A few weeks back I demostrated how to enter the PCCRC using TOS, as I entered a trade or JOYG. This trade has turned interesting today because the company has lowered its full year outlook, and the stock is tumbling before the opening of the markets.
http://biz.yahoo.com/ap/070725/joy_global_outlook.html?.v=1
THis is ironic, considering that I entered the trade because of a positive outlook, including a stock repurchase.
http://biz.yahoo.com/bizj/070530/1469464.html?.v=2
I'd like to demonstrate how a timely profit taking move at rollover, has open the trade to the posibility of profits to the downside once the upside move took place. Today, a strong decline in the stock price may increase my profits further.
First, here is the trade as recorded in platinum.
OK, so you may say, can you show me that you entered this position "for real"!?
Here it is in my TOS account. Note that I entered the position at a limit price and it got filled between 9:56 and 10:35 on 5/31/07. The average price is entered in Platinum above.
You can't predict exactly when the next strong move is going to take place, so the front month shorts moderate the risk as we move from month to month in expectation of the rally, or decline that could make us the profit. Note that on 6/8/07, I rolled over my June shorts to July with a good credit of $2.8.
By the time July expiration arrived, the stock had climbed to the mid 60's, about 10 points above my strike price. In such situations, it is not even worth shorting the nex month puts, but I did increased the number of short calls to 12, changing the configuration of my trade to a delta neutral (straddle-like) appearance. Of course I had no way of knowing if the stock would continue rallying or declining strongly as it has done in the last couple of days, and it is poised to continue doing today. I simply took my profits, while leaving the door open for a strong decline or rally. It matters little to me. Take a look at the chart below, so you can see the power of the PCCRC in action. I am poised to make money thanks to Delta, as the stock declines, Vega as the news impact the IV of the options I own, and THETA too. Yes, Theta because the stock will fall back near my strike price, eroding the value of my short calls!. I might even sell ATM puts now, at my original strike price, thus taking profits.
I am looking forward to your comments.
Today, thinking of where to go now that the stock has collapsed, I had the option to close the trade at a good profit. However, to make up my mind, I analyse JOYG using RET. It may appear that the stock may continue its slide down to $40. I can still sell ATM puts, front month...
The chart below looks at my trade near the closing, not bad!, in fact, if the decline continues down to th 40's, my trade may turn out to be a big winner!
8 comments:
Juan,
Thank you very much for DVD’s. They are great. I learned a lot from them, and still learning.
My question based on GOOG trade.
On 5/22/2007 you rolled out position from 470 to 530.Technicaly you have closed 470 and opened 530. I looked at that days GOOG IV/SV graph, and it was approx. 1.4. So 530 PCCRC trade should be ruled out based on PCCRC new position opening rules. But anyway position worked out, I believe.
Generally, if stock spikes one day it affects Platinum IV/SV graph for 6 days after spike. So on very next day SV might be very low, lower than IV and that day true IV/SV might be more than 1, but IV/SV graph will show opposite.
Is the Platinum 6day IV/SV graph valid as PCCRC candidate filtering criteria, when earning spike occurs?
Is the Platinum 6day IV/SV graph valid as PCCRC candidate filtering criteria, when earning spike occurs?
You don't specifically need to look at the IV/SV in a stock AFTER earnings spike.
Remember, since the stock jumped >10%, SV will be high. Since the IV declines followig earnings, IV will decline. So post-earnings provides a good moment to enter PCCRC because the IV/SV will be below 1, in most cases.
After earnings, with a 10% jump, just make sure that the IV of the back month is below 40%, preferably lower then front month options. the IV/SV ratio is not that important here, but it would rarely be >1 post-earnings. Case in point RIMM, after earnings, IV/SV did not decline, but the PCCRC is doing well.
BTW, It would be very useful to hear from others as well as you, some feedback about the Disks in content, presentation, etc, etc. EVERYTHING would be useful for me and for others interested in getting the disks.
I have been considering whether I should amplify the blog to allow videos as a way of comunicating my observations. This would necessarily be subscription-based so that I can pay for the server space for large video files. This would only be worth it if there are enough people interested.
Thanks
1. Would you make adjustment of long PUT if stock moved 1 strike down and position still not in the profit zone?
2. In some cases adjustment of longs adds more risk to the trade. Would you adjust longs if it will add more risk to the trade?
3. What is a least amount of credit you will take for 5 point adjustment?
The way I choose to sell longs or add to the short position is based on the IV. Try to sell high IV and buy LOW IV. Your long puts may even be bought later, if the stock moves sideways. The shorts may expire worthless if the stock moves sideways until Aug. expiration.
DO look at the risk graph. Obviously, the purpose of the PCCRC is to manage risk. Once a trade is working, you don't want to move in a riskier position.
Only adjust if the resulting trade is less risky or provides for higher gains. Otherwise, exit the trade.
In my experience with the Elliott wave, this kind of strong decline in JOYG (count GOOG too) are not ameable to reversal. A continued decline is very likely to continue. I am willing to leave the position as is for now, but at the first sign of weakness in the decline, I will sell front month puts, as long as the resulting configuration makes sense and fits my expectations.
Do you think that would be useful to have a discussion on exit strategies such as Candlesticks, Bollinger Bands, and Moving Averages?
What if trade is not working yet? What if stock fell 1 strike down in result of correction and currently at max loss zone. What would you do?
“Do you think that would be useful to have a discussion on exit strategies such as Candlesticks, Bollinger Bands, and Moving Averages?”
Of course I do. It will be very useful.
I would suggest also to outline some kind of decision making tree for all possible adjustments and trade exiting.
Regarding DVD’s. I can’t suggest anything better than you already did.
Davit... You answer your own question when you say "not working YET"
Remember that the max loss zone, if you follow the money and portfolio management rules, is not going to deplete your account too much. Only put 2% of your account at risk.
You can wait until 1 week before expiration to make that decision. Then, you evaluate if the rollover gives you a better trade (reduced risk). Don't rollover what is not working out. So 1 week before expiration is your decision making point.
I can't tell you what to do in every circunstance. I can only show you as many examples as I can. Then tomorrow there will be another outcome I have not contemplated. Knowing the theory helps, but the decision is easier only with experience.
I can tell you for sure that I have not found anything more consistently profitable than the PCCRC.
I have started using it with Elliott wave set ups, as described in disk 1, and it works fine there too. However.
I can tell you for sure that it is more comfortable to learn with some success here and there.
Lately, I have had so many winners that I have gotten a 40% return so far this year (that is 40% increase in my trading capital). With that kind of performance, it is easy to exit the losers, without hesitation, no need to see them "work".
Focus on learning the entry points, then the exits will be simpler.
HI,
I am still watching the DVD. However I really hope you can have a "table" form for different actions for different senerios so we can monitor the position.
e.g. if IV spike, but price goes up, then....
those "if..then..." condition will help beginners to track them.
thank you
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