New attempt at oscillation trading

Leave it to me to try something else when what I am doing is working fine. This time I will leave well enough alone and NOT change what I am doing with regards to the option strategy involving using the services that I am currently testing. Also I am still funding for the Optioneer strategy, no change there either.

So, on to my next endeavour.

I don't know what to call this but it involves trend trading, sort of seeing trading with a slight twist.

I am plotting a few indicators and overlays that I have been comfortable with for the last while. On the chart below I left the legends on so just click on it for a larger view.

The solid lines are the typical simple moving averages. The dotted lines are 100 day simple moving average envelopes which I was using a while ago to determine entry and stops for trades. I never really used them but they certainly help visualize stops while the price is in the channel.

The oscillators are both Williams %R which is just an over sold and over bought oscillator similar to Stochastics. I am using the 14 and 5 day for comparing two timeframes without plotting two charts.

The bottom indicator is the Bollinger Band,a volatility indicator. I was going to use a standard deviation but it is identical to this.

Here is a stock that I am currently trading using options. It was a trade based on the service that I just recently cancelled as they were providing one trade per week and I didn't feel that they did much more than watch for chart activity. It is worth noting that I bought long options on September 14th...according to this chart it was the wrong time to go long but I still have some time to go before expiry so I will see where it heads next.

ININ - Interactive Intelligence Inc.

I plotted green and red vertical lines to represent buy and sell indications. As the %R in both the 5 and 14 day period dip to -80 the next day the stock is bought at the opening price, that makes it simple but lower limit orders could be used. Seeing as the stock is trending nicely I could have easily just bought when the price came within a certain range of the 50 SMA, a typical swing trade move. I will plot this over other stocks in varying trends to see how it holds later.

The exit is as important, or even more important, than the entry. Seeing as I am using options I plan on buying options with strikes close to the stock price at the time, estimate the timeframe to determine expiry dates for the price move and not use stops. The total trade cost will not exceed my maximum loss allowance at the time. If I were using stop loss orders instead I would use one of the 100 SMA envelope lines or the 50 sma.

The key is when to take profits and this is where this strategy helps as it takes the subjectivity out of the process.

Initial stops are easy enough, use the SMA that closely corresponds to the Maximum Loss Allowance or an unbroken SMA that forms a trendline and move them with the SMA chosen. The stop will move up slowly. As long as the price does not move too far off the lower trend line (no straight lines here, just the SMAS) there is no need to do anything other than adjust the stop every day or two.

Once the price moves then there are two methods of exit:

1)$3 target (or any price of choice)
a) with stop loss exit
b) with limit order exit
2) %R short term dip

The first is easy enough. Using the entry method I believe that a tighter stop than the profit target can be used. In the ININ example a $1 stop could be used initially and a $3 profit target provides a 3:1 profit to loss ratio, acceptable. Once the price moves in my favour I continue to move the stop loss with the SMA.

Option a) has me move the stop loss up to the $3 target as soon as, or very soon after the stock price passes this price. Exit will be by market order once the price touches the stop. The advantage to this is that the stop can be moved up tight with the price in order to secure greater profits should the price move higher. The disadvantage would be the possibility of the price gapping down through the stop.

Option b) has me placing a limit order and getting the $3 profit, or better if the price is higher at the time of the order placement. The advantage is that once the price is above $3 I am pretty much guaranteed that profit. The disadvantage is if the price continues to move up I miss some additional profits.

Option 2) has the exit order place the day following a dip below -80 on the 5 day %R.

There is a third exit, if the price moves slowly up then the SMA stop keeps moving and either gets hit along the way or just keeps following the trend. The loss slowly reduces along the way and may turn into a small paper profit position.

ININ

Three trades plotted in the last six months profit using:

1)$3 target (or any price of choice)
a) with stop loss exit = $12 (trailing by $1 raised in 50 cent increments)
b) with limit order exit = $9 or slightly better
2) %R short term dip = $9.15

No matter the method there were profits to be had, and that is the important part.

I won't go into the possible option strategies here but suffice it to say that options for this stock could be had for a fraction of the cost of the stock.

One thing that I see mentioned about trading with any type of automatic or mechanical style is that they are prone to curve fitting. I think that the problem with washing any strategy as curve fitted, making the indicators work due to the stock price activity, is that it works historically for a stock and that pattern can be used to identify other stocks that are in similar early stages of the fitted strategy. So why not use the fitted strategy and in turn fit the stock by pattern fitting? I have a successful short list of stocks for my P & F strategy using this idea. Therein lies the key, stock selection to match the strategy employed and not trying to make a strategy that works for a few stocks work for every stock or even ones that I may like to trade.

