redman59

Average person with a full time job and interest of the market. Prefer reading trading blogs over trading books. Grew up near Rochester, MN & now live near Gettysburg, PA. For more information visit http://redman59.com/
Joined Oct 27, 2011
174 Blog Posts

redman59

Joined Oct 27, 2011
174 Blog Posts

A Bullish Play in Auto Parts

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Looking at industry breadth Auto Part Stores was a top performer with 80% (consisting of 5 stocks) having up days.  This in itself is not the only factor when I single out industries as one could say that 5 stocks is not a lot.  Another metric I use is the Daily Hybrid Change and Auto Part Stores ranked 5th out of 196 industries and also ranked 10th in Weekly Hybrid Change.  This warranted some further study into the individual stocks within the industry (information provided by The PPT).

Looking at the charts I like the risk reward in AZO (AutoZone Inc.).  This has been a hot stock in 2010 & 2011 but mostly a consolidation in 2012 between 355 and 385.  Below is a weekly logarithmic chart of AZO and the past 3 years.

azo_20121214a

Below is a daily chart of AZO and you can see how it has been consolidating for the most part of 2012 and how it has bounced between 355 and 385.  Looking at the volume on AZO it is interesting to see that a majority of the above average moves happened into those support/resistance levels, around them, or at earnings which is the case in most stocks.  The latest volume move is highlighted on the chart below at the 355 level.

azo_20121214

With this information there are several options strategies that one could play that would attempt to capture the range and would be based on time decay (butterflies, condors, etc.) or one could play an outright bullish strategy, which is what I am looking at.  Looking at the volatility chart we can see that AZO is in the bottom of its 90 day implied volatility range so I am not looking to be short vega but would rather be long vega.

azo_20121214c

One could choose the calendar strategy but I only prefer these on weekly options so that I am able to roll the short strike.  My choice is the Bull Call Spread as this will get me long vega, reduce time decay,  and reduce cost over the naked option.  Looking at the past I am looking at a 15-20 bar hold (3-4 weeks) so the January chain would suit me fine with an extra week of time if my price objective of 380 is not met.  Trade idea is the Jan 360/380 Bull Call Spread for a debit of 6.75. The max risk id $675.00 and the max gain is 1325.00 if at or above 380.00 on expiration in January.

azo_20121214b

It’s Not the Size of the Tool That Matters

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Did you vote yet?  If not go here and vote for the next tabbed blogger(s) of iBankcoin.  The top 3 win the spot and exponential viewership.  I voted early this morning based on prior content and value.  Moving on now.

The first thing I look at when doing end-of-day homework is industry breadth.  I do this through The PPT, a premium content engine for those unfamiliar.  I then sort the industries via breadth from the top down to see what industries are popping to the top.  After the market closed I stuck to this routine and one industry that stood out was Small Tools & Accessories.  It ranked 8th of 196 industries with 75% breadth, meaning 75% of the stocks with the industry had a positive change from yesterday.

Also what sticks out and what The PPT also measures is technical score, fundamental score, and hybrid score (combination of tech & fund).  These are all sort-able.  Small Tools & Accessories ranks  3rd technically, 14th fundamentally, and 2nd via the hybrid score.  Needless to say it is a top performing industry and was also strong yesterday.  When looking at stocks within the industry, there are only four.  This a small group but still strong nonetheless and includes the following stocks (linked to FINVIZ):

Below are two of my favorite charts that include SNA and SSD.  At this point I would rather be a buyer on weakness than strength.

SNA

 

SSD

Submitting Orders the Old Way and Closing Trades in $AAPL $IBM

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Going into Friday I was long $IBM and long $AAPL both with option spreads in which I have time-lined in my blog.  In my Thursday post I stated that I would be absent Friday and on Friday I was able to check my phone intermittently when in transport from one hunting spot to another.  Around noon, while having some lunch, I saw that not much was going on with the $IBM position.  I decided that I would just close the position out realizing half the gains I had before I adjusted, but followed my adjustment plan.  Also I didn’t want to be assigned 100 shares of $IBM as the 195 Weekly Call were in-the-money, so this needed to be closed.

This is where the glitch occurred.  When I went to close the position through my thinkorswim phone app, it kept shutting down unexpectedly.  Of course the one time that I need to close it out this happens.  So I had to go the old route of calling your broker (always have a back up plan) and I will say it was quite flawless and easy.  He gave me the natural (bid) & mid price.  I told him to come 0.05c off the mid (quoting 2.18×2.30) and put my order there as I would expect an immediate fill given the liquidity of $IBM and penny increments of their options.  I was immediately filled.  Trade history is shown below, realizing +$15 on $211 of risk (+7.11% per 1-lot).

Today I went ahead and closed out my $AAPL Diagonal that I have been adjusting around since I put on for earnings.  My overall gains were not what they were but still gains that I was happy with.  This is another one that took a hit on Friday and saw my gains quickly become a losing position, but still holding technical level I was watching.  This morning it caught a gap up on news of their iPad sales with the launch of the mini.  Not liking the action on Friday and recent action altogether I decided that I wanted to exit this position ahead of elections & its ex-div date as I think action will be more of a mental drain than anything else.

I watched the first 30 minutes and where the Diagonal Spread was trading (mid price) on the high of that 30 minutes.  I then placed an order at that price (which was 23.50) to close the position thinking that the first 30 minute high would get taken out.  Well as $AAPL would have it, it kept to its recent M.O. and saw selling, going below the opening range.  I then adjusted my order down 0.10c as this should be filled if we tested those highs again.

We then saw buy support after it near filled the gap and then my position got filled near the end of the day on the late day push.  I was happy to see the fill and now could care less where $AAPL goes, even though I may miss out on better profits.  My mental capital is now preserved into the elections as I am flat positions.  My overall gain was +$213 on max risk $2920 (the initial Diagonal), +7.30% per 1-lot.  Trade history shown below:

I now have no positions and I am quite content with that.  I believe intraday volatility will pick up with elections and I more content without positions right than if I had some on.  I am still in the mindset of trading less and keeping the overall portfolio risk low.

Theta Burn and Position Update in $AAPL and $IBM

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It looks like everything will be in full-swing on a market level tomorrow Wednesday.  I have nothing new to say that you probably have not read as far as news of Hurricane Sandy or market stats when it has been unexpectedly closed 2 days in a row.  Here in PA near Gettysburg we have flooded areas (only affecting houses near rivers, not towns) but no big damage like that seen in the news.  I wish the best for those with damage.

