Holiday is over, new scaling and options.

Back from my two weeks off. As much as holidays are a nice get away it is nice to be home again. I had lots of time to ponder a great variety of topics and aspects of life....but I will only write about the trading related stuff here.

I gave some more though to my entry strategy, the 25, 25, 25 share scaling and decided it was not the best approach. I ended up sticking on a two trade entry which can be left as a single trade depending on capital and price moves. As a typical trigger may fall on $30 (using 25's I would enter at $30, $29 and $28 with the stop at $27 with an ACB of $29 at 75 shares) I changed my entry sizing to 50 shares and lowered my entry after the trigger.

New entry is 50 shares at $29.50...which is the same as 25 at $30 and 25 at $29 with slightly lower trade costs (minor) while arriving at the same ACB.

The next trade would be another 50 shares at $28.50 which ends up with the same ACB as a full load of 25's, except now it is 100 shares instead of 75. The slight increase in risk is still within my tolerance.

The 25's entry worked well enough while I was away as I placed VTSOs on all of my positions and netted a small profit as they all closed out in the first week. The disappointment was TCO as I only ended up with 25 shares with a $4 and some per share profit... but a profit is not a loss.

Seeing as I am happy with a 50 share trade by itself this makes me feel better about getting only the first trade in. This still let's me trade the slightly higher priced stocks and maybe fill up more often on the lower priced stocks...which leads me back to the topic of options.

There is much not being said about options and exactly how the "greeks" are calculated and what they mean. While there is lots of free information available on stocks there is less on options so I am working on my own knowledge base for these. I have sent off the necessary paperwork to my broker to allow me to trade options in all of my accounts rather than just the one.

Any stock on my hit list over $25 in price has now become an option trade. I have setup a spreadsheet to automatically calculate the option price that corresponds to my P&F trigger price on the stock...this takes into account the various factors relating to how the price can change given the delta, Intrinsic and Extrinsic values. I realize that my estimate will only be close until the stock price actually approaches the initial trigger but close seems to count for more in options than in stocks due to the method used to set quotes (5 and 10 cent graduations).

The reason I decided to go with $25 as the break point for options rather than stocks is not only due to capitalization. Stocks under $25 I have room for quite a few trades and stocks are easier to trade for me right now, quicker trigger calculations, quicker order entry and a comfort level. Previously I had decided to qualify my trade priority based on lower priced stocks first, this allows me to continue trading while studying the option/stock relationship with the larger prices.

I currently have an order in for IPI at $24.50 as well as the Jan 2010 call at strike $20 for $6.40. I am curious to see how the option execution compares to the stock execution.

Upon rethinking the justification for using options for only the higher price stocks I may consider just going to options for all trades. This means I may have to select a few other stocks to base these on as the options chain should have enough liquidity to get in and out smoothly. The advantage to using options for even the lower priced stocks is in the leverage. If a $15 stock have an option that I would trade at, say, $5 then the leverage is an advantage. In addition to leverage this would allow me to enter more trades to keep my diversity up and not have to commit 100% of my cash to active trades...always leaving a bit in reserve for another nice trade setup.

Currently I have one option and four stock positions, one additional option order and three stock orders. I also have a penny stock position and a penny stock order in place. Pennies are something I decided to stay away from in the past but, upon a suggestion I have two trade "dabblings". One thing about pennies, the profit and loss is fun to watch as a 500 share position creates a quick P/L move. 1 cent = a $5 move. I won't mention anything other than my trades here so anyone else's suggestions will remain un-named.

Jeff.