In this series I am going to show you my analysis on stocks in which I have PCCRC's. The goal is to see if the Elliott wave analysis supports the bullish outlook in this stocks. I am posting a video clip as well as the charts.
I. AAPL
point your browser to this address to download the charts: http://homepage.mac.com/paperprofit1/.Public/AAPL.pdf
II. ADBE
point your browser to this address to view the video: http://homepage.mac.com/paperprofit1/.Public/ADBE.mov
point your browser to this address to download the charts: http://homepage.mac.com/paperprofit1/.Public/ADBE.pdf
III. AMZN
point your browser to this address to download the charts: http://homepage.mac.com/paperprofit1/.Public/AMZN.pdf
IV. CDWC
point your browser to this address to download the charts: http://homepage.mac.com/paperprofit1/.Public/CDWC.pdf
V. GOOG
point your browser to this address to download the charts: http://homepage.mac.com/paperprofit1/.Public/GOOG.pdf
V. LXR
point your browser to this address to download the charts: http://homepage.mac.com/paperprofit1/.Public/LXR.pdf
V. PNRA
point your browser to this address to download the charts: http://homepage.mac.com/paperprofit1/.Public/PNRA.pdf
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4 comments:
Hi Juan,
I have some additional questions about the PCCRC rules and candidate selections:
1. Are there assignment risks and how do you deal with them?
2. Have you ever consider candidates with historical high IV of > 100%?
3. How about Strangle instead of Straddle to lower your costs of the trade?
4. What do you think of lower priced stocks for the PCCRC i.e. > $15?
5. And how about candidates who droppes sharply after earnings with a spike in the front month options which makes a better skew profile?
I would love to have your 2cents about this. Thank you so much for your time and effort, appreciate it!
Cheers,
Hung
Every trader thinks that they can outperform a system, and thus they tend to move away from the guidelines they are given, even if the proven system has been tested and retested. Doing so, really changes the whole story and you have to work out your own statistics, build up your own experience and test, and retest before you can say that it is a successful system, like the original.
I can only comment with appropriately to the reasons why I do what I do, and only you can figure out if the modifications you make would produce the same, let alone better results. It may well be that your modifications are better, but they would not have the backing of months and months of successful trading. This is not to discourage you, quite the contrary, experiment, find out what works for you, but take what I could say about your modifications with a grain of salt unless I specifically say I tried something and did not work for me.
Hung: 1. Are there assignment risks and how do you deal with them?
Juan: I have dealt with this, and there is nothing to fear. At first, I was nervous about assigment, now I not only expect it, in some cases I want it.
Currently, I have 3 short contracts on GOOG Nov 400 calls, the stock is at $483 and with 3 days to expiration, I have not been assigned. I want to be assigned as a way to close the position. My longs are 6 Jan 400 calls. When assigned, I would simply buy back the calls. The credit of the sale would be reduced back to $0, I then SELL (NOT EXERCISE) three of the long calls to compensate for the loss the assigment may have cost me. This is not much different than BUYING the short calls, except that there may be a tiny time value and the commissions of buying stock may be less than those of buying options. You would have to figure that out with your broker.
Generally, to "avoid" assignment, you can rollover your shorts to the next month one week before expiration (as it is stated in my rules). With short puts, you may be assigned the stock shares if the options are deep in the money as early as 2 weeks before expiration. In that case, sell the stock and sell new shorts (if you want to continue on the PCCRC). The new shorts may be the same or next month, experiment and see what works for you. It is really no big deal.
Suppose I am assigned the stock before the opening of market today because I had short puts in a stock XYZ, and the stock jumps 3 points at the opening. In such case, I just got $3 worth of profits give to me buy this fortunate event.
In summary, don't fear assigment, learn to use it you your advantage. It is no more than the buyer of that option giving up their time value.
Hung: 2. Have you ever consider candidates with historical high IV of > 100%?
Under my conditons, IV MUST be low. If you trade stocks with high IV, you could suffer volatility crush and lose money. Unless the front month has a high IV and the back month as an IV below 40%, You are shooting yourself in the foot. The volatility skew MUST be in your favor: the IV you sell must be high, the IV you buy must be low. Also, try to find out why is the IV skew present? there may be some impending news, in which case the crush may occur right after the news release. Carefull with that, these are rare and unpredictable occassions. I used this format on IMCL back in May, take a look at my articles on IMCL.
Hug: 3. How about Strangle instead of Straddle to lower your costs of the trade?
This did not work for me. Reason: OTM calls and puts become profitably more rarely. Thus the jump in stock price would have to be much larger. Also, one approach to profit taking is to sell your longs and buy OTM longs once the second become ITM. Then, and only then, would you be reducing your price. Using Strangles, rather than straddles in the long portion while keeping the short ITM, is a completely different animal. You have to keep track of your cash requirements because you are entering credit spreads. I don't like that because there is a difference between my buying power and the cash in the account. If you have limited funds and you think that this may work for you, try it and report back your experiences and some examples for us to explore.
Hugn: 4. What do you think of lower priced stocks for the PCCRC i.e. > $15?