I do know from an options position standpoint that those that have positive theta positions will benefit.  We have seen an additional 2 days of theta decay that was not built in.  As far as my current positions go in $AAPL and $IBM, they should benefit from this time decay as I was short the weekly options in both and long the November options that expire on November expiration.  In my post on Friday I detailed the positions in $AAPL and $IBM and I wanted to show the Risk Profiles in both to show how the option greeks changed, mainly theta.

In $AAPL on Friday my Risk Profile looked like that below:

Now as of Tuesday night the greeks and Risk Profile look this below:

The main component here is theta.  As you can see with the added days of market closure as of Tuesday night the theta (time decay) has changed from 23.57 per day to 62.47 per day.  In theory and price and all else being equal, I have went from gaining $23.57 per day to gaining $62.47 per day while doing nothing and the markets were closed.  You can also see by the blue highlighted area above the 1 Standard Deviation range into Fridays (11/2) expiration.  This is telling me I have a 68% probability of $AAPL being in that area, making the downside near a max gain.  Now with the recent news of the firings and other patent/iPad-mini reviews who knows where $AAPL will be, but from a probability standpoint that is the expectation.

As for $IBM, it also caught some news during the market closure in that it issued a $5 billion dollar buyback in stock.  This can be seen as favorable news for the stock which should be favorable for the position I have as it is bullish in direction.  As of my last post the Risk Profile is below:

In the last post I stated that this was a 1/2 position as I have no faith in the bullish action of this market but based on prior action and a technical indicator (for analysis click here) I thought that $IBM would see some upside, benefiting this options strategy.  But if we saw some downside my plan was to add another Call Calendar or roll the short strike.  As of Tuesday night you can see this Risk Profile below:

Again focusing on theta as this position benefits from “lost days” or time/theta decay you can see that it went from 30.68 to 50.76 in those unexpected 2 lost days, benefiting the position around $50.  Again this is with all else (price/greeks) being equal.

I am sure that the Risk Profiles will change on Wednesday’s open as there is a lot going on now in the market with end-of-month mutual fund scrambling and news affecting these two stocks specifically.  Either way it should make for an interesting day and these positions should make for a good study on option greeks, specifically theta.

Earnings Update in $AAPL and New $IBM Trade

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Previously I was long the $AAPL earnings trade as I put in my Twitter timeline.  Thankfully this played out after earnings as we are aware of their miss on EPS and downward forward guidance.  The price action from what I could understand is that it was  “baked” in to the recent selling as the volatility sellers looked like geniuses on Friday’s open.  $AAPL closed at 609.54 on Thursday and opened at 609.43 on Friday, so really no movement at all and predicted by just about no one as many expect a volatile move.

So going into the earnings reaction I posted in a blog this trade that was long the $AAPL Nov/Oct4 550/580 Call Diagonal spread, selling the Oct4 580 and buying the Nov 550 for a 29.20 debit or $2920.00.  The Risk Profile can be shown below:

After the earnings release I decided that I would like to roll the short option to the next month that would increase my profit from positive upside action from a $80 gain to a $280 gain at expiration 11/2 .  I then rolled the short call by buying back the Oct4 580 Weekly call and selling the Nov1 580 Weekly call for a 2.00 credit.  I could have received a better credit by $100 if I would have waited as $AAPL sold off shortly thereafter I rolled the short call, but hindsight is 20/20 and my downside expectations still held.  I have included the order entry as well as the new Risk Profile :

So you can see that the position is still positive and upon Thursday I plan on rolling the short call again to the next month on a dip (given that I am still in the trade).  I will be absent Friday (maybe some mobile trading) so my decision will be made Thursday.

On Friday I also entered into a $IBM 195 Call Calendar and the risk profile can be seen below:

My reason for this trade can be seen below on the chart.  I took into account it’s recent hit on earnings, stabilization, and a technical indicator that proved snap-backs prior occurrences (% above/below 10EMA) as shown in blue highlighted boxes:

So I entered into this position with a half position in case further downside occurred into which I would enter into another Call Calendar.  I want to iterate that this is not a volatility/income edge type play but more of a directional play.  $IBM is one of those stocks that does have a volatility index in itself and looking at the volatility chart you can see that we are in mid-range of recent volatility readings:

I believe that this is a trade that can see upside to $195 and this spread is more of a cost reduction type trade that benefits from time decay and upside action.  In the end I look to take around  25-30% overall profit on this trade.

Staying Light and Earnings Trades in $AAPL and $AMZN

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Last night I posted in how I have no plans to go either way with this market as there seems to be a lot of tug and war and direction is not clear.  Today my morning consisted of morning admin catch-up that I usually save for the weekend.  But the morning action was a recording of previous days of where we saw a gap up followed by selling.

Today I did see a nice opportunity in $CRM as it was selling off and placed an order  for the 140/130 Bull Call spread at the mid of 2.65 credit.  This was to take advantage of the expected volatility decrease on a rebound off the 200 SMA and 142.50 support level.  Well this was the bottom and I  never got the fill.

Then obviously we had the news stock of the day of $AAPL that was set to report earnings.  I had no desire to take on an earnings trade but the more I looked at the chart, the more I starting looking at options strategies coupled with the chart.  In the end I placed an order and was filled 2 minutes later on an $AAPL Nov/Oct4 550/580 Diagonal spread.  In this spread I sold Oct4 580 Weekly Calls (expiring tomorrow) and bought the Nov 550 Monthly Calls for a 29.20 debit.  Usually I do not risk this much in an earnings trade but when looking at the chart and what the Risk Profile showed me, I liked the trade.

In this trade I looked at 550 as the max move to the downside.  I thought this was a safe max move and anything further than that and I find it hard to believe that there wouldn’t be buyers.  If $AAPL saw a move to the upside then at a minimum I would have made $80.00.  If we did see an extreme move to the downside, then I had 2 more expirations to roll the short call to reduce loss/cost basis.