I think that almost any strategy, if proven for some stocks, can be made work in this way. The second key is in recognizing when the fit is no longer good. This is accomplished by keeping records and tracking performance in order to see when the overall strategy no longer works for a particular stock or group of stocks.

Jeff.

Plan update...nothing really new.

I closed a position today for a loss, in the $50 range so my win rate is 8 of 10 trades...80%. The only reason that the option lost was due to me getting in 5 cents higher than I wanted to and setting a limit order that did not get filled to exit...had I just placed a market and took the spread (only 10 cents) I would have at least broke even or made a couple of bucks.

I am gaining back what was a paper loss earlier in the week and still placing more trades. I am up to 22 active trades with two outstanding orders. The outstanding orders are only open due to the price jumping ahead and not pulling back. I figured that I would be best not to chase them at all as the Friday rush seems to have driven prices up at the end and these two stocks were already in a bit of an intraday uptrend. I might expect to see them drop back a bit on Monday and perhaps see my limit orders hit and filled.

This week has been slow. I got used to the flurry of opening and closing trades two weeks ago so this nibbling here and there is odd. I would like to see some of these move BUT quite a few are now January through March expiry so there is lots of time to let them move.

I have decided to not place any call only trades when the alerts indicate a credit spread trade. The trouble is that a credit spread already made some money so closing it while the call is still down can still yield a profit...for those entering the entire trade...perhaps not for me with only the call. I didn't really realize this problem until now. I have to review my trades to weed out those ones placed under the premise that the call was going to appreciate more than it has, maybe just set some stop losses to let them close themselves and cut my loses.

The upside of doing this will mean more capital in my account to get into the long options. I am running out of cash as positions are open and orders are placed. Part of the issue here is getting into slightly too large of positions. I am paring them down now to keep all trades no larger then the $1.20 option cost, as I mentioned in a previous post. The exception will be when a good looking trade is worth up to $1.50 leading to $150 for a single contract or slightly above $120 for two or three. $1.20 is just a close guide for me and this is only to keep the number of trades up while allowing no stop losses to be necessary.

Oh, the reason I want to keep the number of trades up is to allow the full diversification using the service that it looks like I am going to settle upon. The classic "trade the plan" means that picking a few of the lot MAY also mean that I pick the wrong ones. That would suck.

Profit taking...not for me...yet.

I am receiving profit taking alerts from the main active trading service ... but the alerts are for positions that I am not in. Either they are positions entered before I was on or are spreads that I did not take or even one or two that I just didn't chase the price on as it ran away too quick for me to get into.

So far almost all the profit alerts are just that, profit alerts, not loss takings. A few notes about positions that may expire worthless but too few to be of concern.

BTW, I decided that I am willing to start at 5 cents higher than the recommended price of the option depending on a few variables which I decide upon at the time...like how close to the market close, activity and strength or weakness of the stock. I need to test the limit order to see if I place an order with a limit above the ask price will I only pay the ask or will I get nailed for my offer? I know I am best, in most cases, to set the limit at or even under the bid and wait for a spike. Although with low deltas (0.5 or less) it takes a larger price change to initiate a drop in the option price to make this strategy work out.

I must admit to being a little over zealous in my need to get active in this trading and my need to make a trade. I placed a few trades based on spread recommendations by only buying the underlying call and not selling the corresponding call... my account is not funded enough to do that right now. In my haste I didn't quite realize the implications of the trade in it's entirety. The sold call, in a few cases, may have been the basis for the profit.

Yesterday a trade was just that. Buy a call for 14 cents or less and sell a put for 16 cents or more.

Net 2 cent credit off the bat...not a bad proposition.

I had decided to leave all alerts alone unless I could execute the entire trade. This one was a good place to start sticking to that rule.

Today the trade was closed. Sell the calls for 9 cents or more (a loss on the initial call only position) and buy back the put for 3 cents or less. A total of 6 cents credit.

I would have lost 5 cents on the call had I bought them. The put, being a naked put (the call does not cover a short put), would require $25,000 account balance. Not something I am prepared to fund right now so the trade was not possible anyway. That and a naked put is a VERY risky trade as I would be obligated to buy the stock at the strike price at expiration should I keep it. At the very least I could buy back the put to close the trade for a loss based on the option price but it still amounts to a loss by at least the difference in the strike and the price when I eventually bought back the put.

I would want more faith in the trade alerts than I have right now to risk selling naked options based on a service.

Reduced loss with options: example

Today a position that I have dropped a few cents off the start due to a downgrade by some company or other. The stock was ARRS (Arris Group).

The interesting bit is that the stock gapped down from about $12.70 yesterday to $12.10 at the open then proceeded to head down to hit $11.40. It seems to have stabilized at about $11.70 now. Considering that the stock dropped $1 overnight to now, the option I hold is down 35 cents. I bought the $15 strike call when the price was near $12.75 so the delta was in the 0.35 or 0.40 neighbourhood... right now it sits at 0.29.

