Happy Halloween

So, the fed announced a .25% cut in the fed funds rate. Which seems ideal because apparently GDP beat expectations with 3.9% growth.

After they announced the cut I sold my 25 SPY contracts. This initially was a premature move because things moved down and I could have actually made an extra 250, instead I only lost 100, which I will gladly spend for some insurance.

I did lose 1,000 on the day though, which is somewhat disappointing, however I was not nervous or stressed going into the announcement at all, I was just there to make adjustments as needed. This is how I know I was in a decent position, and had it turned out poorly and I wasn't hedged it would have been much worse.

So for tomorrow I have found some trades I will take that have low risk entries, I looked at Jeff Kohler's watch list which was great and took some bearish and bullish trade ideas from there as well as a few I am watching so I will be getting into a few trades tomorrow, which I will discuss at that time.

CROX got hammered after hours due to earnings projections apparently not being up to par, which could be a good day trade opportunity as usually it will snap back.

I am excited for tomorrow with all the possibilities, could see some profit taking, hopefully on some bullish trades I can get some better entry points. Now its time to celebrate Halloween.

Balance Pays Off

I have to apologize for the late posting, I just got done watching American Gangster(yea I am cool because it isn't out yet and I have it).

Anyways, today we had a down day ahead of the fed announcement tomorrow at 2:15. The nice thing was that my account was actually up on the day and I am back even from where I was before the BIDU trade. The SPY puts ended up being a big help, while AKAM looks like it has started its movement, as well as YUM. ACH is the laggard which actually lost me 1,100 on the day, I couldn't exit either because at the end of the day at work someone came in right before market close and before I could exit. Damn people.... :-)

There were a lot of plays I wanted to take ahead of the announcement, mainly bearish plays, however many of them involved banks, which would benefit from a cut and right away I would be out money. The bullish plays also, like on AAPL which looks to have broken out of its flag around 185 would have been great too, but if they don't cut tomorrow it will likely get sold off and I can get in at a better price.

So, I am sitting tight realizing I will have options either way and plenty of opportunities after the announcement and the fed influences the market direction. I feel like they will cut the .25% however part of me feels like they may hold steady simply because rising oil and the falling dollar and rising commodities can't be over looked forever.

If they hold steady I will likely add to my SPY puts because I think the market will sell off because it will be due to inflationary pressure and not strong economics. If they cut we may see a slight relief rally and then a focus on earnings again and I'll likely get into my bearish plays and bullish plays as normal.

We shall see what happens. Hopefully my balanced approach will help me be poised to kick the markets ass regardless, such as my friend the Karate Kid.

Hedged for Fed Day

So the much anticipated Fed decision day looms on Weds. What will they do? Cut .25% cut .5%, do nothing?

My goal is to get to a point where I don't care about what happens because I am diversified enough and almost neutral to the market. This is still very much a work in progress because I am still learning the most effective way to be neutral. I took a simple approach which I think is correct in terms of being delta neutral.

Before we get to that though, I'll detail my unsuccessful BIDU trade. I saw BIDU up in the pre-market about 3.5%, on a day that would likely have little volume and not much market movement I figured this would be more than most positions and would get sold off down to 2 or 1%. So I watched for a change in direction after the open, it presented itself, I got in with 10 put contracts (again lagged a little and had to replace my order still haven't looked into trade triggers nor do I know if I can trust them). I get in after it broke below support, it then reverses and bounces back up to a previous resistance line, so at that point it isn't broken, it come back down and I am back even.

After a little more range trading it goes up and then breaks resistance again where this time I exited at a $700 loss. This was good in that it fit my risk criteria and if it broke down to where I projected I would have made much more than I lost, So I got out with less than a 2% loss, and the trend was broken, however the bad part, is I lost money. The stock traded in a range ALL day, where at any given time I would have probably been up 500, or down 500 but still in the range. at the end of the day it ended up near highs, so I avoided a larger loss by exiting when my trend line was broken originally, even though it did re-enter later on.

I took on a few new positions. some Jan 40 calls on AKAM, it looks like it is going to be reversing and broke above 38 which was resistance and should hopefully fill a gap to 50, which is my target price. A close back below 38 will be a signal to exit. I got back into ACH, who now apparently reportered earnings, I saw it being bought and it got above 75 which it was having trouble doing before. I got in when it was above 76 and it came all the way back down but did manage to finish above 75 which is my line.

So, now I have 3 bullish plays going into the Fed rate decision, the fed funds futures point to almost a guaranteed .25 cut, but again we never know. I decided to hedge my position with some SPY puts. I currently hold 25 total long calls, I estimated an average delta of .5 each so lets say I have a total of 12.5 delta positive on those positions. I wanted to counter that, but I am still overall bullish so I went out of the money front month(since I probably won't hold them for more than a day anyways). I bought 25 152 puts each with a delta of -.27. That positions gives me a -6.75 delta, for an overall positive 5.75. This is obviously still fairly bullish, but much better than a complete long position in my opinion. Plus I am testing the waters to see how it works out.

AAPL couldn't finish above 185, RIMM is looking appealing though, AZO was brought to my attention of an Inverse Head and Shoulders pattern, so a break above 125 would confirm but it touched 125 and finished under 124, no go yet. I am still looking for relative weakness plays that I like the entry points on because a hedge will help me in this situation but not in general.

Have to say thanks to Brett Atlas for pointing out both YUM and AKAM originally.

Also, I have to say I think Bernanke so far is doing a good job and I like him better than greenspan in my limited knowledge, but I just couldn't resist putting that pic up once I found it. :-)

Trade Costs

Ok, so I have been behind on posting, I apologize(which I am likely doing so mostly to myself).

