to speed before I go further let me remind you what I did last week. It was last Sunday night (4-21-13). The /ES was up 9 points in the Sunday session and since it was the only thing that was tradeable I was interested in selling a call to serve two purposes:

1) Scalp 4-5 points on a pull in as we rolled into the normal US trading session. I thought there was a chance that the futures would reverse and allow me to possibly scalp some profits. I do need to add that we were within 1/2 a futures point from getting filled on the scalp.

2) To initiate a short position on the /ES at all time highs. Since I sold the short 1,555 call for 32.5 points it would get me an effective short of 1,587.5 only about 4 points away from all time highs.

The markets irrational move to the upside has continued as investors poor money into anything with some possibility of a return of more than they can earn in money markets or bonds...which is much closer to zero. As I write this the /ES is currently trading at 1,586.50. But lets update you on what I have done with this trade as it has moved against me.

First let me tell you that the above risk profile shows you the aggregated position that I now have in /ES. As convicted as I am in this trade I have to realize that markets can do crazy things and I am not willing to be a hero as I am always trading with longevity in my mind. So as my break even on the short call began to become in danger I had to do the prudent thing and define my risk to the upside. So lets outline the different adjustments I have made to this position:

1) I sold 1,415 put @ $4.10

2) I sold 1,550/1,530 putspread @ $4.50

3) I bought the 1,615 call to spread off my risk to the upside @ $4.35

All in all you will see that on a net basis I have collected $36.75 in option premium. Now look we have 53 days left until the expiration of these options. Looking at the risk profile you can see that I have a peak in profitability at the 1,550 strike price. So other relevant stats:

Downside Breakeven: $1,398.50
Upside     Breakeven: $1,592.00
Profit rage: 1,398 to 1,592 = 194 point profit range (with short bias)

1. Profit in 1,415 - 1,530 range = $837.50

Margin Requirement: $2,873 (risk capital)
Max Gain: $1,837.50 (at $1,550 /es, potential return on capital of 64%)
Max Upside Loss: ($1,162.50)

I know I have put out a lot of numbers above, but these are the things I am watching. You will also notice that I left my risk to the downside open as we are so far away that I am not concerned with the downside at the moment. If we move 175 points, I may look at protecting the downside...but that is not likely in my opinion.

Until next time I continue with my bias to the downside. The risk/reward at all time highs favors playing the market with a short bias. I will continue to update you on this position and what I do with it.

Good Luck Trading!

In The Money Trades

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JNJ Finishes Up 17th Consecutive Week

I really don't have to say much here, as many of you that have been following the blog know I am short JNJ with conviction. We made another new high this week and closed up for the 17th straight week in a row. Call me crazy but I am sticking with my bet that this thing is going to have a down week. And I honestly feel that the higher this thing goes the harder it is going to fall. My first target is $80/share and as low as $76/share.

I had previously mentioned that I was going to roll my $85 puts out a month if I did not get the move lower I was looking for, but after watching the price action the last few days of this week. I decided to keep the May puts in place with 21 days to go until expiration.

We will see what happens next week.

Good Luck Trading!

In The Money Trades

And 1 favor that we ask: 

If you like the hard work we put into our blog posts and videos, PLEASE help us out by sharing them. Click the share links below and share them on FB, twitter, etc. It really helps us get more exposure and grow IN THE MONEY TRADES!

Trading Commissions...The only cost to trade!

The barrier to entry to trade these days is so low with firms providing data and trading platforms for free to all customers. There is no reason why any retail trader should be paying to use a platform or receive market data feeds. For online brokers, this is now a cost of doing business.

The only cost you have as a retail trader is commissions. And even these have been commoditised over the last decade. Now that is not to say that brokers are not going to try to squeeze a higher commission rate to the uninformed trader. I have talked to a lot of new traders lately on the topic of commissions and the fact that they are negotiable.

As many of you know reading this blog, TD Ameritrade is our preferred and recommended broker for all traders. I have been with Interactive Brokers and TradeMonster and it does not even come close to what the ThinkOrSwim platform offers. With that said I want to share a few insights on negotiating your commissions.

After helping a few traders get their commission rates lower of the the last few years I have found the sweet spot to where TD Ameritrade is willing to start a new trader until they build up some account activity.

1) $1.50/contract for option trades (no minimums)
2) $5min or  $0.01/share for stock trades ($5 for 100 shares, $6 for 200, etc)

If you are opening up a new account with TD Ameritrade you get your first 60 days of trading for free, so I would wait to negotiate the commission rate until after your free trades are up.

Over time as you become more active you can go back to the negotiating table to get your commission rate lowered on the option trades and have them remove the $5 minimum for the stock trades. I personally have a $1 min or $0.01/share.

Good Luck Trading!

