Thanks to Mike, I got wind that the Nasdaq Stock Market will close next Tuesday, 2 Jan 07, as part of a national day of mourning to mark the funeral of President Ford. Other exchanges will likely follow suit.
Coincidentally, next Tue is also public holiday in Singapore. So we are all going to have a longer break and come back trading on 3 Jan 07.
I would divide his book into 2 main sections. The first section is on overview of uses for options, options basic and a chapter each devoted to Option Pricing, Time Decay, Volatility, Probability and Market Timing.
Jay is an advocate for buying ITM underpriced options (low relative IV), selling OTM overpriced options (high relative IV). And he talks a great deal about Volatility and Probability. I can't agree more with him that never doing anything but just buying cheap OTM options is a SURE way to lost money in options trading in the long run, which is why I usually buy ITM. I had some take-aways on relative volatility rank and IV skew. And for those of you who think that buying longer term options is a safe haven, think again. Do you know that changes in IV have a greater impact on prices of longer-term options than on shorter term options?
The next section of his book is all about trading strategies, with each chapter written on each one of them: backspread, long naked option, calendar spread, butterfly spread, long straddle, short vertical spread, short naked put and writing covered call. He explains the key factors in using each of these strategies, with risk curves and position management of these strategies. At the end of the book, there is also a summary table on what strategies to use under different conditions of volatility, delta, skew, timing and time to expiration.
All in all, this book is quite clearly written and hence ease of reading. Suitable for both new traders and intermediate traders.
p/s: Does anyone know any website that provides free charts or data on relative volatility rank of stocks?
Our internet experienced downtime and slowness yesterday due to Taiwan earthquake damaging underwater cable communications. I have been and will be rather inactive on the trading front this week even though DOW closed at all time high, surpassing 12,500 mark. Still in holiday mood :) and given the thin volume and window dressing, I don't think I will be missing much.
But I'm still reading blogs and here's a few good posts that I like to share:
-AAPL gapped down on options scandal but recovered grounds quickly. See how Jamie and Caltrader traded this gap fade. The lastest news out from briefing.com at 20.06:
AAPL Apple Computer CEO stk options not authorized by Bd - FT
Chief Executive Steve Jobs was given 7.5 mln stock options in 2001 without the required authorization of the board of directors, The Financial Times reports on its Web site, citing people familiar with the matter. The FT reported that records that purported to show a full board meeting had taken place to approve Jobs' remuneration, as required by AAPL's procedures, were later falsified. The sources said that those records are among the pieces of evidence being weighed by the U.S. Securities and Exchange Commission as it decides wither to pursue a case against the co or any individual over the affair. According to a 2002 filing by AAPL, the options under review were handed to Jobs in October 2001, at an exercise price of $18.30 a share. However, the FT said, the purported board authorization was dated near the end of the year, suggesting the benefits were both not properly authorized and were backdated. Jobs later surrendered his options before they were exercised, implying that he didn't gain any direct benefit from them. he was later given a grant of restricted stock by AAPL instead.
Honestly, I am in holiday mood already :) It will be holiday trading these few days, so not a bad idea to take time off to enjoy this festive season and spend time with family & friends, given little movement in the market. The only 2 stocks worth watching tomorrow would be RIMM, which announced earnings and is already up about $8 after trading hours. And GOOG, which closed @ $456.2, inching even closer to the 20 Oct support and risk of gap fill
There has been some hoo-hahs about Caltrader making $8k in a day in futures trading. My stand? Why waste time speculating about it? Just sit back and monitor his progress. Time will tell. Anyway, I think the most constructive post coming out of this saga is Bill's comparison of trading futures, options & ETFs
Phileo shares with us the elements of a good swing trade
And if you want to know more about moving averages, check this out.
New blog by ODA125 talking about credit spreads. Btw, the charts (& the style of drawing on the chart) that he/she has posted reminds me of old solider. Is that you, old solider?
Among the books I've read on trading, this book by Ken Trester is one which I complete reading in the shortest time. This book is sooooo easy to read that it clearly disappoints me. I should have seen it coming, with such title as "101...secrets". Each "secret" is about 1-3 page long. If you are looking for options trading book to teach you about trade setups, entry & exit points, technical analysis etc, look elsewhere.