So, we left off I was long the Q's, that following day before earnings I was down flirting with my loss limit during the day, but sure enough at the end of the day I was only down less than 1%, well within my risk tolerance. I figured MSFT would post good earnings and lift the market and particularly the Nasdaq. This did in fact happen, however the gap up only gained me 500 initially, however this was on 20 contracts. That decayed however so I got out even as I figured that is as high as we would go for the day and it would just sit from there and I'd lose money so I sold at break even and decided to buy puts on the Q's instead. I bought 100 contracts and the options gained 10 cents at the time up 1,000. The stock started to stop and trended sideways, then started back up, it broke the down trend line so I then exited, after the previous experiences I am trying to be more patient and wait for confirmation of broken trade before exited rather then setting a sell limit.

This time that worked against me however I did get out with 500 gain. However, lets take a closer look. That 500 gain was actually only 330. Ameritrade charged 9.99 per trade and .75 per contract. Which means they took 170 dollars home on my work and in the proces took 1/3 of my profit. Obviously 330 is nothing to be upset about but I could have exited multiple times at different prices but Ameritrade also only allows me to trade options in 5 cent
increments. So what could have been a 800 dollar gain is cut even smaller.

This is getting me thinking about different brokers because some places charge significantly less money and if I am trading more that will mean more profit and less loss in the long run for me. If anyone has good suggestions for low priced option brokers please let me know. One guy I know said there is a place that charges 9.99 for 50 contracts, which would have let me keep way more of my profit. My only fear is going with something less reliable and reputable, so I'll have to do some research.

Right now I am only long 10 Jan calls on YUM, waiting on my other two favorites GOOG and AAPL to pull back, that have had trouble getting over 675 and 185 as of late so that may be a price to watch. I have a few bearish plays on the radar thanks to Jeff and the other OA's but haven't decided on which to go with. Time for good old fashioned research.

Lesson of the Day: Trust the Chart

So, today was partially frustrating. but where there is frustration there is likely a lesson to be learned. The lesson today, always trust the chart and logic.

My SPY calls lost about 500 of value overnight so I sold at the open anticipating a big down day due to both Amazon and Merril Lynch earnings. This ended up being correct overall, with the S&P rallying only at the end of the day and the options barely getting back to where I sold, obviously I don't know if that will happen so I sold.

So back to the issue. Today I was bearish on all of tech with amazon coming out, combined with such a large run up the previous day I assumed there would be profit taking. I was watching AAPL and GOOG for some price action to exploit to the downside since that seemed like the logical path of least resistance for the day.

The above picture is of AAPL at the begininning of the day, forming a PERFECT ascending triangle, with support at 185, if this broke I assumed we would go down decently partly because the pattern shows a 2 point move, which was then my target of 183. So I sat there waiting for the break with my order filled out on Ameritrade waiting to hit "submit". It breaks and the option price goes up above what I currently had, I have to scramble to change and as I do it starts to break hard and I sit there and don't want to chase it. I could have entered about 1 min before the break for my limit price but didn't take the anticipatory trade. As you can see once that support broke it moved even farther than I thought going all the way down to 179. Even waiting for my original target I would have made a quick 5,000 on my 50 contracts.

In retrospect, I should have take the anticipatory trade, the pattenr was setting up perfect, I had a bearish stance and I would exit if it moved out of the triangle so risk was defined. Once it broke and I didn't want to chase it I think I let emotions of ego get to me, not wanting to break my "winning streak" being 5/5, which is stupid. Obviously that is great but I am going to be wrong many times, it is just a matter of limiting those losses. So as a result I missed that trade and a similar trade to get into AAPL calls as I figured there would be a bounce off 180 but again my order lagged the option price movement and I ended up sitting out all day.

The only positives are I didn't lose money today, which is one of the first things you want to try and achieve, as well as I kept in mind that there will always be other opportunities and didn't chase trades, and I got to see how short term patterns and price action again can be used to my advantage.

After the big recovery at the end of the day, I bought 20 calls of the Nov 52 QQQQ's in anticipation of MSFT earnings. This ended up being wrong because they report after the close tomorrow, however almost all the tech names that reported after the close were positive and Microsoft announced a deal with Facebook. In General, I think tech is the place to be in this economic climate and if we can manage to finally break and finish over 2800 that clears the way for all new highs. So far the Q's are up in afterhours so hopefully it will follow through tomorrow.

We shall see...

Day After Day Trading?

So, Apple opened up at about 188, I assumed this would get sold heavily upon open so I sold my single contract I had held as soon as I could. I sold the option at 19.60, remember the previous close price was about 12.3, the stock gapped 14 dollars which was all intrinsic value at this point, and I only gained 7 dollars on my option, just to further point out the IV decay(had there been no decay I should have gained all 14 dollars).

So I decided to day trade again, I assumed there would be a hard sell off, which happened, it dropped from 188 down to about 183 in short time as people locked in their gains, from previous experience this is usually then countered with a snap back to the hard sell off. So I waited until the down trend broke went long 25 Nov 190 calls, this promptly made me another 1,250. Again, I got out fast and left money on the table, but until I am more comfortable and have more experience I will go for a quick 3% gain any day.

I got back in later as the stock traded down again to 185, which I assumed would be support due to the psychological number and a few other things, obviously the chart confirmed this and I waited for it to start turning up, I assumed we would have a market rally after the sell off in the middle of the day, so I watched the Dow and Nasdaq also to try and get an indication of it helping the upward move. I bought back in and it sat right at my line of support, fluctuated from down 250 to up 250, after 10 mins of the rally not materializing like I thought I bailed out with only a $100 gain which is better than a loss. Had I been more patient I could have made another nice gain, I was just too impatient.