More on my downside thesis.  $AAPL is a stock like no other.  This thing is a growth stock with awesome fundamentals.  Into the close it was nearly 14% off the highs with a tape that is not healthy.  So my thoughts going in were that expectations are high but this stock is still putting up numbers to make any company envious and the fundamentals in regards to price to growth, margins, and returns on assets/equity/investments are impressive, also there is no debt and the cash hoard is almost stupid to believe.  Needless to say it is an awesome stock fundamentally that has seen “wanting to get in on selling” even before the earnings.  Also on a technical basis with it coming into the 200 SMA and support levels if we saw more downside, it is just hard to believe that buying would not ensue.  Below is the 4 year chart to show some of the 2008-2009 calamity and how $AAPL has performed since hitting the uptrending 200 SMA (purple line)

So with this I went in wanting to get in if we saw a drop while also taking in some weekly profits if we saw an upside move.  So the Nov/Oct4 550/580 Call Diagonal made sense to me.  It takes advantage of the 580 call volatility crush while the 550 Nov call would not be effected as much on a volatility basis.

The Risk Profile and chart can be seen below with notes:

Also during the day I bought the $AMZN Nov 205/210 Bull Call spread for a debit of 3.75.  The thesis was kind of the same minus the fundamental thoughts.  I liked the chart technically and looking at support levels this made sense with the thought going forward that if we saw selling, I had two more expirations to roll the short calls.  Also this would take advantage of any positive earnings reaction.

After the close both companies released earnings and the price action made volatility sellers look like absolute geniuses.  The price action was gratifying to watch in both as both sold off right away.  $AAPL crossed below that 200 SMA and never looked back.  The hindsight thought now that $AAPL returned to its close after some selling is that the selling since Sept options expiration is priced in.  $AMZN moved up to an important support level and is hanging right there.  Should be an interesting day tomorrow and as of right now the $ES_F is -11.25pts (-0.80%) from the close and the tomfoolery continues.

I Will Not Partake in Tomfoolery; Seeing Conflicting Market Signals

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As the title suggests I have no interest in partaking in this market here.  Right now I have many conflicting signals as far as the direction of the market.  Basically they all same the same thing in that we are oversold, a bounce is expected, but overall the market is not healthy and further downside can be expected.  Last night I posted about a short term technical indicator I watch that shows that a bounce can be expected; I still expect this.

I am truly conflicted here.  I do believe that a bounce is expected but selling into the bounce seems reasonable, notably the 1430 area in the $SPX.  On another note it is hard to ignore the QE stats and that there is usually some ludicrous action after QE announcement followed by a run a higher and that coupled with presidential election year seasonality suggests run into the years’ end.  Many of the macro indicators I watch suggest further downside and room for further downside, they include:

  • Bond:Stock Ratio w/a 65-SMA, this has recently crossed above suggesting downside action
  • US Dollar Heiken-Ashi chart with a 42-SMA, this inverse-market indicator confirmed upside market action on 8/7 and just confirmed downside action today
  • NASDAQ:SPX  ratio with moving averages, this suggested downside action on 10/2 and remains bearish
  • Premium service showing that a majority of the $OEX stocks are in downtrending patterns (measured on pure O-H-C action)
  • Distribution days as measured by Investors Business Daily

Now that the doom and gloom is out of the way there are some things that suggest a bounce is due.  One indicator is a premium service that suggests that we are highly oversold and a bounce is expected, another is the current McClellan Oscillator reading comparing to previous levels, and the $VIX.

As far as the McClellan Oscillator reading, looking at the chart below we can see that we are near levels that have historically recorded bounces.  Look at the highlighted boxes but one thing that is different rather than early on is that we are seeing lower lows instead of higher lows, something to take in consideration:

The other thing that I like to pay attention to is the $VIX and closes outside of the Bollinger Bands.  This essentially measures the volatility of the move on volatility.  I like to watch closes outside the upper and lower bands as extremes.  The chart below shows the $SPX on top and the $VIX below.  The $VIX arrows show closes outside of the Bollinger Bands.  The $SPX shows yellow lines in where the $VIX closed outside of the upper Bollinger Band, essentially an extreme $SPX move to the downside.  Note the $SPX price action after we see consecutive closes outside of the upper Bollinger Bands on the $VIX.  This is a favorite timing indicator and the best way that I use this is to wait for the $VIX to close back below the upper Bollinger Band rather front running an extreme.  As you can see, there are occurrences where volatility continues to “walk” the Bands:

So like I said I am not interested in partaking in the tomfoolery of the market here.  I highly believe in mental capital preservation and today I closed out my positions (previously stated in blog posts) in $AAPL and $GOOG and I am now flat.  This leaves me in a relaxed state of mind and allows me to work on watchlists and track the market without position bias.  If we see more downside action I will stay in cash but not look to short and if we see upside action I will look to see how the breakout stocks are acting (if sticking) and look to get in bullish positions.

I have learned through time that sometimes less is more and right now I am feeling that this thought needs to be put in to practice, at least for me.  Never forget that mental capital can be as precious as monetary capital.

Statistical Thoughts on Today and Trade Updates in $AAPL and $GOOG

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Today we saw a gap down of greater than 1% as measured by the $SPY.  In recent occurrences it tends to mark close to a low and a bounce ensues and as I write this the $ES_F is +5 pts.  On the daily 1 year chart below of the $SPY the yellow arrows mark days where the $SPY gapped down greater than 1% and the lines consisting of the 50 SMA (blue), 100 EMA (red), and 200 SMA (purple):

So what do I expect from here?  For some reason  I do not believe we saw the low and I think today’s low gets taken out.  Ideally we see a gap down and this flushes some out and in my opinion that would be the dip to add some or more to your longs.  Today was really a boring day as the bulk of the move occurred overnight and most of the $ES_F intraday action was in a 8 point range.  I do think that this created some panic based on a close over close basis but many are programmed to buy the dip.  This is why I think a gap down would create some frustration causing further panic and making those that bought or added today to cut their losses.

