When stop-loss screws you

The markets were open again today after closing for what many called the storm of the century. There were some big moves both up and down in fast trading, continuing the wacky price action we've been having since early October. Double-digit moves and price gaps were seen for Generac, Impax Labs and others.

I mentioned buying into two positions on Friday just before trading ended and they've now been closed out (automatically) making them some of the worst trades I've ever made. Not worst in that the monetary loss was great, just particularly demoralizing.

Here's what happened - both Allot Communications (ALLT) and U.S. Airways (LCC) opened down this morning, just over two percent, triggering my trailing stops and selling my positions. However, by the end of the day both stocks were up over two percent.

What makes the trade so bad is that I was right, and I still lost money. Ouch. If I had been less conservative on my stop loss I would have made about $150 today, instead I lost close to $200 on the pair. However, I did come up with a better strategy for the near-term, one which has already put some money back in my pocket.

I purchased 100 shares of Cirrus Logic Inc. (CRUS) at 39.78 and sold a Nov. 12 - $42 call for a net credit of $190 after fees. Right now, the options markets are put heavy, so the calls are trading lower than the puts at the same strike. On some stocks, OTM calls have gone down so far they are a small fraction of their respective puts. CRUS, on the hand, has been doing well relative to the rest of the market and consequently, encourages more demand for its OTM calls.

Say CRUS goes up to over the $42 strike and I'm assigned in November. Then I'll make (42-39.78) x 100 + 2 x 100 - (15.98 + 9.95 in fees) = $396.7 or just a hair under 10 percent for less than a month of risk.

If the call expires worthless, then I'll reevaluate the situation and either sell the stock or sell another OTM call on it. If confidence in the stock starts to deteriorate, then I might instead sell an ITM call at $40 for December, just above my entry point. It's great to have options... pun intended.

Selling a call usually indicates a bearish or neutral outlook, but with the OTM call, the strike price is higher than my entry price, so I'm really using it as a moderately bullish strategy. One of the benefits of this approach is the premium I make from selling the option offsets some of the downside potential. (This is not a hedge however and should not be confused with one. With a hedge, movement in the opposite direction as expected will eventually become profitable or fix losses at a maximum.)

I decided picking the stand-outs would be a better decision that shorting a tech company and risking a quick turn-around to the corrections or some unanticipated spike. I considered shorting Amazon (AMZN), but I would hate for the markets to turn optimistic after the election results. As a leader, AMZN would likely enjoy some upward moment from any such optimism.

Still saving some buying power to see what happens over the next couple weeks. We're looking for signals for how long this correction will last, and I wouldn't be surprised if they coincided with election week.

Friday, we'll recap the week and look at charts of our present holdings and the indices. Until then, farewell.

Hurricane Sandy closes markets

For the first time since the blizzard of 1888, the stock markets will remain closed for two normal business days in row. No subway either. I admit I'm not exactly sure what effect this might have on the rest of the week. Will there be higher volume due to built up demand or will everyone be unsure and sit it out until Monday? They both seem plausible to me. Not to mention the election is right around the corner.

My margin cleared Friday, so I decided to take on two long positions. I purchased 100 shares each of Allot Communications (ALLT) and U.S. Airways (LCC). I chose ALLT due to a 4.7 percent drop Friday, putting it outside it's Bollinger bands. Every time it incurred such a steep drop in the past two months it has either had a big up day the next day, or moderate improvements the next two days. I plan to swing trade any bounce it has and get out before it has a chance to sink lower.

LCC has had a lot of visibility lately with talk of merger and it has been enjoying an underlying uptrend despite the overall market correction. Often, when a stock has upward momentum in spite of a correction, it can break out once that downward market pressure subsides. I see this position doing one of two things. Being closed to make room for more short positions, should next week renew the slide, or sticking around until mid-December.

Overall, I'd say I'm -1 the market right now, though I haven't taken on any short positions to match that outlook. It has been volatile and mixed lately, making it hard for me to decide out long this correction will last. However, if next week there are signs it will continue, look for me short stock, probably in the technology sector.

Later in the week we'll look at some charts and see where things are going.