After the second Apple trade I figured I would go for some index ETF options, I chose the SPY's, which turned out to be less profitable than the QQQQ's would have been since everything tech related was up huge. I chose a point where at the time the S&P was about 1507, which it had bounced off 1500 the previous day. I got long 20 contracts of SPY Nov 152's, which at the end of the day were shaping up nicely with a 1,000 unrealized gain. I had considered selling out but figured with Amazon's earnings we could have a follow through day.

Unfortunately it's looking like at the open I'll be giving back half those gains, Amazon beat but apparently didn't validate the high PE with concerns over margins and the stock sold off and gave up the 10 dollar gain it had during the day. Which then caused many of the other large tech gainers to sell after hours, so that will likely weigh on the markets tomorrow and people will lock in the huge gains today in names like GOOG and BIDU, which may be an opportunity to make some money on some puts, I'll see what it seems like tomorrow.

So, overall today I managed 5% realized gains, which I am happy about.

I am thinking earnings may present a new opportunity, those that report earnings the day after trade usually much higher volume and ranges which could be exploited in day trading front month options. So far it has worked to my advanatage being 5/5(of course we know stating that will jinx me tomorrow :-))

I listened to Jeff Kohler's free advanced option's open house which was very interesting, it is getting me interested in spread trades, unfortunately I think it will require a margin account which I do not have and may not be able to get. I'll have to do some more research and see what I can do.

Let's see if I can make money on a down day too....

An Apple a Day Keeps Losses Away

So, another stock reporting earnings and another stock I had options on going into them. Apple released after the bell, posting a 1.01 EPS and 6.22 Billion in revenue, simply awesome, they even raised guidance for next quarter which is unheard of for them.

So, of course the whole dilemma came up about what to do going into earnings. I decided to take the conservative approach this time. I hadn't done analysis like last time so even though I expected they would beat I didn't know if it would be good enough for expectations. I was holding 5 contracts with about 1,300 in profit. I sold 4 early in the day when the stock nearly reached my original target of 175, which proved to be almost the most I would get for them since the option never got back to where I sold which was 12.60.

Of course they beat huge and the stock is up 12 dollars in after hours. I could kick myself(which I do a little) however in the long run selling most of them will likely be in my favor because we honestly can't predict the future, they may have earned only .95 and that caused a sell off, who knows. I locked in my gains, and let 1 ride since that was basically all profit. Tomorrow according to the CBOE calculator I should have about 500 more in profit if the price holds, sure I could have 2500, but I could also have lost money. The Implied Volatility COLLAPSED from 54 down to 9! So I am lucky to even come out ahead at all, if I was holding OTM options I likely would have lost money or at most broke even.

Now options are actually underpriced and a better value. I feel like Apple could pull back here because it has had a huge run, so I may wait for a better entry point.

On to my other trades, the morning opened ugly, things gapped down then continued down for the first half hour and then started to recover. I sold out of my SLB and DRYS options as I was already way below my line. Was this smart or should I have waited? I think what matters is consistency, in this situation, I sold SLB and it ended up down further, I sold DRYS and it ended up gained a lot back and then some(still finished below 120 which was my line)

Had I kept DRYS I would have made back another 600.
Had I kept SLB I would have lost another 800.

As we can see in this situation it worked to my benefit as I am up 200 vs where I would have been had I sold at the end of the day.

I think the Nasdaq will be strong tomorrow due to Apple so I'll have to watch some positions, most I lost on likely will have recovered but I have to assume they wouldn't have. And overall I should basically be even compared to the big down day on friday, which is the first thing you need to do is not lose money.

I Saw Red

Well, pretty ugly day today, Dow down 366 Nasdaq down 74 OUCH!

Well, GOOG ended up gapping up to 558, that should have then added 18 dollars of intrinsic value to my option and where did it open? Why, 3 dollars higher than yesterday... This illustrates the collapse of IV clearly those calls were way over priced. I luckily got out though with a 100 gain.

I was not satisfied with that and figured on such a day it would be great to do some day trading the front month contract. I watched and waited and bought after GOOG had put in a pretty good bottom at 546, bought 50 contracts at 1.60, this was also during the middle of the day and we were down at 230, at the time i figured there would be a slight rally also, it did indeed go up as expected, I didn't want to get greedy so I set my sell limit at 2.00. A quick 2,000. Then I got to watch it go all the way up to where I thought and the calls were worth 3.40, oops could have had a quick 8k out of GOOG, however I set my targets, plus that is a large position and didn't want to hold it too long. I then got into another 10 contracts later and made another 500. Overall, made an extra 2,300.

That extra 2,300 was very helpful because after that I went shopping for options, BIG mistake(today at least), at about 1pm. New rule, on a down day like today, always wait till the end of the day to see if I should still get in. What happened is I got in at my exits, and they sat around them until the end of the day and most significantly broke so I had to exit again immediately, which I am glad I followed rules. Due to some circumstances Ameritrade fucked up and I couldn't exit some trades. So, at the end of the day, I still ended down 1,200 largely due to getting into those new options.

I am desperately needing to diversify as the market seems to be wavering, if we break 1500 on the S&P I think we go down, and if the Fed holds in october, people will likely sell quite a bit.

lessons of the day: Wait till the end of the day on big down days to take trades(and in general), DIVERSIFY, calls and puts.

Ben

Holding Over Earnings: My Opinion

Ok, so as long as I have traded and watched investment shows and been part of trading communities this question always comes up. "do I hold over earnings?" That depends. In my opinion, earnings speculation can be fairly profitable, it can also lose you money. First lets remember the lesson I learned the hard way.

If you are holding OTM options going into earnings and plan to hold, at least switch to ATM or ITM options.