Ken Trester advocates buying cheap, underpriced options as well as selling options. So you will learn a thing or two about these strategies. Personally, what I gained most out of this book is his talk about probability calculation. Not that he teaches you how to calculate probability of winning, but his frequent mention made me do some searches on this topic on my own.
Having said that, while a trader at intermediate level may not gain much out of reading this book, I think it will be a good read for those who are planning to go into options trading.
In case you are wondering what is Sawatdee Kaa, it means hello in Thai. I can't help but comment on the boo-boo of Thailand U-turning its currency policy. I'm no economist, have no investment in Thailand (thank god!) and I have nothing against Thailand. In fact, I've been there a few times and it is a great place with good food & shopping and friendly folks. But I just can't understand how such policy change can be implemented in the first place. Don't they ever consider the impact such a restrictive currency control will have on the financial markets and foreign investments? Well, I think they obviously don't, or they underestimated the response from the market. The Thai bourse was forced to halt trading for the first time in the market's 31-year history as the main index slide, at one point down by 19%, dragging with it the rest of the market in Asia.
As if this was not bad enough, the Thailand central bank made a U-turn on this new policy, a day after announcing it. Not that this U-turn is a bad thing. But this flip-flopping behaviour will not go down well with existing and potential investors. For a country that relies heavily on foreign investment, I worry for the future of the Thais...
Ticker Sense conducted a 2007 outlook poll with some prominent finanical bloggers. It is interesting to see the breakdown of the results by bloggers. Overall sentiment is still bullish for 2007, with positive bias towards tech and energy sectors. Consumer Discretionary sector fared the worst in this survey.
A string of merger deals pushed the indices higher yesterday, but there were no follow through. Eyeballing the past 3 years chart on the 3 major indices, the week preceding X'mas is positive gains at Wall Street on lower than average volume. More specifically, last year, the gains were made 3 days before the X'mas holiday, although I would add that technically the 3rd day is really more of a flat day as most traders are either absent from the trading floor or their mind is somewhere else already.
A couple of charts to share:
NVDA was on my watchlist. As said, the stock is trading at all time high and closed on very strong volume last Fri @ $37.5 (right on strike, not sure any pinning here as I didn't take note of open interest). See the spike on price & volume half hour before market closed last Fri. There is likely to be institutional buying and true enough, BMO on Mon, I see this from Briefing.com:
Before the open, Nollenberger initiates NVDA with a Buy and a $43 tgt. Firm says NVDA is executing on all cylinders with momentum in virtually all target mkts and product areas, in their opinion. They believe NVIDIA will gain another 10% points of graphics market share by the end of 2007, a dynamic that the Street may not yet be factoring into its expectations.
I noticed TEX because it gapped up today, due to analyst initiating a BUY rating. Upon taking a closer look at the chart, this stock is trading near all time high and see how volume spurt towards close last Fri. The second last bar of last Fri was bullish engulfing and signalled potential reversal. And it gapped up today. Pretty similar to NVDA, it's the big guys out there buying ahead of an upgrade or buy rating.
There is also a NRB entry after stock consolidation above OR high and supported by 5 EMA. Richard from movethemarkets traded this setup.
Google, our good friend, took a dive today, which is not surprising, from a technical point of view. After we traded a bull put spread on GOOG last Fri on expiration day itself due to good risk/reward ratio, I reviewed the chart again over the weekend. I saw a descending triangle formation, which is bearish. My entry would be break of $477 and target $470. Lol, this is how I would have played it if my account allows me to or if it is nearer to expiration. GOOG options at the start of new month is too pricey for my liking and I have to stick to my money management rules, although the setup looks real tempting. I was thinking of entering a bear call spread at $520/$530 strike when market opened. This is way OTM and according to the probability calculator, there is only 15% chance it will cross over $520 from now to Jan expiration. But as you know, I'm not really keen on spreads play, especially now the new month has just started and especially it's GOOG we are talking about. Well, I figured if I did enter the trade, I would have made some $ on the spread in just 1 day alone.
