Planning the Trade, Trading the Plan
Friday, February 29, 2008 at 08:32AM I had a suggestion to walk through a recent trade from start to finish. While this trade hasn't been fully closed out, it might be by days end. I will go through the process of why I chose to take the trade, which option I selected, and how I sold off a portion of my position as it reached my target price, and sold off more into strength. Keep in mind, this walk through will pretty much summarize how I handle every option trade I take. Take notes.
I am going to use CNQ as the example. Here is a chart as of this morning...
I highlighted this as a double bottom formation via my watchlist, and as with all the price patterns I trade, I waited for a confirmation of this pattern (a break above $67) which came on Feb 20th. I waited towards the close of the trading session and picked up a load of March 70 calls. Based on the price target, which was calculated by measuring the distance of the pattern ($66 - $60 = $6) one of my exit points was predetermined for $73 (green line). Had prices closed back below $66-67, I would have closed out the trade.
I chose March options because my time frames have been reduced, and based on my analysis the pattern would only take a few weeks at most to confirm. I chose the 70 strike because I was expecting a fairly volatile move in a quick amount of time. Therefore, I wanted to maximize my profits despite taking on a lower probability trade. I usually buy OTM options on the stocks I select because I pick stocks that tend to move a lot and move quickly, and I am able to manage my losses well. That is the key.
So I took down the position at a price of $2.50. My position size was calculated by using the entire premium as my risk capital (no stop). I didn't intend to loose the whole premium, since I had a defined exit planned based on old resistance ($66- red line). Even though I planned for the worst, I knew I would end up taking a much smaller loss based on my exit plan. This is a good example of preventing big losses. The right position size can dampen a loss.
Not too long after buying the calls, the stock rallied up to my target price (green line). A target price is a great place to take profits. Whether you decide to take off the full position or only a portion is up to the trader. I have encouraged people to take profits due to the market volatility, but ultimately the trade itself should help you decide.
The 26th was the day that my target had been reached. At this point, the stock still looked strong and I decided to sell off only a portion of my position. Since I was taking profits, I sold a chunk of the position a little more than an hour after the open for $4.20, and was decided to let the rest run. When you are taking profits, you don't necessarily need to wait until the close of business. Take them when you want.
As you look at the chart, you can see that there was some resistance overhead and not too far away (blue line). It seemed like the next logical price target. This was the next objective that I had in mind, and it was reached yesterday. The stock was poised to gap open so I sold another lot at the open for $6.00. As you can see, I sold into strength.
Since the stock has greatly exceeded my price target, and I am down to less than half of my position. Since the stock broke above resistance yesterday, I am decided on holding the rest as long as it sustains $76 (which doesn't look too good). The option is currently priced at $5.60, while the stock is down nearly 4% today. Since I am now waiting to close the position entirely, I am waiting until the close to see where prices move.
This wasn't the greatest trade I have ever had, but so far I averaged over a 120% return. Not bad for less than 2 weeks. The reason I picked this is because it was a recent trade and it was something I might close out today.
A great example of planning the trade and trading the plan.
Reader Comments (289)
FIRST TO COMMENT WOW
Awesome post Jeff!!! What sets you apart from the others and why we are here! Thanks!
On a DE note:
DE is holding and showing strength in this huge sell-off today. The charts show this. It is at a bottom for this short term swing point low. Of course like all that we do or say - history will prove the actual truth... ;) I have a rather tight stop in place and will bail very quick should it actually break-down!
Thanks Jeff,
Added some clarity to me.
Is window dressing more of a quarterly or monthly affair?
Berkshire
You even made it useful Jeremiah.
Berkshire
Jeff:
Fantastic example. Thanks for the real-time instruction. Your teaching has done wonders for my trading results.
Thanks that was very helpful. Now what does it take to get Arty's insider status ;-)
Great teaching example - more of these (successes and failures) will be very helpful!!
Thanks and have a great week end!!!
PS Crystal ball for the weekend?
Tom in SC
Thank you Jeff for the look inside
I only had a chance to skim it (gotta get to work soon!), but I know this is one to go down into the infamous archives. Seriously, bookmark that one.