Even holding over earnings you are going to want to estimate your risk and keep it at 2%.

Here is what I do to decide if I will hold, depending on which way I think the stock will go, I will see what has it historically done? Does it run up into earnings and then sell off on good reports, does it stay fairly flat then gap up?

Obviously, in any case you want to increase your probability by looking at those things. See how many times has the stock beaten lately if you are bullish, does it usually beat in the quarter they are about to report? Is it logical that the stock should do well, has it been talked about lately on how well its doing(or how badly if you are bearish).

What is even better is if you can quantify yourself. Like I did with AAPL, however that may not always be doable. Here is what I did, this was all from either internet statistics and logical guessing based on past performance. You can see I was slightly off, but much closer than the analyst estimates.

Apple Q3 earnings estimate

Previous 2006 Q3 notebook sales 798,000

Reported notebook growth compared to year ago, 65%

798,000 x 1.65=1,316,700

Average notebook cost 1,400

1843380000 x .3=553014000

Assuming 30% margin(previous margins)

Desktop sales

Previous 2006 Q3= 529,000

Assuming slight drop in desktop sales 500,000

Average cost 1,300

650,000,000 x 30% = 195,000,000 .

Iphone Q3 sales 500,000

Average price 580

Ipod Q3

Previous 2006 Q3 sales 8,111,000 which was 32% over 2005

Assuming a drop in growth year over year due to iphone lets say 25% growth

8,111,000 x 1.25 = 10,139,000

Average cost assumption 200 dollars

Supposed comments that margins on ipods are “above 20%”

Let’s assume only 20% margins

10,139,000x200= 2,027,800,000

Other music related revenue assumptions

Previous year Q3 457,000,000

Q3 2007 500,000,000

Peripherals

236,000,000

Software, service and other sales

350,000,000

Margins unknown

Total Revenue Estimate

$5,897,180,000

Prediction is for 14.6% profit(equal to previous quarter profit level)

Using that prediction

Profit= 860,988,280

Total EPS= .995 for 864, 950,000 outstanding shares

So, getting all of this is fine what will the stock reaction be? You honestly don't know but using the above things to your advantage can give you an idea, I also compare to what is currently happening. On good earnings and guidance stocks were gapping up approx 10% from similar companies, so I figured 7%-10% move was possible. I was right, but like I said hadn't learned about IV decay after earnings, so I screwed myself.

For GOOG, I figured we would get a run up to 640, I had bought the 640's hoping it would end up in the money before, but it was ATM, I assumed we would get a move to 650 on good earnings at least, being a round psychological number and validating current PE. This move would be hopefully good enough to offset IV decay and then some, it may not have worked out how I planned but I may be able to break even or take a slight loss which is ok because the money making potential was decent and if you can take a few small losses or break evens and get a good gap up(like on ISRG) you'll do fine.

So, if everything checks out I'll hold, a small position now over earnings, if I am unsure I won't hold.

GOOG earnings

Well, GOOG reported earnings after the close today, the stock closed right at the money for my option and I was up slightly on it so I figured I would hold expecting good results. Good results came, stock initially moved down, then up to 650, then fell back down to 643.5. I was hoping for more.... At this point I am hoping to get out of it even, even though I think it is going higher in the long run, Oil hit $90/barrel afterhours which I think will weigh on the market a lot tomorrow. I will watch it tomorrow and if it is looking like it won't rally any during the day I will likely exit.

Now on to the previous dilemma. FCX, I sold out of this for an 800 loss, which is right at my 2% level. Of course then on the marketcast tonight Jeff says FCX is a great play to be in, oh well. I made a decision and I will see what happens, had I held till close I could have gained another 150 back, but I again had to leave before the close.

ACH, which had inexplicably ran up 10 dollars yesterday(well I think the explanation had to do with China and hong kong exchanging shares) pulled all the way back to 80 dollars, which is where it was having trouble breaking before. I took down 5 contracts a little under 81, with a target of back to its high, possibly take it to the century mark. if it breaks that 80 mark, it doesn't have much support until 70 so I will exit if 80 is broken. a 1:9 risk/reward, which I would always take.

I still want to get some put plays going, maybe on the XHB or some banks, most are already low priced though, JCG could be good but its not very liquid.

Here is how the account stands at the close with my options:
FCX(closed) -800

ACH +250
AAPL +1,375
GOOG +60

A Dilemma...

Well, a little update on the positions.

AAPL Nov 170 calls +1,375 (good)
GOOG Nov 640 calls -90 (eh, took a 6 dollar move over where i bought at to get back to about even)
FCX Nov 120 calls -1,100 (Terrible)

Ok, so as we can see, 2/3 somewhat working out, however FCX is down 1,100, which is over my 2% risk I want to limit losses to.

As we went into the close there was a rally, which was good, I spent the last hour before close in the car though, at the the time I was down about 850 on the call, just over my limit but it still wasn't the end of the day.

So here comes the dilemma, I got into FCX at 115, wanting to play the momentum going into earnings I was giving it a 2% loss forgiveness. So now, I am sitting at almost a 3% loss, however, FCX has not broken recent support at 110, in the meantime my call loses time value and volatility. So what do I do? Hold until it breaks 110 and possibly lose more than even the 3% I have already lost? Or sell out now and assume it continues down but limit my loss to only 3%.

I have yet to decide, what I should have done in retro spect is wait for a pull back to this support level and then get in, so there is a learning experience. I am less inclined to sell because the actual trend hasn't technically broken combined with stocks normally going up before earnings, but I am losing more than my wanted 2%.

The good news is I am up 150 over when I started the positions, however I would be 300 richer had I cut the loss exactly at 2%.

I'll see how the day shapes up tomorrow. If anyone has input on suggestions that has more experience let me know.