When the price of the underlying is low, the number of shares (contracts) you'd buy with your capital will increase, compared with a position in a stock trading at $50. The result is excessive commissions. This is why I trade stocks above $30, although on occassion I have traded stocks in the high $20's. shope around for the broker that would charge you the least in commissions, we don't want to give up too much in commissions.
Hung: 5. And how about candidates who droppes sharply after earnings with a spike in the front month options which makes a better skew profile?
If a stock falls after earnings, chances are that I.V. Will increase, and make your PCCRC inpracticable. Again, the rule is to sell high IV and buy low IV. I have not experimented sufficiently with this set up, which may work in a bear market. I have looked into buying OTM calls in that situation, which results in a bearish bias. Why don't you backtest this strategy? I have not traded this regularly, so I cannot directly comment much more.
Hi Juan,
My goal is to make a good system better. Your PCCRC are good but I try to custum fit them my trading and risk profile thus trying to make it better if I can.
point 1, Assignment risk:
I don't understand your comment "When assigned, I would simply buy back the calls". What do you mean with this? Buy back the 3 GOOG Calls Sold or Sell the 6 GOOG Calls Bought? Can you explain this again please.
Point 2, Candidate with high historical IV > 100%:
You have misunderstood me here. I mean Stocks who's in low IV currently but have high IV in the past of > 100% meaning that these stocks were big movers in the past but probably also big movers for the future thus making it better candidate?!
Point 3, Strangle instead of Straddle:
My thought about this is less cost, less risk thus higher ROI (Return On Investment). That's why your candidate must be bigger movers then for Straddle settups so they can jump bigger thru your profit/strangle ranges more easily. This also makes sense if you look at me point 2 I made, search for bigger movers.
Point 4, Lower priced stocks:
That's why it's important to not pay to much for commissions. But these stocks must have enough strikes to play with though!
Point 5, Hugh drop after earnings:
IV will probably spike but after the stock has stabilized than IV will fall again making it a good candidate cause of the better IV skew of the front (high) and back month (lower)?!
I also would like to add that Gamma is also an important Greek. So all four the Greeks can give you the advantages with this strategy instead of three.
I just have to test these setups a lot more to justify my thoughts/points. I will share my findings with you. By the way, I'm not a platinum user so I can't use the links from platinum. I use The TOS software for my analysis. Do you have other links/URL's from your past PCCRC trades (like the GOOGLE trade) so I can check them out, thank you!
Cheers,
Hung
Hung: Hi Juan, My goal is to make a good system better
Excellent Hung, that is the spirit. Just be sure to backtest and forward test your changes. Some of the things you propose I have tested, some others I haven’t. Just be sure you report your successes and failures here, so we all benefit. Thanks.
Hung: I don't understand your comment "When assigned, I would simply buy back the calls". What do you mean with this?
I closed my PCCRC on GOOG at 400 strike yesterday, leaving 1 long Jan Call. However, if I had kept the position I had -3x-3x6x6, I could have been assigned 300 short shares of GOOG at $400. To compensate, I could simply exercise my longs but I would lose my time value since my longs expire in January. Instead, I would buy close the short shares within the trading day at a big loss. To compensate I would SELL (not exercise) 3 of my long calls, rather than exercise them to compensate for the short shares I was assigned. Why? Because the long calls have still $1 of time value I would leave on the table if I exercise the long calls to compensate.
Hung: Stocks who's in low IV currently but have high IV in the past of > 100% meaning that these stocks were big movers in the past but probably also big movers for the future thus making it better candidate?!
You may be selective that way. This is an approach to find momentum stocks I suppose. As long as they are in the low end of IV, and a big move in either direction can occur, this might be a good approach. I you want to develop a system, searching such candidates using in Platinum, you will need to test that assumption. But yes, I would rather trade GOOG than GE.
Hung: Point 3, Strangle instead of Straddle: My thought about this is less cost, less risk thus higher ROI (Return On Investment). That's why your candidate must be bigger movers then for Straddle settups so they can jump bigger thru your profit/strangle ranges more easily. This also makes sense if you look at me point 2 I made, search for bigger movers.
My experience with strangles was simply not good. Perhaps the ATM options appreciate better if IV jumps (?). My impression is that it was just not as simple as a higher ROI because it cost you less to begin with. I quickly return to my original form of trading. But, don’t let me stop you from testing your theory. Again, my experience with strangles was limited.
Hung: Point 5, Hugh drop after earnings: IV will probably spike but after the stock has stabilized than IV will fall again making it a good candidate cause of the better IV skew of the front (high) and back month (lower)?!
My problem with strategies that you have to wait to enter your trade is that I don’t like to keep track of trades I might enter. I would rather search for the ideal skew. Platinum allows the search for IV skews.
Hung: I also would like to add that Gamma is also an important Greek. So all four the Greeks can give you the advantages with this strategy instead of three.
How, do you think, would Gamma influence the PCCRC? I have not really kept track of Gamma, so your input here will be very much appreciated.
Hung: Do you have other links/URL's from your past PCCRC trades (like the GOOGLE trade) so I can check them out?
Well, you can look back in this blogs, I have published a great percentage of the trades I have done over the last 1 ½ years, so you can see all that I have done. Even in past blogs, you can post questions below the articles you read. I will receive the notification by e-mail, and I could respond in the comment portion of each article.
Thanks for all your thoughtful posts.
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