Sitting out the rest of the week

I was in the process of moving to a more options-friendly platform than my current brokerage, but was disappointed to find out today that they aren't willing to clear me for spreads. Without that ability the comparative advantage of trading in options is greatly reduced, and it wouldn't be much of an upgrade from my current broker, so I guess I'm stuck for a while.

I had some other business to take care of today, but I did make some time to look at the markets. I considered taking on a short term position to try and swing trade a bounce, but it's a bit late for that move. There were plenty of opportunities earlier in the week for both long and short positions, but I was tied up trying change brokers.

Apple Inc. will release their quarterly earnings report tomorrow and it had a down day today (also their daily highs and lows have been narrowing since their big drop Monday), so there is a good chance it will pop if the news is favorable. However, the underlying forces are bearish, so any run will likely fade and maybe even give back some before the end of the day.

If I made a trade today and wanted to pull out tomorrow I would be stuck holding the bag due to the free ride restrictions. My account should be cleared for margin tomorrow or Monday, though, and once it does I will have more ability to take advantage of volatile markets like the one were having. There's just nothing out there right now I'd be confident about enough to commit to holding for more than three days, especially over the weekend.

The course is set, ready, GO!

The goal of this blog is to provide a chart-reader's perspective on current market trends, and map the progress of an actual brokerage account, started with $3,500 and a 10-year goal of $100,000. That's an average of 40 percent a year (I've already done the math so don't bother telling me how crazy I am). It won't be easy, but it's certainly achievable.

I've been studying and trading for almost a year now and I've made some mistakes (some really amateur mistakes at the beginning), but I've learned from them. And I still have more to make, maybe even some big ones. No one can win on every trade, but I've got a plan and I'm determined to continue until I succeed.

Why I decided to do this

There are a lot of analysts out there. Whole companies of them. They sit at their desks and make predictions, talk about "fair value" estimates, and create 12-month price points. That's their job – to have an opinion and some reasons for it. Their reasons are predominately based on observations about a company's fundamentals.

While good fundamentals are typically the result of profitable business operations, you don't have to trade for very long to see a profitable and growing company's stock price take big fall, or likewise, see a struggling company's stock price surge on some bit of optimism.

When it comes right down to it, anything is only worth what someone is willing to pay for it. After all, around 60% of what a stock does can be attributed to market forces. Don't get me wrong, most analysts understand how the markets work and their reports can be a big time-saver when you're looking for earnings summaries or sector rankings. However, the predictions analysts make are only important to the extent that those with buying power listen to and believe them.

I didn't hear anyone out there predicting that Melanox Tech. Ltd. (MLNX) was going to jump almost 50 percent when it opened on July 19, earlier this year. Everyone who cared knew the quarterly earnings were due and expected them to be up around 120 percent, but companies have earnings surprises all the time and some don't seem to respond at all. On July 18, I was looking to long some stock and had narrowed it down to Chico's FAS (CHS) and MLNX.

I ended up going for CHS due to a classic cup and handle pattern followed by a breakout in high volume. I ended up taking just over 20 percent in profits on that trade after holding it for about a month, but that didn't seem as sweet knowing I could have doubled up in a matter of days.

Even if someone had said MLNX was due for a run, it's hard to feel confident about predictions of people who may or may not have any skin in the game. And why didn't I anticipate it? I thought – wow, it would be really helpful if someone just said: “Here's exactly how I'm putting my buying power to use, and here's why.” Sure, there's plenty of information out there about how to create options spreads, using stop-loss orders, timing reversals, etc., but I've looked around the internet and couldn't find anyone who publishes their process.

Here's what it boils down to

Finding the way to success in the stock market would easier with a map. Before aircraft and satellites, the best way to make a map was to choose a course an chart it. Explorers who followed could venture forth with some idea of what to expect, knowing someone went before them and returned whole and often richer. That's exactly what I intend to do.

I won't be giving advice. I wont be making long term predictions, and this blog should not be confused with professional counsel. Everyone should make responsible and well-researched decisions for themselves regarding their own investments.

What I will do is publish all the relevant information about my trades, as well as what I'm looking at and why, the hedges I implement and the actual math behind them, current trends and, of course, charts! My hope is that by showing how I've succeed (and where I've messed up), someone out there can learn by my example.