Trading Rules

Here are my rules I have come up with so far. Most of these concepts are adapted from Jeff Kohler's blog and tailored to fit my trading style. I will discuss the rules under the list.

1. Plan the trade, trade the plan. Determine entry point, exit point, price target and time needed before entering the trade.

2. Be patient, wait for low risk entry points, these higher probability trades will be worth waiting for.

3. Only risk 1-2% capital per trade(as account grows position size will naturally grow as well).

4. There will always be more opportunities, if a trade is missed wait for another entry point or better trade altogether.

5. Take trades that are the logical easy money, that you have conviction about.

6. Do NOT trade in the first hour unless absolutely necessary.

7. Do not put on a full position unless it is a very low risk entry point and risk is clearly defined.

8. The trend is your friend, do not go against it unless a pattern confirms reversal.

9. Cut losses short when confirming break of support, let winners run unless chart or news of company says otherwise.

10. Trade(in general unless situation determines otherwise) one strike out of the money options with appropriate time for target.

As a trader all we should really be concerned about is probability. How can we gain an edge over the market in the long term? We do this by only getting into high probabilty situations with defined risk. If we create a plan before we enter a trade, emotion should be essentially eliminated. This is because we already know how much we may lose and it is within our risk tolerance. If we know we are only risking 2% of our capital and we can rest easy knowing that is likely all we will lose.

How can we increase our probability of success?

We cut our losses at 2% always and let our winning trades go until they reach our targets, unless they signal an early exit or break of trend.

We only choose trades with higher probability, trade with the trend, wait for confirmation before taking trades, and trade relative strength or weakness stocks.

We diversify our portfolio with multiple higher probability low risk trades, with both put and calls plays and hedges. For example if we have 10 positions on at once that gives us a better chance of being right at any given time.

ALWAYS follow your rules! The purpose of these rules is to be able to trade almost mechanically without emotion. Most people fail because they hope when they should fear and vice versa, since we already have a plan and rules we don't need hope or fear, we simply follow our rules knowing probability is in our favor in the long run.

These are my rules, feel free to use them or change them to make them your own, but make sure you take responsibility for your own trades.

As I learn and adapt these rules will be updated as I feel appropriate.

Back in the Game

So after selling out Friday somewhat prematurely, I was lucky enough to get pull backs today in many of the current stocks of interest which ended up working in my favor this time, mostly AAPL, GOOG, POT, DRYS, ISRG, FCX, BIDU, FSLR. These are stocks that have been discussed over on Option Addicts. Those are all currently bullish plays and patterns and I need to put on some bearish plays, I think possibly now more than ever.

After today I am slightly concerned, although looking at a 3 month chart the S&P and Nasdaq are sitting at what appears to be diagonal support, so I'll have to watch that closely, I may buy a few puts on the S&P as insurance. Jeff discussed hedging with gold and oil which I am looking into as well.


I took long calls in AAPL, GOOG, and FCX

If I get a close significantly below 165 on AAPL I will exit, I got in with the stock at 165.8, looking for it to get back up to 170, if it doesn't break 170 and close above the next time it gets to it I will likely exit since it hasn't been able to a couple times now however if it does I will stay in till 175. So my risk/reward ratio is approximately 1:5 at worst, very good. In general I will try and stay above a 1:4 ratio, lowest is 1:3. 165 in apple has been recent short term support, I think more significant support would be found at 150. In this case I am partially playing the run up into earnings which happens on Oct 22nd. If my options get into the money(Nov 170's) then I will sell part of the position and hold part over earnings. I am currently up slightly on these calls(+275) on 5 contracts. The stock was bought fairly heavily going into close, which is encouraging, I am hoping it was institutional buying and not short covering.

GOOG, I bought 1 contract of 640 november call, again a play on likely run up into earnings and increased Implied Volatility(IV). I like the pull back today because it gives head room for a run back to new highs before the report. My line is 620, I got in at 626, with a projection of 650. I took it at 626, because during the day it was holding there but fell some, 620 is my line, if it closes below I will exit. It did fall below during the day but going into close rallied back above, it wasn't as strong as I'd like closing basically right at my line but it did rally, and I feel like it shouldn't have too much downside before earnings. Currently, I am down slightly(-220). Again if I am significantly in the money going into earnings I will hold. I feel if they have a good report with good guidance we see a gap up, since last report people sold so heavily, however it has ran up almost 100 points in a short time so we could see selling on the release. GOOG reports on thursday the 18th. risk reward is about 6:24, or 1:4, fits my criteria.

I bought 5 calls on FCX around 115.10, target of 120, earnings report on the 22nd as well. 110 is more significant support, 115 has been recent. I bought these in the middle of the day, I likely should have waited on all of these to the end of the day, however they were close to my entry points so it shouldn't matter. FCX was rallying into the close with the others so I stopped paying attention, but somewhat stalled and fell back below 114 so I am somewhat concerned. I should haved paid closer attention, so now I will have to watch it tomorrow, I am only down .75%(-275), so it is within my risk tolerance of 2%, normally I would want to only have to lose that much to determine an exit, in this case I am somewhat playing momentum and slightly looser. However, if I get down my 2% I will exit.

So overall on the day, I am down less than 1% in my portfolio overall, which I like on a day where the nasdaq was down 1%.

I can use that to illustrate the importance of position sizing, and minimizing risk. I waited and took positions at points close to where I would need to exit. Positions are small since that is needed to keep risk in check. I would like to be more diversified with some put plays, if earnings aren't as strong as people think the market may turn over again, it will likley be volatile for now.

I'll try and find some bearish plays tomorrow, Jeff Kohler releases his weekly watchlists on Tuesdays which are extremely helpful, if I see some bearish setups I like I will likely take some.