On another note, Jeff, over the last several weeks I've noticed how you've been putting more emphasis on teaching strategies and methods. I want to let you know that it has helped me sooooo much. I was able to pick-off little chunks and pieces here and there before, but it's much easier, and there's a lot less guesswork now. Your efforts are definitely appreciated!
Damn if you got into ILMN at 72 nice move. It bounced very quickly back up to 73.5, i got in a 72.5.
Jeff,
Thanks for letting us see a trade from start to almost finish. It is amazing how you can do this over and over. I would be happy if I could just do it over!
Still learning...
Thanks to everyone else for your continued banter, that also helps me in my thought process.
Cameron,
Have you missed all of the capital 2 to 4 letter tickers I have mentioned (today even I spit out a list).
As much as you all saw the indices "breaking" north, I noticed them merely testing the rally high. But it was fun to see the bullish optimism ramped (everyone is finally bullish when??? at the top my friends) up here lately.
I suppose I would be a little hesitant if all of you were bearish.
Glad to be on the short side.
(P.S. in supermarket's I go to the line no one else is in also)
Berkshire
Jeff,
Thanks for the great post, and for the great community.
-MrVikes
Berkshire,
Yeah, I got so excited my mind went blank!
Jeff,
Great post! I learn the most from exactly this type of exercise. Thank you so much.
If you are ever having trouble coming up with ideas of what to write about, a repeat of this with another stock would be great.
Has anyone checked the poll also?
To me it is funny that the majority of traders who answered would rather buy groceries than tech or bank stocks.
That should say something people.
Berkshire
We'd rather buy groceries than the NQ or S&P.
I guess it's all DOW from here on out eh?
Berkshire
Krystal:
I noticed your familar name earlier and always associate it with your fond support of WFMI (goodtaste). I too am a "Hoosier" and reside on the Eagle Creek Reservoir. Welcome back as you have always brought good trading energy to the blog.
Jim
A guess some buy "Self-Licking Ice cream Cones" as well... :)
Jeff, Thanks !!!! It REAALY helps to see what you "the master" (a little ass kissing is OK, right ?)
have done on a real trade. I'm sure everyone would love to see you do this every week or two. Show us something that didn't work out as well that you got out of.
Anyone else see a potential intraday bear flag on the QQQQ?
NOOB,
ABSOLUTELY.
Capitalize on it man.
Berkshire
In fact,
I see huge intraday flags on all the indexes. Wonder if things will get worse today??
Berkshire
Trader JH thanks for that WYNN just took that a few minutes ago
betred
Apparently there isn't ANY fear as TOS has my VIX @ 2.53 right now. Ain't skeered.
It's been doing that all day, but it is funny to watch.
It certainly spooked me the first time.
Berkshire
Berkshire,
Quarterly for sure.
How are you setting up for next week? You don't think the market is going to continue heading lower, do you?
Jeff, the consumate coach,
Thanks, just the kind of thing I need here, along with reviewing your price patterns stuff,
I'm in my bean bag chair, eating cheetos and learning.
Have a T RIFFIC WEEK END.
Certainly do Jeff,
Basically, I have taken this rally to pick up any names that have not made higher highs.
Consequently, by buy list has become HUGE.
I still need to see DOW below 12200 before I completely come out of my cave, but looking good so far, no?
I totally respect your opinion, but I think this may surprise even you.
Berkshire
P.S. Thanks for calling my attention the XHB.
Jeff, I found that post very helpful. Thank you.
Check this out...
http://online.investools.com/public/events/home.iedu
http://online.investools.com/public/events/sessions.iedu
Excellent post Jeff.
Maybe sometime you could do the reverse on a trade that you were in that did not work?
Sarah
Great suggestion,
Berk,
Suprised? That you are bearish? Nah. Most people I read or listen to are bearish. In fact, I am bearish...I just don't think the market goes all that much lower. I might be wrong, and that is why I started looking for stocks to short before the open yesterday.
I'm never willing to bank on an opinion.
PS- XHB... are you long or short?
