S&P 500 50-Day Average Daily Change Back Above 1%

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S&P 500 50-Day Average Daily Change Back Above 1%

via Think BIG by Bespoke on 6/7/10

Since peaking out at over 4% in late 2008, the S&P 500's 50-day average absolute daily change saw a steady decline getting down to as low as 0.48% on April 26th.  Since then, the average daily change has seen a rapid increase, and as of last week went back above 1% for the first time since late July.  The recent market swings certainly bring back memories of the moves we saw during the credit crisis, but memories must dull quickly because what we're seeing now is still nothing compared to what we saw back then.

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Diagonal in SPY using weekly options

Before I put this trade on I only have the 114/110 July '10 put spreads. So I feel like I am covered to the downside. I wanted to add a play that was neutral to slightly bullish, in case the market finally finds a bottom and catches a bid. But I wanted two conditions met. First is I wanted very little risk to the downside as this would eat into my profits from the put spreads that I own and second is that I wanted a wide range of profitability with some cushion beyond the current range of about 105-111 or about 60 handles on the /ES futures.

Lets break down the trade. I bought 5 110/111 call diagonals for a debit of $0.09. I sold the Jun2 '10 110 weekly options that expire this Friday and bought the front month 111 call options. This gives me a profitability zone of 104.64-112.28 by Friday expiration for the weekly short calls. My max profit is around 110 on the spy which would yield a profit of about $530 bucks. My maximum loss which would not occur until about 119 on the SPY would be about $545 on the upside. As I do not see this market taking off in a big way between now and Friday I am comfortable with this risk. In all reality I am looking at making about $200 on this trade.

The weekly options should decay quickly or quicker than the front month options that I bought. I would stop out of this position between 112.3-113 on the spy. I accept full risk to the downside of $45.

Managing winners like you manage losers...

Ok, so I know the title sounds a little funky. But if you stop and think about it for a minute it makes a lot of sense. It is human of us to hold on to trades that go against us and hope that they will one day come back and we will either get out for break even or a tiny profit. At the other end of the spectrum we sell our winners too soon. I am completly guilty of this but am at least aware of it and am trying to fix this. As this method is completly ass backwards. You should be holding your winners and cutting your losers as quickly as possible.

Before I really got a risk managment system in place I would routinly let things trade against me and have no stop loss in place and would just pray and hope that it would eventually get back to break even. This is not to say that my system is perfect yet as there have been a few slip ups here and there, but nothing like before. Plus you can not expect to change habits over night. But I can certainly say that I have gotten much better at selling losers. But as I got better at selling my losers I noticed myself selling my positions that were working to offset those losses. What a physcholgical accounting mind fuck, right? This makes no sense what so ever. Well today after I cut my last long position I took a step back and had to fight with myself as to whether I should keep my short spreads on that are working and working well or sell them to offset the losses from a few of the longs I sold. This is a good example of the whole physcological dilema that many traders face.

This is when it hit me that I should be treating my winning positions like I use to treat my losing positions. I need to continue to let it run and do its thing. Nothing has changed in the market that is telling me to take the position off. Today I decided that in the long run it will be much more profitable to treat my winners like I use to treat my losers and let them ride.

No one ever said that trading was easy!

Trade idea for GOOG on 6/4

Date:               6/4/10             

Underlying:    GOOG

Trade Idea:    Sell (10) GOOG 560 naked calls @.50

Pre-Trade Analysis: I'm thinking about doing a similar play as last month and selling naked calls on GOOG. It's had a nice bounce the last few trading sessions. I choose a strike price well above possible resistance and its new trendline. The yellow bar is OPEX, the blue bar is the needed trendline to hit the naked strike by OPEX. I would look to possibly close this trade out if we closed above resistance at $525, it depends on how fast we get there. If that happened on trade day of 6/4 you're looking at a $1950 loss. So the initial RoR is ($500/1950) = 25%. If it gets there early next week you're looking at a $800 loss. Each day we don't continue with the new steeper trajectory and/or break resistance and I would just look to stay short until expiration. There are no earnings between now and 6/18, nor is there any expected GOOG related news. Other than a monster surprise on the upside for the employment report on 6/4 and I'm comfortable with this trade. It's relatively low risk with an implied possibility of loss at expiration of 4.5%

Entry Point:   Sell (10) June $560 call for .50 with GOOG @ $505                                   

Exit Point: Reevaluate trade if GOOG breaks resistance at $525

Risk: $1950    Return: $500              RoR: 26%

Additional Info: I think it's important to keep in mind that the industry standard for figuring out the probability of expiring worthless is the one sigma at 68%. This is dangerous in my mind as this lulls you in to a safer state of mind. This kind of thinking disregards or doesn't pay enough emphasis on the fact that 32% of the time these odds are wrong, or worse than expected. For someone doing multiple trades and always using the default 2/3 or 68% to make decisions, I think this is discounting the true risk as obviously the more trades you make, the more you're going to see two and three sigma trades. So below I've created an Excel sheet that deannualizes IV and figures out the probability of a given stock hitting your strike price given the amount of trading days left until expiration. The real odds of the naked $560 strike finishing ITM is 9.25%. The TOS model below shows that probability of finishing ITM at 7%. I'm not sure why my math and TOS is different so I need to figure this out.