GOOG is now resting on $460 support. If it's not able to hold this level, high chance of it breaking down and filling the gap. Watch for it.
Have been busy the last 2 days running some errands and have not been updating the blog and also reading other fabulous blogs by fabulous traders. Read some great posts and here they are:
-The Miseducated Daytrader reviewed his trades and revised some trading rules in Beyond the Setup
-Penny options = More efficient trading cost. My broker, Interactive Broker has already jumpstart penny pricing for options. Btw, has anyone tried it out yet?
On a separate note, IB has recently published a new Excel API Beginners Guide with step-by-step instructions on how to start building a trading application in Excel...hmm, we have always wanted to explore it...now that IB has come up with Excel version and for Beginners (aka dummies), much of our inertia is greatly removed and we'll start looking at it real soon.
-If you haven't read the Dec issue of the Options Trader Magazine, do grab a copy. It's free! This issue has got some interesting write-ups on seasonal straddle, FOMC options opportunities, earnings announcement options play and many more.
With Dec options expiration coming up this Friday, I thought I'll talk about what is commonly known as the conspiracy of expiration ~ the Pinning Effect. According to the Investopedia, Pinning is defined as "The tendency of a stock's price to close near the strike price of heavily traded options (in the same stock) as the expiration date nears."
But what criteria have to be fulfilled before we consider the stock to have the potential for pinning? After looking at some videos at TheStreet.com TV on this topic, this is what I've gathered:
-Pinning usually occurs about 2 days before expiration. Any earlier is probably...too early
-How big is the open interest and its relativity to daily stock trading volume. Open interest of at least 20% of daily trading volume is suggested for significance
-Big open interest is balanced on both sides of Call & Put
-More likely in lower volume stock (less liquidity) where market makers can control trading activity
Adam discusses about pinning on XOM and GS. Have a look at AAPL and GOOG, both are now trading close to strike of $90 and $480 respectively. These 2 stocks certainly don't fulfill the above mentioned criteria, but let's just see where they end up on expiration day.
I have been watching ENER for a couple of days and it has finally made its move today. But alas I was not watching ENER closely today. Not in top form today and was feeling rather tired. Good for you if you have caught the move. Here's the chart: ENER gapped up and moved strongly, hitting 1.62 Fib ext by 3rd bar (15 min chart). This is typical of ENER. When it moves, its movement is explosive and you really have to catch on fast. After the spike up, it consolidated around the 5 EMA. A good entry point would have been 15th bar high, where it cleared the 1.62 Fib ext and supported by 5 EMA and spike in volume. I would have exited at the 200 daily MA and if I still have remaining position, would exit the rest at 24th bar as it drew near the $40 resistance level when it failed to make a higher high.
I checked Briefing.com for news on ENER's spike and here's the reason:
Energy Conversion: IBM PCM announcement could be catalyst for licensing memory technology - Merriman (37.97 +1.59) : Merriman notes that today at the International Electron Devices Meeting, IBM, Qimonda and Macronix are presenting a white paper on their development of a phase change memory based flash chip. They believe this research group could be the next major licensee of Ovonyx's (39% owned by ENER) OUM memory tech. They also believe other major memory manufacturers could report positive development on phase change memory this week including Samsung, STM, Intel, Hitachi, Renesas, and Infineon. Based on conservative assumptions of PCM adoptions, they est ENER's ownership of Ovonyx (they do not feel is currently valued into ENER shares) is worth $30 per share today.
AAPL was in my watchlist. As I mentioned, it was trading in an increasingly narrow range accompanied by lower than average volume. And it closed below support @ $90 the day before. I was watching it on the 15 min and 5 min charts. AAPL opened up, but looking at the 5 min chart, it soon became clear that it was testing the $90 level. Entry on break of previous day low, with target @ $88 (20 EMA). Stock was well-behaved and exit on target. Stock rebounded for awhile but continued its slide downhill to close at $87.04, nearly closing the gap between 20-21 Nov. Cal Trader had some sweet apples as well.
