Saturday, November 19, 2011

GOOG Option Trade Review

One of my favorite trade setups for stocks during options expiration week is the "pinning trade" that shows up late in the week or the day of expiration. Long story short, I look at a stocks open interest and if there is considerable OI present at one strike versus all others then I like to then look at the short term trend and momentum of the stock to see if it likely that a move towards that high open interest strike price unfolds. This logic of pinning and why it happens is a whole post for another day but here I just wanted to do a trade review of my put spread trade in GOOG from Friday that I tweeted out live.

GOOG traded between 601-604 in the first hour of the day and I already saw that the 600 strike had the most open interest out of any strikes. It also is a good round number that traders monitor. So while I watched the market chop around slightly higher and tech kind of weaker overall on the day I kept my eye on GOOG and if it traded with any intention of going towards 600. The plan was to buy the slightly in the money 605 puts and look for a move to 600 AND THEN short the 600 puts to be in a vertical spread and expect the stock to pin at 600. Even if the stock tanks below 600 I still make the spread. My max risk on the trade was basically above the high of the day which would have risked about 1.00 on the spread.

Thought Process:

  • Watching the 5 minute chart on the left I took alert when the TTM trend bars closed 2 red candles in a row. At this point I see the stock decisively below the VWAP (red dashed line) and a fresh TTM squeeze setting up as shown at the bottom of chart. I want to buy the 605 puts on a pop back to the VWAP expecting the stock to roll over to new lows.
  • As the arrow shows I scaled into the 605 puts where I marked the blue vertical line. I added to the position a few minutes later as the VWAP held as intraday resistance. 
  • My mental stop was the highs and if GOOG broke down under 600 as planned I would put in a hard stop at breakeven to ensure no risk on the trade.
  • Within 20 minutes GOOG tested the 600 level and I shorted the 600 puts to create a vertical put spread at an average price of 2.25.
  • The TTM squeeze fired off a short signal and GOOG fell all the way to about 594. In hindsight, it would have been nice to simply be long the 605 puts with no spread but I cant trade in hindsight.
  • The max my 605/600 put spread could be worth would be 5.00 since that is the difference in the strikes. That max wouldn't be reached til near the close when the premium evaporated so I was very happy with simply selling for 4.75 if I could instead of being greedy for the last few dimes.
  • By the next hour I was filled for 4.75 on the put spreads after an entry of 2.25. A gain of about 111% or +2.50 per contract.
  • A huge winner for a relatively small move in the stock, percentage-wise. That is the best part about using options and spreads during options expiration when you know the likely strikes that are in play for pins.

Wednesday, November 16, 2011

Dollar Index Wants Higher

As a follow up to my previous Euro post I thought I would look at the dollar index and where it might be headed. The dollar index futures have been in bullish mode for most of November as it bounces off its 13 day EMA and holds the 200 day at 76.79. It has now gotten above and CLOSED above the 61.8% retracement of the down move during October that took the dollar from 80.46 to 74.86. Because of this I think it will bring in more buyers on any dip back to the mean. I think at the least there should be a retest of 80 coming soon and eventually Fibonacci extension targets as shown in the chart point to a move up to 81.94. This fib target would make alot of sense because it matches up with the 52 week high from January at 81.63.

If the move really gets legs in the longer term the second target would be the 161.8% fib extension of 83.87. That would be quite a move and while I doubt we see it that high...the possibility exists.

The TTM wave in the chart is positive saying bulls are in control in this timeframe. Momentum in the squeeze is rising also. If the dollar index continues to rally towards 80 it would make sense the foreign currencies like AUD, CAD, BP, EUR would sell off and all of these daily charts are in bearish trends at the moment so it matches up well.

Wednesday, November 9, 2011

VIX a Sale at 40?

I will be watching the VIX and the 40 level to look at selling volatility in stocks. The main reason is based on the LRC I have on the chart. The linear regression channel I use shows when the market gets too stretched in one direction based on its recent activity. The outer red lines are two standard deviation bands and the LRC channel dynamically updates in real time. The outer band is sitting near 39-40 so this will likely be a tough level for the VIX to sustain above for more than 1-2 days. This is also a very similar concept to using the bollinger bands on the VIX.

  • If/when the VIX tests the 39-40 area it would probably also mean the SPX is testing the 1200-1210 zone of support. A big line in the sand for bulls going into year end.
  • Thanksgiving is in 2 weeks. That means holiday trading mode. It also means theta decay will start to be priced into the options markets in the next few weeks. 
  • It would take a lot of new information from Europe that isn't already somewhat priced in to get the VIX to explode thru 45-50 into the holiday season. Unlikely. Not impossible, but just not probable.

The easiest way to sell vol is to sell put credit spreads into support on strong stocks. Selling SPY iron condors works as well. Or maybe even just buying a calendar spread on the SPY going into the next month (Buying Jan/selling Dec). Expecting price to stay range bound and volatility to come in. Just some ideas here.