I'll post on my rules so they are more clear, a little later but wanted to get those out there with some thoughts on what I did and why I did it.

"By the Grace of Kohler"

In June of 2007, after I had been trading options about a month I came across another blog after I was looking for technical analysis videos on YouTube. After watching a video he gave the address for his blog www.optionaddict.blogspot.com and the rest is history. :-)

I am always the first to give credit where it is due and I have to give almost all credit for my quick progression to Jeff Kohler. Jeff is an instructor at Investools and a professional trader. He also manages to run his amazing Option Addict blog. Everything up until I started reading Jeff's blog was simply information and ideas on how to succeed. Jeff was the example of success I needed with finite examples of trading that really hammered home concepts and made me change my old ways. I have to also give credit to the incredibley helpful community as well.

Through Jeff's blog I quickly saw the error of my ways and how I could improve my trading. I honestly believe that is the single resource anyone needs to learn to be a successful options trader as long as you can follow the rules you end up developing.

After learning technical analysis and reading Jeff's blog and exchanging a few emails I have since realized a few things are dumb to do if you are a trader.

Averaging down, if you chose a low risk entry point, you will never need to "average down" such as outlined in Cramer's books because if the stock drops you know to exit the trade.

Jeff's rules stress low risk, small position sizing, which is crucial to success. Before I would put on a huge position, thinking this was the way to make money. Having seen my new method work with way less risk, there is simply no reason to risk a high amount.

I have come up with my own trading rules after having learned from Jeff. These are basically Jeff's own rules but worded to my liking, I keep a copy of these on the wall next to my screens so I always have a reminder to not do something stupid and risk too much capital.



I cannot thank Jeff enough for the help and guidance he and the blog have taught me, hopefully I can help others through this blog and they can see value in my methods. Jeff is definitely someone I would like to meet someday and hopefully I will. By following my rules I learned I have been to get back to only 21% down from 50% down in the 3 weeks I have been back trading. Later I will describe how I now look and analyze all trades and why I think that way, which should help as I journal.

A little note about the title and picture. On Jeff's blog there was a down day in the market on thursday October 11th. Most people were upset and lost quite a bit of unrealized gains due to the unusual swing in the nasdaq. One blogger wrote "by the grace of God I had sold most of my positions earlier in the day". I posed to them that if it had been the "grace of God" then he must really love them and hate all the other Option Addicts to let them lose money. He then replied and said no it was actually due to his positions hitting their targets and being properly positioned and diversified that he was fine which was thanks to Jeff Kohler. I then decided he was actually saved "by the grace of Kohler". I liked that line and found it appropriate and humorous, hence its use here for my own situation. I have seen the light of Kohler, and it is good, lol.

Ben's Book Review

Before I even started trading I read a few books to get started and continue to read others to try and learn even more. I will basically summarize a book, give my opinion on if it is worth reading or not.

The Little Book That Beats the Market.
By Joel Greenblatt

This was the very first book I read on investing and stock picking. This is a great book for those just starting out and learning how to value stocks. It describes the concepts of valuation in very easy terms since he wrote the book to be readable by younger kids as well. Up to that point I had ideas on valuation, but this book gave good easy examples on picking stocks that were undervalued. The book basically referenced a "magic formula" which is basically high return on equity, high earnings yield and getting companies with little to no debt. His even setup a website www.magicformulainvesting.com for free and a few stocks I picked from there that I still watch would have yielded great gains(50%+). It is supposedly backtested to have returned 29% annually over 30 years.

I recommend this book for beginners just learning about stocks and valuation, very worth it.

Real Money: Sane Investing in an Insane world.
By James J. Cramer

Jim Cramer of Mad Money fame wrote this first book on investing. This book covers some good disciplines and has some good advice on how to pick stocks given the time in the economic cycle. Gives pretty solid advice on diversification and when to take risk. Gives good examples and also teaches about how to value stocks. It is easy to read and written in a fun kind of tone, if you have watched Mad Money you can see the personality come through in the writing.

I recommend this book for beginners learning about diversification, risk tolerance and economic cycles.

Mad Money: Watch Tv, Get Rich
By James J. Cramer

The second in his series of investing books, basically builds on Real Money with some good additions and newly found insights. Also talks about his show a little as well. One nice thing is it gives you a template on how to do homework on the stocks you are looking at to see if they are good candidates.

I would recommend this book if you have already read Real Money.

Confession of a Street Addict

By James J. Cramer

This is basically the history and background on Jim Cramer and how he got to where he is today and some of the interesting things that happened to him. I actually enjoy books like this because I like to see the history of those that became successful and how. Cramer is a talented writer, since he originally was a journalist, and the book is very entertaining.

I recommend this book if you are a fan of Cramer, it is well written and gives a great account of his journey to wall street and making money.

Seven Years to Seven Figures
By Michael Masterson

The only good information I got from this book was that if you want to make money and become a millionaire it must become your primary goal. I took this advice and hence started educating myself on the market and options. The rest of the book is worthless, you just get these stories from people that "did it" even though you have no idea how much they even started with. Page 40 basically tells you "it takes money to make money".

Do not waste your money on this book, I have given you the only valuable piece of information from it.

All About Option

By Thomas McCafferty

This is a good book for those looking to get information on options and different basic strategies to use. This will give you a good definition of options and will explain how they can be used more in depth. However this information is pretty much available online all for free.

Good for an intro to options but all the information can be found online from places like investopedia for free.