Post-Trade Analysis:

Profit/Loss:

Market view

As you all may know or not know, I read the IBD news paper which for the most part is a technically driven paper. One of the article that I look forward to reading is the "Big Picture". They also publish a "Big Picture" article on their website on a daily basis. And for the past couple of weeks they have held firm that the market was in a correction, but after yesterdays follow through up day the current market out look is that the market is in a confirmed uptrend again. Now this does not mean we are going to make new move highs or that the uptrend will hold for that matter. All it says is based on the price action the mood has changed, at least temporarily. The next few trading sessions will be critical as to the direction of the market.

I am currently short the market via puts spreads on the SPY at 114/110 with July expiry. Although I am in bearish mode I have to, or for that matter we all have to be open to the fact that the complexion in the market can change at any time. I have not initiated any new positions since the put spreads that I bought on 5/17/10. One of the greatest things that I have come to learn over the last year is that you do not need to be making a trade every day. Sometimes it makes more sense to just sit back and watch and be ready for the next opportunity that comes your way. Keeping a large portion of cash keeps you armed and ready to attack at a moments notice.

On thing that I will be keeping my eye on is whether or not the SPY can close above its 200 day moving average at 110.84.

Good Luck Trading!

USD/CAD +38.1 pips

Hi everyone, thanks to Jason and Domenic for the invite to contribute to their trading blog.  Best of luck this month in reaching your financial goals!

Most posts of mine will simply be a brief breakdown of my previous trade and accompanying chart.  But first let me talk about what I am trading and how.

I have been trading FOREX off and on as a personal trader for over 5 years with mediocre success - normally just breaking even.  I have always stuck with trading technicals and basing my positions on price movement with very few indicators.  I am aware that big financial announcements affect currencies (Monthly non-farm payrolls, interest rate changes, etc.) but I decided about 3 years ago to stay away from attempting to "trade the news".  Since I got back into trading FOREX seriously in March, I have still been having little success so I decided that joining this blog would help me to stay true to my trading plan.  I'm continuing to learn lots about the mental and emotional discipline needed to achieve some form of consistent profits in this market.  If I can get to the point where I can start paying my apartment rent from my monthly FOREX profits, I will accept a victory towards my eventual goal of being a successful and profitable currency trader.

For the month of June I think I have made a substantial change to my trading strategy.  For the past 6 months I have been trading exclusively from 5m and 1m charts.  I was doing this mainly because I felt impatience in waiting for any of my positions to develop and I felt that I could be successful in trading from these shorter timeframes.  Well I haven't been anywhere near as profitable as I thought I would be by June 1, so after taking a look at other scenarios that may work I have figured that trading a 1 hr timeframe actually displays a much better trend than on the shorter scales.  It's all such a learning experience, right?  Anyway, here's my strategy that I would like to commit to trading for June.

TREND ALPHA JUNE

• 1 hr timeframes on 8 major currency pairs.
• Trade in direction of trend as indicated by 100 & 200 EMA indicators.
• Open trade when price retraces to a level of resistance.
• Close trade when price reaches a profitable level of resistance/makes a substantial gain (like a price spike) OR the trend reverses.
• Allow one additional trade to be opened on same currency pair to cover, if initial trade isn't looking profitable.
• Small leverage per trade, one currency traded at one time.

Pretty straightforward, but all the successful action takes place in executing properly.  My hope is that this blog will assist me in being honest with myself about obeying my rules and trading my plan.

This was trade # 1 for June and I picked up a modest 38 pips on the downward movement.  My entry was perfect and my exit was decent as well.  Not a big move, but I took profits and made a positive step in the right direction for a new month and a new strategy.  My starting balance for June is small money = $50.  My broker is FXCM and the charts are from their trading platform, Marketscope 2.0.

Monthly Goals for June

Wow did May go by very quickly for me. Seems like I was just listing my goals for May. Needless to say I didn't achieve them all, but I did spend a good deal of time on them and I learned a lot in May. Below are my goals for June.

• Use paper trade account to create a diversified options strategy portfolio. This will entail purposely setting up some trades with  positive and negative vega, and some trades with positive and negative delta. The goal is to diversify the basket of holdings so that your cumulative greeks aren't lopsided in any one direction. This reduces the need to significantly hedge your portfolio as its construction has a bit of a built in hedge. Once created, follow each trade individually and the portfolio as a whole to see if any positions need to be adjusted, exited, or hedged. This whole process is to familiarize myself with movement in the greeks and how they affect your holdings.
• Spend some more time on the TOS platform to get familiar with their analytical tools.
• Books to read: The Option Trader's Workbook, Fibonacci Analysis, and I've got a few on technical analysis.
• Practice charting and using this as an input for trade selection
• Create a formal watch list 
• Continue to build a spreadsheet with past trades going back to mid 2008. The purpose of this is to see  my win/loss ratio, avg win/loss, total profit, and see if there are any patterns or information I can use going forward to make future trade decisions.