Apple Rotting?

AAPL stock has had a tough time attracting buyers above the 400 dollar level since it first got to it back on July 22nd. Since then it has closed above 400 on ONLY 21 days out of 77 trading days. Granted we have been in a pretty strong selling mode since early August but this just shows there is a lack of buyer interest at these high levels.

The earnings gap from mid October left a bearish island reversal top in place at the 426 high and AAPL has been struggling to hold the 400 level once again as it bear flags on top of the 50MA. This could be a pretty big turning point for the stock that has been so loved by Wall Street for so long.

AAPL is breaking hard with the market today and I think it has a date with the 389 open gap from Oct 10th. Below that there is little support at the uptrend line of the larger scale rising wedge near 375. The 200 MA is down at 362 and could be where AAPL is headed if it cannot get its act together and get back above 410 and attack that island gap top.

Looking at the volume profile on AAPL you can see the 1 year VPOC (volume point of control) or where the most volume has traded, is down at 346 so that is huge support if it ever goes there. But the thing to keep in mind is there is a decent volume pocket between 355-385.

Buying Dec puts on bounces is not a bad idea and then selling weekly's against them is a decent way to play a choppy to down move over the intermediate term.

Wednesday, November 2, 2011

Euro Gets Stopped at the 61.8% Retracement

The short covering rally in the EUR/USD since October ran up about 1000 pips and got stopped cold right at the 61.8% retracement of the larger downtrend in place since May 2011. Pretty amazing how these fibonacci levels work in the markets, especially currencies. The 1.4250 level has been a huge level of interest for the past year as this was where the Euro topped out in late 2010 and then found support throughout mid-2011 as the currency made a major top before falling to 1.3145.

Now after the bounce back to resistance it failed and slipped back below the 200 EMA which sits at 1.3955 on the daily. The daily chart has flipped back to a short term sell signal based on the color of my TTM trend bars and if it doesn't recover the 1.4000 zone soon it should continue a multi-month decline. 

This is even more significant based on the fact that the weekly chart is possibly forming the right shoulder of a bearish head and shoulders top with the slanted neckline shown below coming in near 1.3400.

This definitely depends on the direction of the dollar as well but I think in the intermediate term there are more downside risks to the Euro than the US buck. It will be interesting to see where the Euro goes into year end but last week's blowoff top at 1.4250 has all the makings of a important high that we might look back at in 3-6 months. If it does actually breakdown I can see the EUR/USD at 1.25 to 1.2750 very easily as initial targets.

Tuesday, November 1, 2011

Fascinating Similarities Between 2008 and Now

There are some crazy interesting similarities in price action between the present market and the early 2008 patterns of price. So I went back to compare the analog chart between then and now. I trade in the short term but I always have a view of the big picture. Just wanted to point out the possibilities of where the stock market might go in the intermediate term-long term. 

First chart shows the 5 year weekly chart of $SPX from 2006-present with some simple 50 and 200 period SMA's. The highlighted rectangles are what I am focusing on. Notice each top clearly shows a bull trap above previous highs and classic 6 month head and shoulders rounding formations which led to longs being trapped with plenty of supply overhead.

  • 2007-08: The Oct 11th high of 1576 to the March 17th low of 1256 was a decline of 20.3%
  • 2011: The May 2nd high of 1370 to the Oct 4th low of 1074 was a decline of 21.6%

Fairly equal percentage moves right?

Here is where it gets nutty.

  • Each decline from high to low lasted a total duration of 23 weeks.
  • Each decline found support and eventually bounced off the 200 week SMA
  • Both price lows were bear traps which undercut the previously made lows. In 2008 it was the March 17th "Bear Stearns" low.
  • Both of the subsequent rallies up were stopped at resistance at the 200 day SMA. In 2008 at a level of 1440 and 2011 at a level of 1292 SPX.

As the 2nd and 3rd charts show there are a few key differences as well.

  • In 2008 the slope of the 200 day SMA was pointing much sharper down than it currently is. However it is still pointed slightly down in the present 2011 market.
  • The rally back up off the lows was faster and sharper in 2011 than in Spring 2008.

Even so, I think its been interesting to keep an eye on the similarities between this analog chart and the present markets. History repeats itself because human nature is constant. I think this is even more significant because we have just had a 5 wave up bull market for the past 2.5 years and the long term investor sentiment is clearly bullish in the "acceptance" stage.

Remember the technical's move far before the "data" confirms reality because the market is the smartest in the room.

Simply ignore the outside noise and media and focus in on the pure price action. Clearly, it is not 2008. It is 2011. But like in the 1930's when the "great recovery" began, the government interfered and helped welcome the double dip recession of 1937-38. The public is losing confidence in the leaders as shown by the Occupy movement. A lot of the same ingredients are in place at this time so is the market predicting the same fate? We shall see over the next year!