Paper loss had I bought 200 shares of ARRS would be $200, so far my option paper loss is $75. What looks a little worse is the return as a $1 loss would represent 7.8% on the trade compared to the $75 loss being 50% of the trade.

The upside is that the positive returns, had the price moved the other way would be equally varied, if not more pronounced as the delta increases and the option price goes up in a non-linear fashion.

I will be updating my paper tracking later today to see how much ground I have recovered.

Jeff.

Market uptrend re-enforced

I see that today the market is coming off of the resistance at the blue 50 SMA, a nice setup for a continuation of the current uptrend and welcome news to my mostly long positions.


I debated whether to cut some losers of follow the plan of the trade services to the "T" and hold the positions. The ideal plan, as I have always said when using someone else's strategy, is to be able to trade the plan the way they envision it. With the options trades that I am following now the strategy is not so much to treat the entire capital as a possible loss but to allow for the possibility that it may be if the trade does not go in my favour.

I think I mentioned that I will be downsizing my trades again in order to allow a smaller loss while following these plans. My new Maximum Loss Allowance will be in the $120 range and this will be the maximum capital in the option trades...so position sizing as follows:

$0.15 - 8 contracts
$0.20 - 6 contracts
$0.25 - $0.30 - 4 contracts
$0.35 - $0.40 - 3 contracts
$0.45 - $0.60 - 2 contracts
$0.65 - $1.20 - 1 contract

The first week of gains when I cleared $1000 net I was using many positions in the one or two contract size. I may yet make some profits from these positions (two accounts are at breakeven and the third has one third of the trades in the green...all were in the red last week.

The drop in position values made me take another look at the track record of the services I am using right now. In one case the old record is actually pretty good. They are, right now, closing trades that were opened before I started and many are in the 300% and greater return. Three today were like that even though I know that other trades are languishing.

I will be setting up one margin account this week to take advantage of trading spreads as some of the strategies used are of that style. As well I am transferring most of my RRSP over to the Optioneer account this week as well.

All in all I feel fairly confident that my plan, going forward, is going to work out nicely and I expect to see some gains in the near future to justify my time spent getting into the trading in the manner that I have. While I don't anticipate replacing my income this year, or even next year, I will be able to gauge a timeframe when that might be possible.

Jeff.

Trust or foolishness

I recall posting about the "pain" of holding a position through a period of loss in order to ride the planned rally on the other side.

Today is one of those days, as was yesterday. So I need to consider if this is pain or foolishness.

I am running only with trade service trades right now and all but one are long positions. This is not a move that I would have wanted to be long in most of my trades, but things happen.

As far as the market is concerned I feel (I know, not the best word to start a statement about trading) that with all the bad news the market should have sold off more than it did. In that light the positions that I hold are not doing too bad. Some are up since the last time I did a "price check" to see where I would be with regards to my total portfolio.

My trade in progress numbers show me giving back all of my gains PLUS a healthy bit on top should I close the trades now. The one thing that is tough about holding options instead of stock is also the thing that is good about it, if anything good can be gleaned from a losing position, the price scale of the option is so different from a stock. A 40 cent trade that is at 5 cents looks pretty bad... but if it is based on a stock that has gone from $12 to $8, it doesn't look so bad.

Option people say to buy intrinsic value, I have said so myself but found a problem or two with the plan. The thing is that if I call the move wrong I can lose the intrinsic value penny for penny when compared to the stock in addition to the extrinsic value. Buying an option that is wholly EV but has a strike very close to the stock price allows an increase in the price of the stock to drive the IV up almost right away while not losing too much EV. The downside, which is also the upside, is that the EV should be considered the total loss allowed on the trade and this one factor gives a sense of freedom to the trade as, if I am wrong, I have lost either way. If I am right I could stand to gain more on a return on capital basis.

I am re-considering my current position sizing as I was buying 2 and 4 contracts per trade. I should have kept it to 1 and 2 for now. I think I lost sight of the fact that a service is susceptible to the same losing streaks as anyone else, especially when going long while a market is undecided. I know that some other services I tried had abysmal results so even though these ones seem more in the profit. I am glad I was not trying to stick it out with one of the previous services.

This then ties into trading some else's plan. The trade services are recommending holding everything through. I note that they are not averse to holding a losing position through expiry, neither am I... given the right option price scale. So, how long to I hold them? That is the big question.

I am setting up my Optioneer account as I type. I sent in all the paperwork today and I am awaiting funding instructions. I have to liquidate the RRSP amount that I wish to start with and get it prepared to transfer. I dislike taking the tax hit on that but I am choosing to take it now in light of future plans to recoupe those tax loses.

Jeff.