FCN had good earnings and is holding up
betred
Sarah,
Take your pick...GILD, WNR or HOLX?
Jeff,
thanks.
ALO looks really good here as an E/E for myself.. A little early obviously, but forming a nice hammer at horizonal support for those that like that sort of thing.
Step
Jeff-
Brilliant post. Thanks for letting us into your trading room. This one example explains volumes! I can't get enough. Keep it up.
Hi Jeff
Would you mind explaining what you do when you have a stock that is holding resistance, but it is up on big volume when the market is down big? The example I have is SOHU. I had it breaking a triangle on 2/25 and yesterday it tested the apex around $75. I dumped it for a small loss because it showed such strength on a day that showed such weakness. Thanks man.
Step
Jeff,
Thank you, I must be listening because on the CNQ trade I did almost exactly what you did with the exception of closing out the remainder of my positions on the big up move.
Tierra del feugo,
Cheers,
Arty
Jeff,
Thanks for the look inside. This type of example clearly shows me where and how I can improve.
Denver
Anyone else still long CLF?
Sue G
Jeff:
great post thanks. Can you just tell me or us how do you search for stocks to trade? I know all the rules, double bottoms etc but I find it hard to search for candidates. There are many screeners, gazzillions of indicators to use on them but are they usefull? Can you tell little about how you come with weekly candidates to go long or short on? You have any scanner or do you check them by hand etc.
Thanks for help and thanks for this very educational blog.
wish you good luck
regards
Tomaz
Jeff,
Would taking the 70's on Feb 20th been ATM? (Not trying to be too technical, just would love clarification).
Based on things I have learned from you over the past 2 years, I thought you do not buy ATM?
ATM is technically the strike that is closest to the stocks price, Correct??
Please advise on this, would love your thoughts. Maybe you do buy ATM at times (because sometimes it seems to make the most sense)
Thanks for everything.
Ladd
Jeff,
Picked up XHB PUTS. Looking good so far.
What you called a double bottom is, in Elliott terms, simply an expanded flat correction. Starting from the 11/27 low we have a move up composed of 2 upward and 1 downward move (3), then we have 2 downward moves and 1 upward rally since the 12/11 high (3). Finally from the 1/9 low we have 3 advancing moves and 2 declining moves (5). This pattern is quite tricky since it puts in a new price low, but is only still corrective at that point.
Those are my thoughts.
Either way, thanks for the trade.
As far as banking on an opinion...being a younger trader, I am having trouble with this. Though the lessons certianly prove their point.
Again, thanks for ALL you have done. You are a stellar teacher.
Thanks.
Berkshire
Berk,
Of those you posted... I felt I either couldn't trade them, I didn't know how/where to set my line in the sand, or thought they'd moved too far:
TEX : How are you bearish on this?
CNH: It's made quite a move from the E/E already. (risk 4 to make 6)
MICC : What makes you bearish on this?
MER (and other financials): where's your s/r line? I'd probably use 51.75 as the line in the sand (roughly the top of the gap). ROI actually looks decent here if you count the gap, terrible if you use the bounce off the the recent high.
Obviously there's a gap in my understanding that's keeping me out of a lot of trades. It seems like many of these entry points are far enough away from the E/E that the risk becomes high enough to not justify the reward. Thoughts???
Your feedback is much appreciated.
~Cam
Jeff & Berk,
Jeff, that was one of the best explainations of taking a trade I have read yet. Thanks
Berk, the Transports did roll over today. Let's see where they close. I have been using this index as an indicator for directional trdaes for the last few mos. (Working well) I don't see it changing now. It has been leading the market, even when the S&P and DOW went on to retest their highs in Oct 07' it did not follow. Dow Theorist were all over it.
DO appears to be at a good EE and holding steady on a down day. Anybody in or have negative info.?
Tom in SC
NOOB,
Hope you jumped on that bear flag.
Berkshire
If I have to pick, I'll take HOLX. But I'm thinking about a trade where its more difficult in deciding that the trade did not work.Where it breaks your line but not in a distinctive way. WNR and GILD are clear breaks. I can't really think of one since you're so accurate.