In The Money Trades




And 1 favor that we ask: 

If you like the hard work we put into our blog posts and videos, PLEASE help us out by sharing them. Click the share links below and share them on FB, twitter, etc. It really helps us get more exposure and grow IN THE MONEY TRADES!

Who buys at all time highs???

As I write this post this morning the markets are back within arms length to ALL TIME HIGHS! I really don't know how you can buy all time highs. If history tells us anything, buying all time highs whether in the stock market or in the housing market or any other market for that matter is a losing trade. But we have to remember that the markets can stay irrational for longer than expected. If you don't get too big for your pants, you can weather the storm.

In continue to be a difficult environment to sell option premium given the super low volatility environment. 

Positions: Short /ES, Short JNJ, Short GME, Long CLF, Long NLY,

Markets at all time highs are not great on my portfolio but I do have 2 pieces of saving grace:

1) I have positive theta

2) I am long CLF and that is offsetting negative P&L as we move higher.

Good Luck Trading!

In The Money Trades

And 1 favor that we ask: 

If you like the hard work we put into our blog posts and videos, PLEASE help us out by sharing them. Click the share links below and share them on FB, twitter, etc. It really helps us get more exposure and grow IN THE MONEY TRADES!

Stay Small, Stay Out of Trouble

To expand on my post from yesterday about patience. I want to talk about a very important element that allows patience in a position, and that is staying small. If you trade too big RELATIVE to your personal account size, you are likely to be forced to exit the trade before the trade works in your favor. Many trades myself included have all experienced the pains of trading a position way too large given our account size.

There is this predisposition out there that the only way you are going to make money in the financial markets is if you are trading 10 lots of options and 1000 shares of stock at the time. This is not the case, and if this is your mentality you will likely ensure yourself trouble. We have all read the stories of traders blowing up their account.

I personally think a good rule of thumb is to not risk more than 5% of your account value on any one position.

Good Luck Trading!

In The Money Trades


And 1 favor that we ask: 

If you like the hard work we put into our blog posts and videos, PLEASE help us out by sharing them. Click the share links below and share them on FB, twitter, etc. It really helps us get more exposure and grow IN THE MONEY TRADES!

Sometimes Patience Is Hard

Sometimes the hardest thing to have in the markets is patience, I know this all too well as when I first started trading my attention span was that of a rock...thats right I was all over the place. But know I find trades that I like and I extend my duration (thus my patiences). I have seen huge improvements in my trading by doing this, but in the short term this sometimes means some pain. Luckily with options we can trade around a position to reduce cost basis (whether short or long).

The biggest thing to remember if you are going to trade like this is to TRADE SMALL. You can't be a gun slinger trading like this. If you trade too large in the context of your account, you will never be able to stay with the trade long enough to see it work out. And you risk blowing up your account. This is probably the biggest change I have made over the last 5 years trading, and thats my trading size. I use to think that I always had to trade in 5 and 10 lot trades. I almost felt ashamed by trading a one lot. But not anymore.

I have also realized that there are certain strategies that I am comfortable with in individual stocks and others that I will only use on indices. You have to find what works for you.

This post was inspired by my current position in JNJ and a comment that I got on my short call position on the /ES. I was asked if I was worried about the unlimited risk on the short call I sold on the /ES. The answer is NO! That does not mean however that I am unaware of the risk to the upside. But I am comfortable with the position due to its size and the different strategies I have at my disposal to trade around the position.

JNJ Testing Patience

This chart is starting to look pretty parabolic and so strong for a consumer staples company. We are working on putting in the 17th consecutive week to the upside. I have been short this name a few times over the last few months and cashed in some profits early on. But then a week and a half ago as I analyzed the chart a bit further my conviction to the downside has grown and I got short naked $85 puts when the stock was trading around $82-$83/share. As I write this JNJ is making another new high at $85.68. The up move is starting to look like a strait line and the only thing I can liken it too is throwing a ball up in the air, eventually the energy your transferred to the ball as you through it up in the error runs out and then gravity puts pressure on the ball to fall back to earth.

I am committed to seeing this position through and because I have stayed small I can have patience and I feel like the move is right around the corner. We all know that when it comes to price movement, we take the escalator up and fall off a cliff to the downside. I am looking for a drop in price and uptick in volatility in JNJ in the coming sessions. As you can see from the above chart my initial price target to the downside is $80/share, but I do think that $75 is possible. I will also remind everyone that has been following this position that I do have plans to roll the puts out a month if we don't get the move I am looking for this week.

Lastly I would like to mention that because I chose to use puts to define my risk I have lost less on my long puts that the stock has risen if I would had just been short the stock.

Good Luck Trading!

In The Money Trades

And 1 favor that we ask: 

If you like the hard work we put into our blog posts and videos, PLEASE help us out by sharing them. Click the share links below and share them on FB, twitter, etc. It really helps us get more exposure and grow IN THE MONEY TRADES!