BBY also in my watchlist as NR7. On daily chart, $54 is a support level. Entry on break of previous day low, which is also the OR low. This sort of setup seems to have high probability of success, as observed by Richard. Target @ daily 200 MA at about $52.7, which was easily reached by BBY around 11.00am ET
Courtesy of Briefing.com: DE Dec 100 calls are seeing interest this morning, with LBO chatter circulating. The upside Dec 100 calls have traded 8270 contracts vs open interest of 3450, pushing implied volatility up around 6 points to ~30%.
Breaking down: APPL
AAPL has been trading in narrow range the last few sessions and yesterday it closed below the week's low and below $90 level.
ENER is still on my watchlist On a separate note, old solider has kindly shared some of his trades with us and there is some interesting discussion going on here & here.
It was an eventful night, not talking about trading, but about mishaps, lol. About 10 mins BMO, the light in the room started flicking like in disco. Unfortunately we don't have a spare bulb and not even a torch light (shows how unprepared we are for emergency!- we are going to get one this weekend, definitely). My hubby suggested I move my laptop out of the study room to work as lights are still working fine there. But stubborn me refused because I'm quite used to trading with a laptop & a PC and everything has been setup up in the PC for trading. Plus, I can still see the charts, just having difficulties with writing on my notebook. All this fuss definitely interrupted my trading to some extent, while my hubby drove to his parents place to get a table lamp.
Then later in the night, I realised that the internet connection is down. PC & laptop. It was pretty late & I decided to call it a day. This morning, I woke up to find that internet is STILL down. Kind of feel paralysed with the internet down. Decided to continue reading my book and wait for my hubby to fix it when he gets back. And then maybe not. I found the number to call for my internet service provider and while waiting for the call to get through, I turned on the PC again to try. This time it worked! Sometimes I really can't figure this crap out...but nevertheless, glad that things are in order now and here I am writing this post.
I am now reading Mastering the Trade by John Carter and came across this section on TRIN and TICKS. I tried monitoring it last night. I find TRIN easier to watch and understand - what is important is not the current reading, but the relativity. But I am having some problems with reading TICKS. Honestly, I see stars when I watch the 15min candlestick chart for TICKS. One second it was reading 1000 points, the next second it was reading 300+ points. At the end of the day, there wasn't any clear trend on the TICKS chart. Anyone has any experience to share on reading TRIN and TICKS? Btw, TraderFeed has a great post on this topic.
Oh, and my broker IB is going for IPO soon. (via MaoXian)
And read how Steven use use options to enhance his trading performance.
RYL gapped up and 1st bar closed in the lower half. 5th bar came close to OR low, printed a lower shadow, and ended up closing above 78.6 Fib level. 6th bar is a textbook hammer, narrow range and supported by 5 MA as well as 78.6 Fib level. Potential entry above 6th bar high with initial stop below 6th bar low. As this entry is below OR high, watch tight as it climbs towards OR high for potential stalling/reversal. Stock break through OR high with ease and after some consolidation, hit the 1.38 Fib ext. Exit and closed remaining position which it hit 1.62 Fib ext
I almost wanted to enter BIDU last nite. It gapped up and drew closer to 5 EMA. Noticed how the volume started declining along the way. I had wanted to enter on 6th bar high, supported by rising 5 EMA. Target OR high.I was looking to buy the 115 Dec Call (delta @ 0.71) as it was trading at just slightly over $120. But just like the PSS example, the spread is too wide here. My IB screen was showing 7.7-8.0 for the option. As I was mulling over this wide spread, the stock moved up by a $1. I thought, not another PSS again! I checked the option price to see how much I "could have gain" if I had entered. And to my surprise, I saw on my screen the bid/ask 7.7-8.4!!! After sometime did it settle down to a more respectable 8.2-8.4. However, the next few candles would have triggered my my stop loss. I would have exited this with a scratch or with loss. BIDU then went on to make a U-turn later in the day. If you look at BIDU intraday chart, it has the U setup coined by Trader-X.
