MrBigBucks comments, and my replies.

The comments of our new friend MrBigBucks are worthy of special attention. I believe that some other new comers who listen to my traderInterview, may have similar questions.

I first described my PCCRC strategy was in detail in March 29th, 2005. Just a few days later, I added a description of the effect of earnings on a PCCRC. You can download those documents along with others here:
http://www.pathometrix.com/Archives/JISarPapers.zip

Go ahead, download it, it is free. Since then, I have published many examples and in hundreds of articles in this blog, that you can easily recover, and comment on. I will get an e-mail every time a comment is entered, no matter how far back the article goes. Simply go to the end of this page and click on the “Older Posts” hyperlink, or just select a date from the “Blog Archive” pop up menu above.

If you are, like me, partial to video explanations, You can order my DVD’s that I prepared back in the spring 2007, in which I demonstrate how to trade the PCCRC in a paper trading account. You can also view my approach to trading the Elliott wave using plane calls and puts (not PCCRC here). Please send me an e-mail for more details (paperprofit1@gmail.com).
MrBigBucks said:

Juan,

For many reasons, this is a really interesting trade.

Congratulations on your hard work to discover this approach!

I built your screen in my ThinkorSwim account, and it has been interesting to see what has popped up the last few days. The stocks have not met your criteria, but I have learned about some great companies that I would not have noticed otherwise. I played around with some modifications to the screen today, just for fun. I think that variations of this screen could be used in other fascinating ways, and I'll write about that later.
Juan Said:
I am looking forward to your variations. The TOS platform is quite powerful as is its SCAN tab. I agree with you that what pops up 10% in high volume is usually a hot stock. When that happens there is usually a very good reason. Very often we see stocks rallying on upgrades and even on beating expectations, but only those stocks that truly surprise OR announce unexpected raise in guidance really tend to have follow through in the following days (or even weeks) after earnings. In a way, we are reacting to fundamental news. No need to over analyze charts, or calculate P.E. ratios and such, just react with the heard. The PCCRC takes care of the rest.
MrBigBucks said:
I love the reactionary, (as opposed to predictive) aspects of your system. Like you, I have been trading since the 90's and took some years off after the dot-com debacle. I was into a number of the companies that were headed by now-imprisoned management. I just couldn't believe anyone's financial statement for a time after that.
Juan Said:
Indeed. Back then I already had a lot of experience with the Elliott wave. I “knew” a crash was coming, so I decided to trade options because they were time and risk limited. Owning stock for the long term was risky, I learned. I have had very upsetting experiences with 3 stocks that lost over 30% of their value overnight. SCHL, INTC and AAPL at some point gave me a kick in the stomach. In such cases, stoploss orders are useless. So when trading stock you are really risking a lot more than you think. With the PCCRC you can actually make money quickly, if the stock falls strongly. Case in point a recent PCCRC I had on Biogen (BIIB). So it is possible to limit risk while using the leverage power of options. I found, the PCCRC accomplishes that, as long as some conditions are met.
MrBigBucks said:
Anyway, as I returned to trading, I studied it in some new ways. I
have begun to have some real success and freedom with my trading using options and trading in non-directional systems. I have made money trading the SPY and the XLE in ways that react to the market, without attempting to predict an "up" or a "down" move.
Juan Said:
This is commonly referred to as “Delta Neutral” trading. Professionals trade this way, and yes, they prefer the indices. I suppose they are used to the floor activities where they have to find the best way to hedge their bets, so they are not at the mercy of the markets. Keep in mind, however, that we have one tool they lack: TIME. Time is in our side and Time is what makes options gain in value significantly. Even as little as three months may allow a stock move dozens of points. This is why I favor momentum stocks. Some of them, such as AAPL, GOOG, and other “high fliers” may be entered at any time, as long as IV/SV is below 0, and earnings are more than a month away. I like to say that given sufficient time, any stock would move strongly in either direction. The secret words here being “TIME”.
MrBigBucks said:
Your idea works in a similar way. Here is my understanding of the thinking behind your approach - please tell me if I have it correct... You wait, like a vulture, for a quality (and substantial volume) stock to make a large (>10% move) on good fundamental news. The large move is often into a new area for the stock which will have limited resistance or support. Chances are very high that this stock will continue, over the next few months, to make a large move in one direction. You do not attempt to predict which direction.
Juan said:
That is a good summary. I would add that I would look for stocks that break through mayor resistance, but that is not to say that there is no further resistance ahead. In addition, I can pick “high fliers” and “volatility skew” stocks. I have described these two additional strategies, although you’d need an Optionetic’s Platinum subscription to find them. I have found that the after-earnings strategy has given me the most consistent results.
MrBigBucks said:
It's almost like the stock has become untethered, and can flop around for a while.

It would be rare for a stock to make a 10% one-day move, and then
lock itself into a tight range, and stay there. Your system takes advantage of the expectation that this stock will bounce around as it finds a new level. I like it alot, and understood it the moment I read about it.
Juan said:
I have experienced that a stock that raises earnings guidance can and often DO continue on to higher levels, even right after the report. But if market conditions are negative, the continued rally may take days or even weeks to resume. Generally, when this happen, we may have what they call a “bullish flag”, inevitable breaking out to the upside. But if I am wrong, I don’t worry, I can make money even on the Volatility variation alone. This is a factor that work wonders on the PCCRC, and that you have not yet mentioned.
MrBigBucks said:
I played around with the projected P&L graph on ThinkorSwim. It is
an awesome curve that makes good money on a big move up or down,
and loses a little if the stock doesn't move but stays in a small
range. It's like a big smiley face - it really is! You should add a chart to the web page.
Juan said:
If the stock does not move at all, then the front month options decay, and finance your trade to stay long enough to see the break out without losing money as you would in a long straddle. So you can also use the name “calendar straddle” if you’d like because time decay does not hurt you at all.
MrBigBucks said:
The volatility parameters give you a high probability of success. I assume that one needs to jump at this trade late in the same day when it shows up on the screen. That kind of volatility skew can evaporate the next day, if the price and volume settle down. My SPY and XLE trading system also takes advantage of volatility spikes, but not necessarily skews.
Juan said:
I find that the time with the lowest volatility in the trading day is between 2:30 and 3:00 pm Eastern (11:30am – 12:00m here in California). If you entered the trade right after earnings, then IV will be reduced. Eventually to rise again toward the next earnings report. You can exit the trade JUST BEFORE earnings, and even reenter it again AFTER IT, only changing expiration dates.
MrBigBucks said:
I'm going to give your trade a try as earnings come out next month.

I don't see any reason to re-invent the wheel. I expect to try it exactly as you have specified, and only when all of your criteria
are met.

Great work. Thanks!
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Juan Said:
I would encourage anyone to try the rules exactly as outlined, and then, when completely sure of its proper application, explore other variations. You can certainly run a TOS paper trading account simultaneously and test your theories. Always make sure you understand every step before you use your own money. I am happy to share what I know, but I cannot be responsible for the results anyone might get. This blog is to share information!!!!

Remember, if you want to join my private blog to view my quicktime videos and/or receive my tutorial DVD’s, please send me an e-mail to Paperprofit1@gmail.com.