1. Try clicking on the name of the most recent article in the column on the right. This will remove the "Archives" list.
2. Try right click on the chart itself and open it on a separate window.
I am sorry that I cannot always make the chart small enough to fit neatly on the left column. I want you to be able to see the details I want to point out.
I Hope this helps,
Juan
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Friday, DNA jumped more than 5% (6.7% to be precise) with a spike in volume of of more than 200% (293% to be precise). Genentech is one of those companies I keep a close eye on becuase it has been a high flier over the last 5 years, although it has not performed lately.
The news were really encouraging from Genentech. The company increased their earnings growth forecast from 35-45% to 40-50%. How good is this? DNA's adjusted earnings for 2005 was 1.39, so if the earnings DO increase by 50%, DNA may reach $2.085/share. A target of $100 would give us a PE ratio of about 50, a reasonable PE for a company growing at 50%? You decide. Impressive growth, but most of it factored in, it seems, since the company says that it expects to grow at 25% until 2010.
http://finance.yahoo.com/q?s=DNA
Still, I have analyzed DNA with the RET and it seems to be making an important bottom here. We can assume that DNA will rally to $100 in short order. From there, we will see if the stock breaks out to new highs or pulls back strongly.
Based on my system, it is appropriate to enter a CRC, since the catalyst is good along with the spike in volume and stock price. However, this IS a high flier (traditionally, although not lately) and tends to move unexpectedly.
I see also that the IV/SV ratio has dropped significantly since the news yesterday, so this may be a good candidate for a PCCRC as well.
The IV on DNA is not high, and may be on the increase, so we may benefit from Vega gains. All in all, a PCCRC seems like a good candidate strategy too.
Here is my proposed trade:
I am placing the PCCRC in my account, but I will follow the CRC as a paper trade. I will keep an eye on both trades as an exercise from here on, and will keep you posted.
9 comments:
Juan,
I shall place a PCCRC on this one, as you have convinced me that is my trading style. **Smiles**
Thanks for showing both of the two trades CRC and PCCRC positions as a comparison.
I shall create the trade in IB later, but is the position of the back month being June06 best placed time wise? Do we need more time in back month?
Fortitude
Let me write the obligatory disclaimer first, just so we are clear. I am making this trades real and real time so that I may demonstrate purely the real cons and pros of trading. Because no one knows the future, doing this should expose us to the real situation, and not just some backtest trade cooked in a lab. My intention is NOT give you "uncle Ed" recommendations but rather to show you what I actually DO, as a way of learning. I hope to have you criticize and make suggestions as you indeed have done.
Now for your question: For the back month you have to balance cost, time and implied volatility. If you notice a skew with a cheaper back month, that is the one you should take. I looked at the options chain for september and that may work very well too, but you will notice that the cost of the trade is higher, but the implied volatility is lower.
Another important factor is earnings. You want to place your long options strategically after earnings, so that those appreciate as earnings approach, and you can exit the trade if volatility is high. In this case, it is not an easy decision because earnings for DNA are in April, July and October. If you pick the Septermber expiration, you will get no IV spike at the July earnings and if you pick the June expiration, you will get no IV spike at the April earnings.
My experience is not profound enough to notice much difference in either approach, so I settle for the lower cost. We could keep track of both PCCRC's and see which performs better. You can always rollover the June options (long) to a later date, if it is worth it.
Do your own homework and see if you are truly interested in this stock and you think that the catalyst is good enough.
Hi Juan,
Spotted DNA too and i can't agree more with yr outlook for DNA. However, i am more in favour of a CRC. I will do something similar to the Apr-Jun but with a higher ratio, maybe 5-8.
I will sent you my trade on this as a basis for comparison and tracking. Hopefully, we'll be able to gain better insights on PCCRC and CRC.
**BTW I have just been typing this up in Word, so I post it without reading your reply.
Juan,
The next back month options for DNA from Jun06 are Sept06, so they are perhaps too far out? The reason I ask here is this. We entered the SBUX trade in February 2006 (I believe) with the back month July06 being 5 months out. For the DNA PCCRC trade, using a back month of Jun06 is three months out and Sept06 is six months out.
One PCCRC combination on the strikes and expiration months that you have advised, costs $1,425. I reckon perhaps you can shave another $0.40 - $0.45 off that perhaps? So we are talking of an entry at $1,385 realistically. I am going to buy two contracts on this one.
What do the other fellow Bloggers think? Will you take the CRC route or the PCCRC route? Or perhaps just watch on the fence? **Smiles**
Also Juan, just an observation for the SBUX trade. When I sold the front Mar06 options in the initial trade, the time decay has improved the trade by an amount similar to the trade spread difference between offer and bid. Now since the rollover, it has in a matter of days improved it by another similar bid/offer differential. Just an observation, that is all. **Smiles**
Best Wishes again.
Uncle Ed,
RE: "Let me write the obligatory disclaimer first, just so we are clear. I am making this trades real and real time so that I may demonstrate purely the real cons and pros of trading. Because no one knows the future, doing this should expose us to the real situation, and not just some backtest trade cooked in a lab. My intention is NOT give you "uncle Ed" recommendations but rather to show you what I actually DO, as a way of learning."
As always Juan. **Smiles**
Juan,
Something else I have done on IB is load the rollover trade (Buy back the sold April06 options and sell the May06 options), so I can monitor that as well.
Again this I can do using IBs Combo ordering system. Hopefully I will find this useful, because during the last two rollovers on the PCCRCs I felt I was 'searching in the dark' as to what was potentially possible on the Credit.
I have only had three PCCRCs so far, so still a lot to learn on these.
Juan,
For historical and future reference, I paper trade really, so all your postings are for hypothetical purposes only. **Smiles**
JUan,
RE: "Another important factor is earnings. You want to place your long options strategically after earnings, so that those appreciate as earnings approach, and you can exit the trade if volatility is high. In this case, it is not an easy decision because earnings for DNA are in April, July and October. If you pick the Septermber expiration, you will get no IV spike at the July earnings and if you pick the June expiration, you will get no IV spike at the April earnings.
My experience is not profound enough to notice much difference in either approach, so I settle for the lower cost. We could keep track of both PCCRC's and see which performs better. You can always rollover the June options (long) to a later date, if it is worth it."
I could do a one PCCRC using the back month of June06 and the other using back month of Sept06.
it would make an interesting comparison. Also I will incorporate that in the back tests I will eventually do too.
Again Juan, thanks for the Blog, please keep it up. **Smiles**
Juan,
Have found a feature on IB that will help us all in buying these complex configurations.
Not only can I get a chart on the stock price but the exact combination that you wish to buy too. Similarly it will be helpful during a rollover period.
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