One thing I found interesting is that a short-term overbought/oversold indicator I watch on indices and stocks has triggered recently and this does not trigger often on the indices but has recently intraday.  This does a pretty good job and marking turning points and I watch this on an hourly chart.  Below you can see a 90-day hourly chart for the $SPY with yellow arrows marking the signals and a plot at the 141 level to show how critical it is to hold:

With this I expect some further downside, on a time-basis I am not sure but I expect the downside sooner rather than later followed by continued upside.  I have 2 positions on right now in $AAPL and $GOOG and I made adjustments to both.  In $AAPL I rolled down the call side but messed up the order as I wanted to roll the 660/670 calls to the 650/640 calls but instead rolled with an Iron Condor and I forgot to change it to all calls and instead closed out the calls and rolled to 650/640 puts but the risk profile remains the same; just not what I wanted and a mistake noted for my journal, the order entries can be found below as with the risk profile on a 1-contract basis:

The $GOOG trade had me watching the 680 level as we had an awesome day despite market weakness and I raised my closing stop to below 680. $GOOG saw mild basing throughout the day and in the end of the day I decided to go more neutral to the 670/6555 Weekly Bull Put Spread I had on and then entered into the 695/710 Bear Call Spread effectively making this a 655/670/695/710 Iron Condor max risk $990 :

Great Apparel Experience ($UA) and Apple Trade ($AAPL)

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Last week was a busy one for myself and not so much on a trading basis.  When it comes to mid-October the market tends to get active but my trading volume tends to diminish and not so much from a market thesis standpoint but from a “it’s hunting time” standpoint; for deer, rabbit, bear, and other small game.  This is my time to get in touch with the primitive side of humanity as well as walk in the steps of my ancestors and hunt some animals.  But I will say that technology has definitely made things easier from when our ancestors partook in the sport.

This is the first year that I have utilized Under Armour ($UA) gear and I must say that the stuff is awesome!  Early morning I sat and then did some drives for deer and I would sit in warmth, sweat in walk, and the sweat wicked away and my $UA shirt dried out quickly.  My former cotton shirts would have me switching out shirts or just have me freezing when I sat again.  I will say that I have no problem spending the money on good gear (and $UA fits that bill and others I have talked to agree as they are the ones that encouraged me to finally step away from the cotton (cotton still does have its uses though).

I would have a chance to check my phone  intermittently intraday and some quick after hours study to see how the market was doing and I must say last week was definitely full of action to make bulls and bears look foolish.  It basically ended flat to slightly up with 3 big up days to be wiped away by 2 down days most of it coming on Friday.  I went into the week flat as I knew I would be out-of-tune of what was going on.

Seeing the action during the week I knew that I wanted to get long some $AAPL as this stock was getting hit and it was hitting a short-term oversold indicator, and I was looking for the into earnings run that it typically see’s.  Also it was hanging into that critical 100EMA that I have previously written about and I saw this as a good chance to get in.  Knowing that I wouldn’t be able to monitor it much, I chose to use a credit spread via weekly options with the thought of getting out prior to earnings on 10/25.  So on Thursday 10/18 I entered (via mobile phone) into a 605/595 Bull Put spread for a 2.05 credit, risking $795.  A lighter portfolio allocation as I knew on Friday I would not be able to monitor the position for adjustment.  I was happy with the trade but then on Friday we saw the decline of -3.68% and Murphy was in full control.

Monday brought in a different scenario in that $AAPL saw a slight gap up and saw follow-through, basing, and then a late run into the day.  This brought some relief as my stop was close to getting hit which is 1.5x the credit received.  At the end of day I did enter into a Bear Call spread to slow down the trade in case we see some selling.  I entered into the Weeklys 660/670 Bear Call Spread for a 2.55 credit, risk being $745.  This created a Weekly Iron Condor in which I have a total risk of $540 with max gain of $460, but I will take off prior to earnings on Thursday after hours.

The reason why I entered into the 660/670  Bear Call spread into the close was to reduce the deltas to a more neutral position and I can see potential resistance in the 645-650 area by looking at intraday charts.  Below are my order entries for my current position along with the risk profile of my current trade on a one-lot basis:

Also today I entered into a $GOOG trade via the Weeklys 670/655 Bull Put spread for a 3.90 credit risking $610.  For this position I was and will watch the 670 level.  I see this as a good support level and I will exit the position on stop-loss basis with a close below 670.  This level broke after I put the position on but it saw a nice bounce from there and I expect it to stay above this level into week’s end, especially with the  outperformance by tech today.

Looking at Market Breadth in a Different Way

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Traders measure market breadth in a different ways some specific to the overall market or to individual indices, whether it be:

  • Advancers to Decliners
  • Up Volume to Down Volume
  • New 52 week highs
  • New 52 week lows
  • Number of stocks trading above “X” moving average
  • Intraday TICK or TRIN

One way I like to also measure breadth is by stocks trading above yesterday’s close AND that are trading above their open.  The key take away is that they are also trading above today’s open.  If a stock is trading above yesterday’s close it will show as positive for the day but if it is trading lower than the open due to a gap; then this is negative in my opinion.  This is caused by a gap up only to see sellers come in to the stock.

Today we saw a nice gap up in the indices only to see a close lower than the open in all of them and the SPX/RUT putting in positive days & DJI/COMP putting in negative days; a mixed bag.  I wanted to go back and look at the SPY to see how today measured to past experiences.  I used the SPY to mark the days as this provides accurate data for gaps (vs. indices) and used the performance of stocks in the Russell 1000 as this compromises the largest 1000 stocks based on market cap & approximately 92% of the market.  The measurement rules are provided below with data from thinkorswim:

  • Measured from the start of the rally on 6/4
  • SPY trading above the 50 simple moving average
  • SPY gapped up greater than 0.50%
  • SPY closed lower then the open

The results are on the chart below with notes:

So what is the takeaway from this (relative to SPY):

  • Next day typically puts in a doji-type candle
  • Next day close is flat or down, in order of signal number (+0.01%, -0.69%, -0.05%, -0.34%)
  • Today’s number of Positive Stocks (close > yesterday’s close AND close > open) was 2nd highest out of 5 occurrences

With this I can say that today did not seem too bad given historical occurrences.   It did make me wonder if this gap up would hold during the beginning of the day and we can see that it did not.  There seems to be many conflicting signals and when this happens I tend to stay light or go with more delta neutral positions when trading options.  In a whole there is no reason to be aggressive but on a positive note this still seems to be a market of stocks in that specific non-defensive stocks are still working.  Example, one stock that I am trading directionally via options is Visa (V) via a options calendar spread and I still have no reason to sell here even though I am looking to remove it tomorrow.  As noted on the stream, coal and metal stocks have acted well and when these specific industrial stocks are holding then it shows me it is still a tradeable market.

redman59

Average person with a full time job and interest of the market. Prefer reading trading blogs over trading books. Grew up near Rochester, MN & now live near Gettysburg, PA. For more information visit http://redman59.com/
Joined Oct 27, 2011
174 Blog Posts

redman59

Joined Oct 27, 2011
174 Blog Posts

A Bullish Play in Auto Parts

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Looking at industry breadth Auto Part Stores was a top performer with 80% (consisting of 5 stocks) having up days.  This in itself is not the only factor when I single out industries as one could say that 5 stocks is not a lot.  Another metric I use is the Daily Hybrid Change and Auto Part Stores ranked 5th out of 196 industries and also ranked 10th in Weekly Hybrid Change.  This warranted some further study into the individual stocks within the industry (information provided by The PPT).

