My last post had an example of using Williams %R on an up trending stock to play the long side. Buying and selling the stock or the call options could be interchanged easily enough.
This time the stock is BK - Bank Of New York Mellon Corp
I added a mean reversion plot (red, slight up trending), 20 day price channels (orange dashed). The blue arrow indicate trade and direction, the blue vertical lines are the indicator triggers and the blue trend lines are just to mark the general price move between trades. I did not number the trades but they are counted left to right sequentially for reference.
This stock is going nowhere in a hurry so I would play both directions on this one. Using the Williams %R 5 and 14 day oscillator as an over bought and oversold and placing trades the day following both crossing the -80 (oversold) and -20 (over bought). Instead of just closing the trade I would just reverse the trade at the same time. There may be some slippage with this plan but if it is run consistent profits are still regular enough to not really have to worry about it.
If trading the stock, just buy at the bottom and sell at the top then immediately short, cover and buy at the bottom. I think there is an easy way to do this... on the first trade on the chart just buy the 100 shares, market order is fine, so filled at perhaps $25.50. On May 6th the indicator is overbought on both periods, place a short the next morning for 200 shares which should close the initial trade and open a new short for 100 shares. This saves on one commission charge as it closes the first trade and opens another in one trade. I have a feeling that this will not be allowed in Questrade as it is specifically a "short" order...technical issue but it garners them additional commissions.
Next trade on May 21 would be to buy 200 shares covering 100 shorts and opening 100 long. Again, one commission.
Trading every single indicated trade on this stock over this period would result in 14 trades, one still being active. The gross profit for the 5 month period would be $33 (rounding down in most cases for easier math). That's a little more than doubling my money on the trade and $3300 for a bunch of 100 share trades. Maximum capital in play at any one time was the triple trade in June for $8850 or so.
Playing the options for the same stock would be about the same method, although I cannot think of an easy way to reduce commissions as long is buying a call and short is buying a put. They can be executed at the same time but I cannot open a new trade while closing another in one step... not without selling naked options...but I won't go there.
So buy the call to play long and buy the put to play the short game. No need for stops and no need to buy long term expiry's as most of the moves have been a month or less...so maybe always buy two or three months out.
Unlike the stock prices these option prices are a little sketchy as they are not tracked as well, nor do they necessarily trade every day so actual tracking of value is difficult at best.
BK calls and puts right now are around $1 and the spread is 5 or 10 cents. Assume that all things remain equal, and due to the lack of trending they have been mostly. Buying a call $1.50 OTM costs $1 (one month to expiry). The price moves $3 (our "target" even though the price swing has been averaging a bit higher than that) so the Intrinsic Value goes up $1.50 and the Extrinsic Value (the purchase price) holds it own (after all the price is still $1.50 away from the strike). Net increase is the $1.50. As the option gets closer to expiry I might expect to lose most of the EV so "holding it's own" is not the case with regards to time flow.
If I go one month farther out the cost of the options only goes up 40 cents but the degradation in EV is slower at this point... I might only lose the 40 cents instead of much more due to the non-linear drop in EV in the last month.
Making some broad assumptions based on current option prices, $1.40 for a two month option that is $1.50 OTM and adding the price move that puts it ITM and deducting 40 cents of the premium paid due to time value decreasing yields a total gross profit of $13.00. Puts and calls seem to be priced about the same due to the lack of a trend of the stock price.
That is $1300 compared to the stock trading $3650 for the equivalent of 100 share trades...when considering the ROI it is a different matter. The stock trades were, on average $2800 per trade whereas the option trades were $140 on average. That is 130% compared to 928% ROI. With the stocks I would not be able to change my position sizing along the way, or just once near the end of the period if I chose. With the options I could, if I wanted to risk only gains, increase my contract size by one contract a few times along the way in addition to using the unused capital for other trades.
Compounding my option trades while not risking anything beyond the first $140 would result in a different outcome altogether as the very first trade more than doubled my money (I already have trades doubling my money so it is not unusual in options).
The first trade nets $460 on one contract so I tuck away $280 (double my initial investment and continue to work only with profits, but with all the profits used to compound my money). I end with $10,325 or a nice 7475% gain. This is the power of options combined with compounding as they compound much quicker. It is sort of like the question about which would you rather, $1,000,000 now or 1 cent now but doubled every day for a month, which equals $5,368,708 and change.
I would expect that I might just increase my position size by one contract each trade which would see $3823 in profits, still a 2730% profit.
Jeff.
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