The Way of the Turtle

By Curtis Faith

Curtis Faith was supposedly the most successful of the "Turtles" a sort of experiment taking people with certain characteristics and seeing if they could be turned into good traders. This is a somewhat entertaining book, the story gives some good examples of why he succeeded and others failed, similar to the real world where 9/10 people fail to trade successfully. Basically the "secrets" of the turtles, are the usual let your winners run, cut your losses short. Add to positions if your position is being successful, only risk a finite amount and don't trade on emotion. Also, highlights the helpfulness of Technical Analysis.

Again another book to see how one person became a successful trader which I find interesting. I basically gave you the secrets and general themes, which should not be taken lightly because they are correct and should be followed if you wish to be successful.

What Goes Up, Must Come Down

After my oversight on how Vega effects options pricing, I was slightly disappointed but still up 68% in 3 months, I couldn't complain. Afterall, I was a noob.

This was nearing the end of July, and the market had just hit 14,000 and market sentiment was shifting as credit concerns surfaced. I decided it would be a good idea to attempt day trading, heck I could make up that $12,000 in a couple days trading, or so I thought. I knew Apple was destined to go higher. I watched Apple in the morning and it looked like it was going to move up some more and possibly rally again past it's old high it made the day after earnings. It broke its old high in the morning and I decided to buy, my full position during the most volatile time in the market. Right after i bought, it moved higher I had 150 contracts I believe and I was up 3,000 in short order but it appeared to be stalling, I was somewhat worried but figured it was just pausing on its way up. It then promptly reversed and started a downfall as people seemed to be taking profits in the stock. By the end of the day , I was down I think another 12,000 instead of up like I wanted to be. So now, I was only up slightly over 30%. If I was smart I would have cut my losses and exited and waited to see what happened.

I wasn't smart then.

I figured it would reverse, however I chose possibly the worst time because the decent in the major indicies had now begun and people were fleeing equities for safer returns in bonds. By the end of the week I had lost all profit plus another 30%. I had managed to lose $50,000, someone's very good salary for a year, in a week.

Why did this happen? First, I broke all three of my rules. I traded in the morning, I bought all at once and I didn't cut my loss after the 1st day when I was clearly wrong and proceeded to hope it would come back. Had I even just follwed one rule of not buying all at once I could have likely managed to at least stay above even after that week.

So there I was, feeling so confident and flush with cash the week before, now I was defeated and much poorer in my account.

It was time for change....

The Downfall of Success

After I saw my account increase by a much larger amount and at a much faster pace than I could really hope for trading stocks, I was hooked on options. Also, keep in mind that I am only 23, I am allowed to be more risky with my assets at this age than someone who is say 40. However, like I said I still feel like you can be very conservative with options and they can be a good replacement for stock if you stay diversified and know what you are doing.

So for the next month or so I traded Apple options, basically looking at what the sentiment was and how reasonable I thought a move was and I would choose an option out of the money at my price target hoping it would go over it. I had no real education on Technical analysis at this point, I would just go off of what I "felt" the stock would do. Obviously having a feeling about a stock is likely based on logic that is based on previous movement but like I said I didn't really think about that at the time. As I went on I started to notice that the stock price would get "pinned" at a fairly round number at options expiration so I would take this into account when picking a price target.

So, I was only trading Apple options, I then decided diversification would be good(which it is) and bought some other option positions in stocks I liked. All of these positions went against me and my only position making money at the time was Apple. This basically made me think "well why go away from a good thing if it is working".

Since it was so logical to me Apple was the easy money and going higher with all the pending news it would have I focused all my efforts on one stock and started to increase my position size.

This unfortunately worked. I basically got into the market at a very good time (remember the May-July run?) which was great for my account but not good for my skills. My account was more or less increasing steadily although fairly volatile being tied into one stock.

As I went along I had adapted a few rules:
1. Cut loser short
2. Don't trade in the first hour
3. Incrementally buy a position so you can cost average down.

While I was on vacation, I finally saw my account cross the 100% return mark. I had hit $75,000 in my account within 3 months of beginning my options trading career. Great! Right? No.

How did I get there? Basically stupidity that worked out for a short while. I was trading huge positions once I had gotten over 50,000 I would regularly be buying 100 contracts since that then became the new standard(up from my 10 just a couple months prior). I would put on a 15,000 dollar position and see it double. I had the timing and price movement mostly down but I was going about it the wrong way. Way too risky.

So, the wake up call came shortly after Apple's earnings in July. I went all in, literally my whole account into Jan 08 250 calls since they were 1.25 I could get almost 600. That means for every 10 cents the call increased I would make 6,000 dollars.

This was actually fairly logical in setup, I looked at what other comparable tech stocks that beat had done after earnings, most had gapped up. RIMM for example gapped up 50 dollars. I had actually done my own calculations and come up with my own estimate on apple, something like .95 cents EPS, which wasn't far off. I figured if they got close to that the stock would gap up 10-15 dollars. Well I couldn't have been more right, they got .92 EPS, after hours the stock gapped up 14 dollars. At this point I am thinking "ka-ching". I had basically thought I doubled my account on that move, given my Delta was like .10 and gamma was .003. So a rough guess was I gained about a 1.50 in my option value minus some small time decay.

The next day the market opens the price had held pretty much, it was still up +13 from the previous day so I was going to sell out right away and book my profit. Market opens, my option price doesn't move, in fact it has lost 10 cents in value. I am freaking out, going WTF happened. I end up getting out with a 20 cent loss so I lost 12k.

This was odd to me, I was actually lucky I was so right in retrospect because otherwise I would have lost way more at that point. What had happened and what I didn't know about the time was Implied Volatility decay. This basically happens after every earnings announcement, however I didnt see it happen to my last options over earnings because I was at the money and they became in the money and gained intrinsic value, these were all time value and volatility.

