Walking through a Monday spread trade, XLE

Let's see if I can use all free tools to figure out my trade for Monday, I have space for two more in my margin account with Questrade and I am considering liquidating the TFSA positions and transferring the cash left into that account as well. Seeing as I really don't want to have to track those leftover positions that are from the previous advisory service and with year end nearing I will have that room to add to next year if I choose. If I withdraw it after December 31st then I cannot put it back in next year if I decided to.

So, Stockcharts.com for free P&F charts, annotating candle charts, relative performance charts, the CBOE site for option chains...that should cover it. I will use esignals for the candle charts as it is easier but I wouldn't really need to.

First up, the overall S&P 500 Bullish Percent Index (BPI) as a P&F chart.

I used a wider chart to get a feel for past years here. The BPI has only been in this range twice in the last 7 plus years...very overbought. The last time it immediately preceded the consolidation and drop into the 2008 year. This would lead me to consider wider ranges on puts or just selling calls to play the pending downside. I looked at these BPI charts some time ago but never got around to using them... options make these much easier to play I believe.

OK, looking for a trade in SPY is easy and I already have two in, one tight call spread and a wider put spread both meeting or exceeding my target credit. Let's look at another sector and see what we can scare up elsewhere...for diversity.

Putting all of the ETFs on a relative performance chart and jotting down the 30 day period performance (30, 60, 90 etc) results in Energy being the poorest performer over the last 200 days. the trouble is that the BPI in energy is in the low 40's so it is heading into oversold territory already...not necessarily the best time to concentrate on call spreads... the P&F chart indicates that the price is set for a support test on a current bull trend.

This is the trouble with relative performance. As much as it has been the poorest performer it does not mean that it is heading down, just not up as fast. So this leaves me sitting on the sidelines if I were looking to trade the ETF but I am not. It is not trending hard, the S&P is overbought, energy may wallow a bit while the S&P decides what is up. The dollar and oil are doing a dance right now as well. So let's get into the options.

Lots of options here. The January calls put me at $59 strike to meet my minimum target. Seeing as the price is at $55.53, about $3.50 difference, and is on the bottom of the linear regression channel and lower than the recent high in October this would put my call strike inside the upper channel area. I should look at the puts instead right now.

Much better. I get down to the $52 strike, still $3.50 difference but from the bottom of the channel which is around the low for September. Seeing as the strike is also near the 200sma, typical support.

Here is the XLE chart for reference

The way the short term trend is setting up it might appear that the price may head down. Given the last few down moves I think that the trade level given the timeline (red arrows) should provide enough of a buffer. If it does then I would watch for the longer term regression channel to level out and widen. This will give me the setups I would look for to set a call spread at an upper channel price.

Due to the nature of a spread, in that I am playing the difference of two strikes as opposed to the options prices themselves, I can afford to wait to see if an apparent support level ends up being support before placing the trade without too much worry of missing a good price. Of course if it takes a long time to do so them I will lose as the difference does get smaller as the prices depreciate.

The trade is to sell the Jan 52 strike. My spreadsheet gives me values for $1, $2 and $3 spreads. In this case the $3 spread provides the largest difference between the long and short quotes.

My trade:

Buy 4 Jan 49 strike puts, XLE MW
Sell 4 Jan 52 strike puts, XBT MZ
For a net credit of 30 cents (I can go as low as 25 cents and still hit my target, seeing as my goal right now is to get some trades filled and working I may go for the largest lenience)

Jeff.

ECN fees

I have always wondered how the ECN (Electronic Communication Network) fees have been assigned as sometimes I see them and sometimes I don't. They are pretty regular when they do appear $0.0037 per share or 37 cents per lot.

I was reviewing my trades of late and realized that anytime I placed a limit order and was filled there was no fee but yet when I place a market order the fee appears. Even though this fee is not a lot it must be calculated into the cost of trading. I am currently playing with 500 share trades so the commission goes to an even $5 ($4.95 is the minimum with Questrade based on 1 cent per share with a $9.95 maximum) and the ECN for a market order is now $1.85 each way. That makes a total cost of a round trip market order trade $13.70. Still not too much of a concern as commissions where over $20 one way...and still are at many brokers.

Looking a bit deeper into the why I find that an ECN charges a fee for trades that remove liquidity from the market. Basically a market order gets executed as fast as possible at whatever price is next in line, sometimes that price is farther away than anticipated, but that is another story. This does not add to the quotes as an order to be filled at a certain price, which means that I am not adding to the liquidity, I am not placing an order to help fill the basket of orders to choose from.

My next test will be to see if I place a limit order far enough into the quotes that it will just get filled as fast as the inside prices are well under what I am willing to pay...this type of order should get executed as fast as a market order...so I expect to still see a fee, but perhaps not. This still meets my needs of not having to dink around with limit orders and missing the trade rather than having to chase the price.

Jeff.

February 3rd. Market orders return.

Well, I've had enough of trying to nail entries with limit orders.

All the benefits of using a limit order are also detriments. While I do like getting the price that I want, I also would rather be in a trade when I decide I want in.

Today was a prime example of why limit orders are killing me. I won't note the trades on the chart as it is not terribly clear but here is the intraday for HGU:

So, $12.50 limit order ($12.48 PP) at shortly after 1000h...filled then the price dropped to $12.28...I got out around $12.38, it was moving. That was the only order that filled.

I placed another minutes later to catch the bounce off of the 200sma (green) but missed it by a penny or two. 20 cent trade missed.

1035h...$12.50 again, missed, 1058...$12.50...missed. 15 cents and 15 cents again missed.

I made out well enough when I was placing market orders to get in before so I will go back to that method again.

48 cents per share had I been using market orders, and perhaps some trades on HGD too...perhaps not. At 300 shares that is a $144 gain or $104 net profit.

I decided to concentrate on HGU only and leave HGD alone for a bit...although I did place one order over there too, same result.

The end result is a loss for the day, not really much but had I gotten in on every other order...or even one or two I would have broke even or ahead at least a bit. The one trade was filled only due to the price dropping through my order. This ETF is traded enough that the spread is only usually 1 or 2 cents so using a limit is really not a great advantage.

Trying the limit orders has given me a lesson in patience though, letting the price go if the order is not filled has it's own lesson built in. It helped to train my emotions to watch a price climb...and occasionally drop, without worrying that I missed the trade as there is always another being setup later.

I know I am a month in and really nothing to show for it but I did only plan on 40 weeks. So I still have 48 weeks to go...8 week buffer should be loads I expect.

Jeff.