Looking at the charts I like the risk reward in AZO (AutoZone Inc.).  This has been a hot stock in 2010 & 2011 but mostly a consolidation in 2012 between 355 and 385.  Below is a weekly logarithmic chart of AZO and the past 3 years.

azo_20121214a

Below is a daily chart of AZO and you can see how it has been consolidating for the most part of 2012 and how it has bounced between 355 and 385.  Looking at the volume on AZO it is interesting to see that a majority of the above average moves happened into those support/resistance levels, around them, or at earnings which is the case in most stocks.  The latest volume move is highlighted on the chart below at the 355 level.

azo_20121214

With this information there are several options strategies that one could play that would attempt to capture the range and would be based on time decay (butterflies, condors, etc.) or one could play an outright bullish strategy, which is what I am looking at.  Looking at the volatility chart we can see that AZO is in the bottom of its 90 day implied volatility range so I am not looking to be short vega but would rather be long vega.

azo_20121214c

One could choose the calendar strategy but I only prefer these on weekly options so that I am able to roll the short strike.  My choice is the Bull Call Spread as this will get me long vega, reduce time decay,  and reduce cost over the naked option.  Looking at the past I am looking at a 15-20 bar hold (3-4 weeks) so the January chain would suit me fine with an extra week of time if my price objective of 380 is not met.  Trade idea is the Jan 360/380 Bull Call Spread for a debit of 6.75. The max risk id $675.00 and the max gain is 1325.00 if at or above 380.00 on expiration in January.

azo_20121214b

It’s Not the Size of the Tool That Matters

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Did you vote yet?  If not go here and vote for the next tabbed blogger(s) of iBankcoin.  The top 3 win the spot and exponential viewership.  I voted early this morning based on prior content and value.  Moving on now.

The first thing I look at when doing end-of-day homework is industry breadth.  I do this through The PPT, a premium content engine for those unfamiliar.  I then sort the industries via breadth from the top down to see what industries are popping to the top.  After the market closed I stuck to this routine and one industry that stood out was Small Tools & Accessories.  It ranked 8th of 196 industries with 75% breadth, meaning 75% of the stocks with the industry had a positive change from yesterday.

Also what sticks out and what The PPT also measures is technical score, fundamental score, and hybrid score (combination of tech & fund).  These are all sort-able.  Small Tools & Accessories ranks  3rd technically, 14th fundamentally, and 2nd via the hybrid score.  Needless to say it is a top performing industry and was also strong yesterday.  When looking at stocks within the industry, there are only four.  This a small group but still strong nonetheless and includes the following stocks (linked to FINVIZ):

Below are two of my favorite charts that include SNA and SSD.  At this point I would rather be a buyer on weakness than strength.

SNA

 

SSD

Submitting Orders the Old Way and Closing Trades in $AAPL $IBM

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Going into Friday I was long $IBM and long $AAPL both with option spreads in which I have time-lined in my blog.  In my Thursday post I stated that I would be absent Friday and on Friday I was able to check my phone intermittently when in transport from one hunting spot to another.  Around noon, while having some lunch, I saw that not much was going on with the $IBM position.  I decided that I would just close the position out realizing half the gains I had before I adjusted, but followed my adjustment plan.  Also I didn’t want to be assigned 100 shares of $IBM as the 195 Weekly Call were in-the-money, so this needed to be closed.

This is where the glitch occurred.  When I went to close the position through my thinkorswim phone app, it kept shutting down unexpectedly.  Of course the one time that I need to close it out this happens.  So I had to go the old route of calling your broker (always have a back up plan) and I will say it was quite flawless and easy.  He gave me the natural (bid) & mid price.  I told him to come 0.05c off the mid (quoting 2.18×2.30) and put my order there as I would expect an immediate fill given the liquidity of $IBM and penny increments of their options.  I was immediately filled.  Trade history is shown below, realizing +$15 on $211 of risk (+7.11% per 1-lot).

Today I went ahead and closed out my $AAPL Diagonal that I have been adjusting around since I put on for earnings.  My overall gains were not what they were but still gains that I was happy with.  This is another one that took a hit on Friday and saw my gains quickly become a losing position, but still holding technical level I was watching.  This morning it caught a gap up on news of their iPad sales with the launch of the mini.  Not liking the action on Friday and recent action altogether I decided that I wanted to exit this position ahead of elections & its ex-div date as I think action will be more of a mental drain than anything else.

I watched the first 30 minutes and where the Diagonal Spread was trading (mid price) on the high of that 30 minutes.  I then placed an order at that price (which was 23.50) to close the position thinking that the first 30 minute high would get taken out.  Well as $AAPL would have it, it kept to its recent M.O. and saw selling, going below the opening range.  I then adjusted my order down 0.10c as this should be filled if we tested those highs again.

We then saw buy support after it near filled the gap and then my position got filled near the end of the day on the late day push.  I was happy to see the fill and now could care less where $AAPL goes, even though I may miss out on better profits.  My mental capital is now preserved into the elections as I am flat positions.  My overall gain was +$213 on max risk $2920 (the initial Diagonal), +7.30% per 1-lot.  Trade history shown below:

I now have no positions and I am quite content with that.  I believe intraday volatility will pick up with elections and I more content without positions right than if I had some on.  I am still in the mindset of trading less and keeping the overall portfolio risk low.

Theta Burn and Position Update in $AAPL and $IBM

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It looks like everything will be in full-swing on a market level tomorrow Wednesday.  I have nothing new to say that you probably have not read as far as news of Hurricane Sandy or market stats when it has been unexpectedly closed 2 days in a row.  Here in PA near Gettysburg we have flooded areas (only affecting houses near rivers, not towns) but no big damage like that seen in the news.  I wish the best for those with damage.

