Thursday night I blogged about my recent trade in BIDU which can be found here. I wanted to provide a follow-up post with some visual to the trade as I know when I read blog posts it makes the trade easier to understand when charts or other visual aids are included. But here is a quick recap:
- Placed Sep 115/110 Bull Put Spread Wednesday 8/22
- Thursday 8/23, woke top find BIDU trading down -5% from yesterday close, position was -30%
- Decided to enter into Aug5 Weekly 110 Call for retracement of selling
- Exited all positions at end of day for little over +2% return on risk
Below is a trade history of the trades I took in BIDU:
The next chart is a 15min chart of BIDU. When day trading and looking for opportune entries for swings I focus on the 15min chart as I believe it is a good filter for not too short (as in a 5min chart) or not too long (as in a 60min chart). I also like the 30min chart for 1-4 day swings but when only planning on a day trade or precision entry I prefer the 15min chart. Notes can be found on the chart of my entries. I did front run the swing as on what I believed was a capitulation candle of large range in the afternoon on volume that trumped previous volume bars. The better entry would have been to wait for a reversal candle (as it did print a doji) with confirmation.
The next chart shows a volatility chart that I look at. When I am seeing extreme moves in stocks I look at this chart to see how the stock historically performed when similar volatility was displayed. At the time when I looked at this BIDU was down around 7-8% and this just seemed to be too much given the news in why it was down. Notes to take from this chart going back the last year of data:
- It breached the Lower 3rd Standard Deviation Bollinger Band, previous occurrences show high probability of some upside in the following day(s)
- Augen Standard Deviation Spike reading was at its 2nd highest in the last year reading around -3.80 at the time I added the long trade
- Closed the gap on where it gapped up from earnings
With all the data that I was looking at I saw this as an extreme move that was ensued by panic and decided to enter a long position. Did I get lucky with subsequent price movement? I would say yes but at the same time no one can predict future price. All we can do is look at current data, implement a plan within our risk parameters, and hope that price follows that plan. The data that I was looking at had me believe that price was reaching an extreme in selling. So instead of bailing on my current position that was at an uncomfortable loss, I decided that I may be able to add to this losing trade to mitigate the loss. To which this plan worked. I do remember looking at my risk profile grid thinking “wow if this kept going up I could have a nice gain as my dollar cost average was low”. Needless to say I’ve thought like this before and the losers outnumber the winners. I remembered this and thought as to why I put on the swing long (to mitigate loss) and exited the position at end of day relieving myself of mental capital strain.
Do I advocate doing this trade? No, usually if I am in a position and I get unfavorable news I will cut that position immediately as I am not into news-y positions. If I was around during the open I would have cut this position immediately for what still would have been a better gain. But in this case, I woke up to find the position down big and saw continued selling. For the stock to be down the same amount as if it missed big on earnings, was extreme to me and the volatility readings displayed the same. In the end the added swing position worked and if I saw the same setup, minus having the previous position on, I would take the trade again.