#1 Not fully understanding the independent effects of time and volatility on your option
#2 Forcing a pre-selected strategy on every opportunity
#3 Not fully understanding the proper meaning of leverage as applied to trading
#4 Not fully understanding the foundations or building blocks of option theory
#5 Thinking that cheapness or expensiveness of options is determined by dollar cost
#6 Overcomplicating otherwise simple strategies
#7 Not knowing how to pick the correct option for the selected strategy
Personally, I've committed #1, #5, #7 sin most often when I first started trading options. In fact, the biggest joke of all is that I didn't even take note of IV when I first started. And it certainly took me quite awhile to figure out #7. But I have no problem at all with #6. I always like to KISS (keep it simple & stupid!)
The 2.5 days personal development course was simply awesome! I learnt more about myself through the various activities conducted and the "assignment" that we have to complete at home at the end of each day really made me think hard about my past and helped me to determine my future and my purpose in life. I learnt about reframing, reversing negative beliefs, using NLP (Neuro-Linguistic Programming) to breakthrough personal barriers etc. As I grow older, I find it increasingly important to also develop myself into a better person. I don't want to be caught up with just $$$. I think the money is well-spent on this course (it's not expensive anyway) and what I've learnt is life-long skills which I can re-use over and over again. I strongly encourage you to at least read a book or two each year on personal development to balance out your life :)
Ok, back to business. I spent some time catching up on the market happenings last Fri and saw the 3 market indices in the red. Lets see how it is going to play out this week.
The most significant economic data this week has got to be the Unemployment Rate on Fri. On the earnings front, here are some notable companies:
I received a comment from Old Soldier which I thought was very good sharing and in case it gets buried in the comments section, I am posting part of the comment here.
"I follow a pretty strict Risk Management and Trading Process:
1. Never risking more than 1-2 percent of my Portfolio on any one trade - EVER!. I do this through my technical analysis and risk planning prior to the entry. No entry until the exits are planned. I use only mechanical stops, limits, etc. No emotions this way. Once set - they are set! I have learned through costly experience that when I have adjusted the stops or limits I have had either smaller profits or greater losses. No matter what! I use and trust the mechanical "servants" over my human "emotional" mind. Some use what they call "mental stops", I disagree with this method - life happens. Network connections go down, distractions appear out of no where, markets crash unexpectedly, etc...
2. Keep entry points at viable areas to maximize gains, always selling half my shares/contracts (always play even number of contracts: 2,4,6...)upon reaching my initial target point. If I "leg" into a trade then I will treat these additional contracts as new plays and treat the them the same way.
3. Always placing a pertinent trailing stop on remainder of shares/contracts based on the ATR and prior support/resistance levels.
4. Never complaining about taking profits even if the stock continues to move after my exit (why complain if I achieved my goal and met the conditions of my plan?). It is not profits until you sell - on "paper" doesn't count.
5. Maintain viable watchlists and playlists.
6. Follow a strict daily routine for all areas of my trading. This is a business NOT a hobby.
7. Keep my focus!!! I try to balance my trading with all the other areas of my life. To do this, I try to make every move count. Worry is not an option - no pun intended. To worry is to be distracted. ALways remember this is a business it is not a game.
8. Always help someone along the way! I got here because of some other really good people who gave of their time and experience to me. Always be willing to learn - when we stop learning we stop living!"
Thanks Old Soldier! I've always feel that blogging is about sharing and learning. So don't be shy to drop me a comment anytime, I welcome them.
Early this month, I talked about watching for formation of ascending triangle on the housing sector. Sometime around mid Nov, they bounced off the trendline, consolidated, and yesterday breakout on high volume. Trader-X traded 2 of them yesterday
Just some random thoughts on 2 aspects of trading: soft and hard. I view areas such as having a trading plan, managing your trading emotions etc as the soft side of trading; while I see technical analysis and fundamental analysis (if you are into investing) as the cold, hard side of trading. No ifs and buts.
So here's some interesting links for you to chew on it:
Soft: -Trading journey of an ex-engineer. Lol, I didn't know there are so many engineers-turned-traders out there. I think it is because they are trained to be logical (aka no emotions) and have good analytical skills (read: good chart analyst). I have to go tell my hubby about this. He is an engineer.