I do know from an options position standpoint that those that have positive theta positions will benefit.  We have seen an additional 2 days of theta decay that was not built in.  As far as my current positions go in $AAPL and $IBM, they should benefit from this time decay as I was short the weekly options in both and long the November options that expire on November expiration.  In my post on Friday I detailed the positions in $AAPL and $IBM and I wanted to show the Risk Profiles in both to show how the option greeks changed, mainly theta.

In $AAPL on Friday my Risk Profile looked like that below:

Now as of Tuesday night the greeks and Risk Profile look this below:

The main component here is theta.  As you can see with the added days of market closure as of Tuesday night the theta (time decay) has changed from 23.57 per day to 62.47 per day.  In theory and price and all else being equal, I have went from gaining $23.57 per day to gaining $62.47 per day while doing nothing and the markets were closed.  You can also see by the blue highlighted area above the 1 Standard Deviation range into Fridays (11/2) expiration.  This is telling me I have a 68% probability of $AAPL being in that area, making the downside near a max gain.  Now with the recent news of the firings and other patent/iPad-mini reviews who knows where $AAPL will be, but from a probability standpoint that is the expectation.

As for $IBM, it also caught some news during the market closure in that it issued a $5 billion dollar buyback in stock.  This can be seen as favorable news for the stock which should be favorable for the position I have as it is bullish in direction.  As of my last post the Risk Profile is below:

In the last post I stated that this was a 1/2 position as I have no faith in the bullish action of this market but based on prior action and a technical indicator (for analysis click here) I thought that $IBM would see some upside, benefiting this options strategy.  But if we saw some downside my plan was to add another Call Calendar or roll the short strike.  As of Tuesday night you can see this Risk Profile below:

Again focusing on theta as this position benefits from “lost days” or time/theta decay you can see that it went from 30.68 to 50.76 in those unexpected 2 lost days, benefiting the position around $50.  Again this is with all else (price/greeks) being equal.

I am sure that the Risk Profiles will change on Wednesday’s open as there is a lot going on now in the market with end-of-month mutual fund scrambling and news affecting these two stocks specifically.  Either way it should make for an interesting day and these positions should make for a good study on option greeks, specifically theta.

Earnings Update in $AAPL and New $IBM Trade

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Previously I was long the $AAPL earnings trade as I put in my Twitter timeline.  Thankfully this played out after earnings as we are aware of their miss on EPS and downward forward guidance.  The price action from what I could understand is that it was  “baked” in to the recent selling as the volatility sellers looked like geniuses on Friday’s open.  $AAPL closed at 609.54 on Thursday and opened at 609.43 on Friday, so really no movement at all and predicted by just about no one as many expect a volatile move.

So going into the earnings reaction I posted in a blog this trade that was long the $AAPL Nov/Oct4 550/580 Call Diagonal spread, selling the Oct4 580 and buying the Nov 550 for a 29.20 debit or $2920.00.  The Risk Profile can be shown below:

After the earnings release I decided that I would like to roll the short option to the next month that would increase my profit from positive upside action from a $80 gain to a $280 gain at expiration 11/2 .  I then rolled the short call by buying back the Oct4 580 Weekly call and selling the Nov1 580 Weekly call for a 2.00 credit.  I could have received a better credit by $100 if I would have waited as $AAPL sold off shortly thereafter I rolled the short call, but hindsight is 20/20 and my downside expectations still held.  I have included the order entry as well as the new Risk Profile :

So you can see that the position is still positive and upon Thursday I plan on rolling the short call again to the next month on a dip (given that I am still in the trade).  I will be absent Friday (maybe some mobile trading) so my decision will be made Thursday.

On Friday I also entered into a $IBM 195 Call Calendar and the risk profile can be seen below:

My reason for this trade can be seen below on the chart.  I took into account it’s recent hit on earnings, stabilization, and a technical indicator that proved snap-backs prior occurrences (% above/below 10EMA) as shown in blue highlighted boxes:

So I entered into this position with a half position in case further downside occurred into which I would enter into another Call Calendar.  I want to iterate that this is not a volatility/income edge type play but more of a directional play.  $IBM is one of those stocks that does have a volatility index in itself and looking at the volatility chart you can see that we are in mid-range of recent volatility readings:

I believe that this is a trade that can see upside to $195 and this spread is more of a cost reduction type trade that benefits from time decay and upside action.  In the end I look to take around  25-30% overall profit on this trade.

Staying Light and Earnings Trades in $AAPL and $AMZN

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Last night I posted in how I have no plans to go either way with this market as there seems to be a lot of tug and war and direction is not clear.  Today my morning consisted of morning admin catch-up that I usually save for the weekend.  But the morning action was a recording of previous days of where we saw a gap up followed by selling.

Today I did see a nice opportunity in $CRM as it was selling off and placed an order  for the 140/130 Bull Call spread at the mid of 2.65 credit.  This was to take advantage of the expected volatility decrease on a rebound off the 200 SMA and 142.50 support level.  Well this was the bottom and I  never got the fill.

Then obviously we had the news stock of the day of $AAPL that was set to report earnings.  I had no desire to take on an earnings trade but the more I looked at the chart, the more I starting looking at options strategies coupled with the chart.  In the end I placed an order and was filled 2 minutes later on an $AAPL Nov/Oct4 550/580 Diagonal spread.  In this spread I sold Oct4 580 Weekly Calls (expiring tomorrow) and bought the Nov 550 Monthly Calls for a 29.20 debit.  Usually I do not risk this much in an earnings trade but when looking at the chart and what the Risk Profile showed me, I liked the trade.

In this trade I looked at 550 as the max move to the downside.  I thought this was a safe max move and anything further than that and I find it hard to believe that there wouldn’t be buyers.  If $AAPL saw a move to the upside then at a minimum I would have made $80.00.  If we did see an extreme move to the downside, then I had 2 more expirations to roll the short call to reduce loss/cost basis.