So this was partially bad luck and partially a rookie mistake because I didn't know about Vega, which I should have. However, when you lose 12k when you thought you were going to make 100k? You bet your ass I found out why.

The lesson learned here? Trade out of the money(OTM) options going into earnings as volatility will generally increase and increase your option value, then if you do not become In the money(ITM) then trade up to ITM. However, this is only if you are fairly certain of the outcome and its higher probability. I would now take profits and hold less contracts over earnings since you really don't know how the stock will react.

So we covered my earnings blunder, how did I give up my 100% gain and then more in the span of a week? I'll tell you.

The Epiphany

After holding my stocks for a while and being fairly content with my choices to be up 8% in a month I started to read into options a bit more. Most things I read were actually very confusing, they made it seem like you had to hold options until expiration and if you didn't hit your strike price they were worthless. This makes me understand why more people do not trade them. However, I went to my grandma to ask her if you could in fact trade them like stocks, she said sure there is no reason to hold them, in fact you shouldn't hold them into expiration unless you have the money.

After clarifying that and reading a book called "All About: Options" I felt I had enough info to get my feet wet. I had been watching Apple for a bit and liked the company and figured they would do well on their upcoming earnings and had many more catalysts to come during the year. I decided to buy some options right before earnings(we'll get to why this screwed me later). I bought 2 contracts of the 95 June calls, it would have been 10 but the price ran up on the stock in the 15 mins I was finalizing what I was going to do. Apple reported and blew estimates away and the stock jumped 7 dollars the next day. I had instantly doubled my money and made 1,200 into 2,400. Obviously I liked earnings 1,200 in a day instead of a month's time. I at that point also had enough knowledge to know stocks will then usually pull back, so I sold my calls on the open and bought puts, this time the 10 contracts I wanted originally, and actually made another 2,900. WOW, I was excited and proud of myself for predicting how the stock would move. I was off to a good start, which we will find out later why this is not necessarily a good thing.

What most people do not understand about options is they can be as risky or as conservative as you want, I was fairly conservative since I was still new. Leverage can be your friend if you know how to use it properly. Options give you limited risk with unlimited reward which again, can be very useful if you know what to do. Options do have more risk though as they can technically go to zero value and the leverage gives you bigger gains or losses in shorter amounts of time. I'll touch more on what I did in the next post and how my initial success actually set me back and how trading rules must always be followed. Stay tuned....

Moving Forward with a Purpose

This is the start of a new chapter in my life and what better way to celebrate it than blogging about it right?

The purpose of this blog will be to document trades I make, why I make them and how they turned out. I will then reflect on these trades and see what can be learned and applied to the next trade to help myself improve. I hope my thoughts and reflections will also eventually help other people learn to trade better by saving them some of the same mistakes I have already made.

First I will give a background on where I have come from. My grandparents were nice enough to start a stock portfolio for me and my siblings so that it will someday help us financially later on in life. My Grandma had the most knowledge and experience in the stock market so she basically chose the stocks and oversaw our accounts(and of course paid a broker to make the trades and do nothing else). I think we have had the accounts since 2000. In 2004 I became somewhat interested in the stock market and was always curious about it seeing my Grandma watch it constantly while we were on vacation. She was eager to teach me and I wanted to learn and open my own account.

So I opened a TDAmeritrade account(at that point just Ameritrade) and I put some money in along with some money she gave me. Overall, I think there was about 5,000 in the account, not too bad for a college student(or any account for that matter). I was currently studying in Hawaii at the time, and only had class 2 days a week So I had time to watch the market given that it opened at 4am there and was done by 12pm.

Basically what I proceeded to do was nothing more than gamble and make fairly uneducated speculations on stocks hoping to make a profit. As you can imagine this did not work too well, my best day I think was a 500 dollar profit on ticker symbol MAMA which had a short revival of the dot com days. My one good call managed to make me 500 and my grandma about 30,000, which she then lost a short time later making similar speculation.

The result was I lost 2,700 of that 5,000 trading for only a short time. What was even worse was at the time I didn't really think to question anything my Grandma was doing and basically thought all the stock market was just a gamble. Afterall, she had at least 20 years experience over me so I assumed she would have it fairly figured out.

So that turned me back off of it for a while. I continued focusing on my other passion of cars, which is a terrible financial investment but was a great educational one in my opinion.

Around March of 2007 I took an interest again, I had seen how I was fairly lucky to be in a situation where I would come out of college with little to no debt and wanted to be smarter with my money and have my money generate more money. I looked at my account my Grandma had for me and did some calculations and realized I had earned less than a 2% return per year, most of that came from Best Buy stock. I knew I could get an even better return in a CD and figured there had to be something being done incorrectly.

I have always considered myself a Do-it-yourself type of person, I feel I am smart enough to do anything and if someone else can make decent returns in the stock market, I am perfectly capable as well. So, I decided to start reading many books, I also began watching Mad Money with Jim Cramer on CNBC, which I do have to give a lot of credit for getting me excited about making money and learning about investing. So after reading a few books I felt I had a good idea on how to value and pick stocks in my own portfolio so I took over my account.

At this point when I took it over I had about 32,000 in stocks. After a fairly successful trip to Vegas I put in another 4,500. Once I sold to re-allocate my balance was $37,403. I am giving actual dollars because I think it is useful to see real money at stake and to give people an idea of what type of account I am working with for their own references.

So I sold out of everything and went about picking stocks based on fundamentals, more of the Warren Buffet style and what I had learned from Jim Cramer's books as well. This was in mid April at this point. I chose a few stocks based on what I thought were good fundamentals and were diversified. I chose ACH, FCX, HERO, RIG, TCK and a few other tech stocks(funny thing is if I had held those till now I would have an average of 50% return for the year, but I'll get to that later).