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Monday, July 19, 2010

Room to play the Q's, more on the index trading.

Well, deciding not to play with the momentum stuff for now led me to play with something else.... I just cannot help it.

Last week I posted about a plan to trade the QQQQ (NASDAQ ETF) based on our trading room daily bias estimate (bearish, neutral, bullish with various degrees). I recall playing it as if I traded the stock, mainly due to the historical option prices being more complicated to gather for profit targets and the profit came to something like $1,250 for a couple of recent weeks trading.

Today I started with this in mind but I tracked both the stock and option prices. Although the day is not over I hit one of my target exit points, the first level resistance below the primary pivot point. Being that it was a neutral expectation today I would do a profit hit and run rather than holding for larger gains, one half of the first resistance was my target.

Playing the ETF when I saw the entry would have me short at $44.70 (probably higher as it was higher when I "thought" the trade should go but I like to fudge against me). Exit would have been at $44.30, the 1/2 resistance was $44.32, for a 40 cents per share gain.

Here is where my stock trading idea falls apart. In order to make this trade worth the bother I would have to be trading a few hundred shares at least. I know I said that 300 shares would tie up an acceptable amount of cash but this is over $4,000. I also know that the stop would be in the under $100 range, but for my trading purposes I would rather be using less cash, $1,500 might be my max which leaves me with a 100 share trade and a $40 profits. That is just not worth taking my attention away from my other trading.

So I tracked the option activity and pricing. Options are much cheaper so I figured I could spare $500 or so to play and see what I could scare up.

I would trade the front month or the next expiry period. With the QQQQ options there were July 23rd options in addition to the July 18th. I tracked the Aug 21st as well.

July 44 puts cost 37 cents when the ETF price neared the $44.70 entry, this is also fudged against me. August were at $1.08.

At exit target July were at 47 cents and August were at $1.26.

These are all market orders so I count as if I were paying worst price at the times, buy the ask, sell the bid.

Profits would be $240 for 15 July contracts and $90 for 5 August contracts and both trades used less than $600 in cash.

Well, this looks to be far more lucrative than the stock play at this point and it is just extra cash in my account to use for other trading... or maybe this can be my play money stash. Doing a bit of a back check I see that the market more often tracks with the bias laid out in the morning so I should be able to establish a pretty good edge for this idea.

Although today was a virtual trade but I think I may follow it up with some live trading over the course of the week... or at least into next week. It only takes an extra click to buy and one to sell when I have these setup properly.

Oh, I have two other target exits that I am playing with. Exit 2 will use a trailing stop using the 1/2 pivot points and the other will use a near end of day exit to see if, on extremely bearish or bullish days, I can capture some large moves.

More fun and games to add to the mix.

Jeff.

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