More on my downside thesis.  $AAPL is a stock like no other.  This thing is a growth stock with awesome fundamentals.  Into the close it was nearly 14% off the highs with a tape that is not healthy.  So my thoughts going in were that expectations are high but this stock is still putting up numbers to make any company envious and the fundamentals in regards to price to growth, margins, and returns on assets/equity/investments are impressive, also there is no debt and the cash hoard is almost stupid to believe.  Needless to say it is an awesome stock fundamentally that has seen “wanting to get in on selling” even before the earnings.  Also on a technical basis with it coming into the 200 SMA and support levels if we saw more downside, it is just hard to believe that buying would not ensue.  Below is the 4 year chart to show some of the 2008-2009 calamity and how $AAPL has performed since hitting the uptrending 200 SMA (purple line)

So with this I went in wanting to get in if we saw a drop while also taking in some weekly profits if we saw an upside move.  So the Nov/Oct4 550/580 Call Diagonal made sense to me.  It takes advantage of the 580 call volatility crush while the 550 Nov call would not be effected as much on a volatility basis.

The Risk Profile and chart can be seen below with notes:

Also during the day I bought the $AMZN Nov 205/210 Bull Call spread for a debit of 3.75.  The thesis was kind of the same minus the fundamental thoughts.  I liked the chart technically and looking at support levels this made sense with the thought going forward that if we saw selling, I had two more expirations to roll the short calls.  Also this would take advantage of any positive earnings reaction.

After the close both companies released earnings and the price action made volatility sellers look like absolute geniuses.  The price action was gratifying to watch in both as both sold off right away.  $AAPL crossed below that 200 SMA and never looked back.  The hindsight thought now that $AAPL returned to its close after some selling is that the selling since Sept options expiration is priced in.  $AMZN moved up to an important support level and is hanging right there.  Should be an interesting day tomorrow and as of right now the $ES_F is -11.25pts (-0.80%) from the close and the tomfoolery continues.

I Will Not Partake in Tomfoolery; Seeing Conflicting Market Signals

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As the title suggests I have no interest in partaking in this market here.  Right now I have many conflicting signals as far as the direction of the market.  Basically they all same the same thing in that we are oversold, a bounce is expected, but overall the market is not healthy and further downside can be expected.  Last night I posted about a short term technical indicator I watch that shows that a bounce can be expected; I still expect this.

I am truly conflicted here.  I do believe that a bounce is expected but selling into the bounce seems reasonable, notably the 1430 area in the $SPX.  On another note it is hard to ignore the QE stats and that there is usually some ludicrous action after QE announcement followed by a run a higher and that coupled with presidential election year seasonality suggests run into the years’ end.  Many of the macro indicators I watch suggest further downside and room for further downside, they include:

  • Bond:Stock Ratio w/a 65-SMA, this has recently crossed above suggesting downside action
  • US Dollar Heiken-Ashi chart with a 42-SMA, this inverse-market indicator confirmed upside market action on 8/7 and just confirmed downside action today
  • NASDAQ:SPX  ratio with moving averages, this suggested downside action on 10/2 and remains bearish
  • Premium service showing that a majority of the $OEX stocks are in downtrending patterns (measured on pure O-H-C action)
  • Distribution days as measured by Investors Business Daily

Now that the doom and gloom is out of the way there are some things that suggest a bounce is due.  One indicator is a premium service that suggests that we are highly oversold and a bounce is expected, another is the current McClellan Oscillator reading comparing to previous levels, and the $VIX.

As far as the McClellan Oscillator reading, looking at the chart below we can see that we are near levels that have historically recorded bounces.  Look at the highlighted boxes but one thing that is different rather than early on is that we are seeing lower lows instead of higher lows, something to take in consideration:

The other thing that I like to pay attention to is the $VIX and closes outside of the Bollinger Bands.  This essentially measures the volatility of the move on volatility.  I like to watch closes outside the upper and lower bands as extremes.  The chart below shows the $SPX on top and the $VIX below.  The $VIX arrows show closes outside of the Bollinger Bands.  The $SPX shows yellow lines in where the $VIX closed outside of the upper Bollinger Band, essentially an extreme $SPX move to the downside.  Note the $SPX price action after we see consecutive closes outside of the upper Bollinger Bands on the $VIX.  This is a favorite timing indicator and the best way that I use this is to wait for the $VIX to close back below the upper Bollinger Band rather front running an extreme.  As you can see, there are occurrences where volatility continues to “walk” the Bands:

So like I said I am not interested in partaking in the tomfoolery of the market here.  I highly believe in mental capital preservation and today I closed out my positions (previously stated in blog posts) in $AAPL and $GOOG and I am now flat.  This leaves me in a relaxed state of mind and allows me to work on watchlists and track the market without position bias.  If we see more downside action I will stay in cash but not look to short and if we see upside action I will look to see how the breakout stocks are acting (if sticking) and look to get in bullish positions.

I have learned through time that sometimes less is more and right now I am feeling that this thought needs to be put in to practice, at least for me.  Never forget that mental capital can be as precious as monetary capital.

Statistical Thoughts on Today and Trade Updates in $AAPL and $GOOG

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Today we saw a gap down of greater than 1% as measured by the $SPY.  In recent occurrences it tends to mark close to a low and a bounce ensues and as I write this the $ES_F is +5 pts.  On the daily 1 year chart below of the $SPY the yellow arrows mark days where the $SPY gapped down greater than 1% and the lines consisting of the 50 SMA (blue), 100 EMA (red), and 200 SMA (purple):

So what do I expect from here?  For some reason  I do not believe we saw the low and I think today’s low gets taken out.  Ideally we see a gap down and this flushes some out and in my opinion that would be the dip to add some or more to your longs.  Today was really a boring day as the bulk of the move occurred overnight and most of the $ES_F intraday action was in a 8 point range.  I do think that this created some panic based on a close over close basis but many are programmed to buy the dip.  This is why I think a gap down would create some frustration causing further panic and making those that bought or added today to cut their losses.

One thing I found interesting is that a short-term overbought/oversold indicator I watch on indices and stocks has triggered recently and this does not trigger often on the indices but has recently intraday.  This does a pretty good job and marking turning points and I watch this on an hourly chart.  Below you can see a 90-day hourly chart for the $SPY with yellow arrows marking the signals and a plot at the 141 level to show how critical it is to hold:

With this I expect some further downside, on a time-basis I am not sure but I expect the downside sooner rather than later followed by continued upside.  I have 2 positions on right now in $AAPL and $GOOG and I made adjustments to both.  In $AAPL I rolled down the call side but messed up the order as I wanted to roll the 660/670 calls to the 650/640 calls but instead rolled with an Iron Condor and I forgot to change it to all calls and instead closed out the calls and rolled to 650/640 puts but the risk profile remains the same; just not what I wanted and a mistake noted for my journal, the order entries can be found below as with the risk profile on a 1-contract basis:

The $GOOG trade had me watching the 680 level as we had an awesome day despite market weakness and I raised my closing stop to below 680. $GOOG saw mild basing throughout the day and in the end of the day I decided to go more neutral to the 670/6555 Weekly Bull Put Spread I had on and then entered into the 695/710 Bear Call Spread effectively making this a 655/670/695/710 Iron Condor max risk $990 :

Great Apparel Experience ($UA) and Apple Trade ($AAPL)

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Last week was a busy one for myself and not so much on a trading basis.  When it comes to mid-October the market tends to get active but my trading volume tends to diminish and not so much from a market thesis standpoint but from a “it’s hunting time” standpoint; for deer, rabbit, bear, and other small game.  This is my time to get in touch with the primitive side of humanity as well as walk in the steps of my ancestors and hunt some animals.  But I will say that technology has definitely made things easier from when our ancestors partook in the sport.

This is the first year that I have utilized Under Armour ($UA) gear and I must say that the stuff is awesome!  Early morning I sat and then did some drives for deer and I would sit in warmth, sweat in walk, and the sweat wicked away and my $UA shirt dried out quickly.  My former cotton shirts would have me switching out shirts or just have me freezing when I sat again.  I will say that I have no problem spending the money on good gear (and $UA fits that bill and others I have talked to agree as they are the ones that encouraged me to finally step away from the cotton (cotton still does have its uses though).

I would have a chance to check my phone  intermittently intraday and some quick after hours study to see how the market was doing and I must say last week was definitely full of action to make bulls and bears look foolish.  It basically ended flat to slightly up with 3 big up days to be wiped away by 2 down days most of it coming on Friday.  I went into the week flat as I knew I would be out-of-tune of what was going on.

Seeing the action during the week I knew that I wanted to get long some $AAPL as this stock was getting hit and it was hitting a short-term oversold indicator, and I was looking for the into earnings run that it typically see’s.  Also it was hanging into that critical 100EMA that I have previously written about and I saw this as a good chance to get in.  Knowing that I wouldn’t be able to monitor it much, I chose to use a credit spread via weekly options with the thought of getting out prior to earnings on 10/25.  So on Thursday 10/18 I entered (via mobile phone) into a 605/595 Bull Put spread for a 2.05 credit, risking $795.  A lighter portfolio allocation as I knew on Friday I would not be able to monitor the position for adjustment.  I was happy with the trade but then on Friday we saw the decline of -3.68% and Murphy was in full control.

Monday brought in a different scenario in that $AAPL saw a slight gap up and saw follow-through, basing, and then a late run into the day.  This brought some relief as my stop was close to getting hit which is 1.5x the credit received.  At the end of day I did enter into a Bear Call spread to slow down the trade in case we see some selling.  I entered into the Weeklys 660/670 Bear Call Spread for a 2.55 credit, risk being $745.  This created a Weekly Iron Condor in which I have a total risk of $540 with max gain of $460, but I will take off prior to earnings on Thursday after hours.

The reason why I entered into the 660/670  Bear Call spread into the close was to reduce the deltas to a more neutral position and I can see potential resistance in the 645-650 area by looking at intraday charts.  Below are my order entries for my current position along with the risk profile of my current trade on a one-lot basis:

Also today I entered into a $GOOG trade via the Weeklys 670/655 Bull Put spread for a 3.90 credit risking $610.  For this position I was and will watch the 670 level.  I see this as a good support level and I will exit the position on stop-loss basis with a close below 670.  This level broke after I put the position on but it saw a nice bounce from there and I expect it to stay above this level into week’s end, especially with the  outperformance by tech today.

Looking at Market Breadth in a Different Way

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Traders measure market breadth in a different ways some specific to the overall market or to individual indices, whether it be:

  • Advancers to Decliners
  • Up Volume to Down Volume
  • New 52 week highs
  • New 52 week lows
  • Number of stocks trading above “X” moving average
  • Intraday TICK or TRIN

One way I like to also measure breadth is by stocks trading above yesterday’s close AND that are trading above their open.  The key take away is that they are also trading above today’s open.  If a stock is trading above yesterday’s close it will show as positive for the day but if it is trading lower than the open due to a gap; then this is negative in my opinion.  This is caused by a gap up only to see sellers come in to the stock.

Today we saw a nice gap up in the indices only to see a close lower than the open in all of them and the SPX/RUT putting in positive days & DJI/COMP putting in negative days; a mixed bag.  I wanted to go back and look at the SPY to see how today measured to past experiences.  I used the SPY to mark the days as this provides accurate data for gaps (vs. indices) and used the performance of stocks in the Russell 1000 as this compromises the largest 1000 stocks based on market cap & approximately 92% of the market.  The measurement rules are provided below with data from thinkorswim:

  • Measured from the start of the rally on 6/4
  • SPY trading above the 50 simple moving average
  • SPY gapped up greater than 0.50%
  • SPY closed lower then the open

The results are on the chart below with notes:

So what is the takeaway from this (relative to SPY):

  • Next day typically puts in a doji-type candle
  • Next day close is flat or down, in order of signal number (+0.01%, -0.69%, -0.05%, -0.34%)
  • Today’s number of Positive Stocks (close > yesterday’s close AND close > open) was 2nd highest out of 5 occurrences

With this I can say that today did not seem too bad given historical occurrences.   It did make me wonder if this gap up would hold during the beginning of the day and we can see that it did not.  There seems to be many conflicting signals and when this happens I tend to stay light or go with more delta neutral positions when trading options.  In a whole there is no reason to be aggressive but on a positive note this still seems to be a market of stocks in that specific non-defensive stocks are still working.  Example, one stock that I am trading directionally via options is Visa (V) via a options calendar spread and I still have no reason to sell here even though I am looking to remove it tomorrow.  As noted on the stream, coal and metal stocks have acted well and when these specific industrial stocks are holding then it shows me it is still a tradeable market.

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