Understanding Options 101

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I bought 10 Feb weekly 30 Straddles for $3.50. I bought 10 Feb 30 Calls for $2.25 and 10 Feb 30 Puts for $1.25.  So my breakeven on this trade is $26.50 or $33.50.  So if the stock sells off under $26.50 I will be profitable, but I can either buy stock against my position to lock in the Feb 30 Puts that will expire into short stock after today or I could sell the Puts out.  Since options close at 3PM and stock trades until 7PM CST I bought stock against my spread.  So, last night I bought 30% of my stock back, or 300 shares at $26.50.  As the learning process is, when I buy Puts and buy Stock I create a Call.  So, I converted 3 on my Feb 30 Puts to Calls by buying stock.  So, going into today I am long 13 Feb 30 Calls and long 7 Puts.  Today, APKT was off to the races and I sold stock against my Calls on the averaged price of $32.  So, lets look at a breakdown on expiration:

Bought 10 Feb 30 Calls for $2.25, Selling Stock at $32 is the same as selling the Calls at $2 after expiration, so $.25 loser 10 times= Loss of $250

Bought 10 Feb 30 Puts for $1.25, these will expire worthless= Loss of $1250

Bought 300 shares of Stock at $26.50 and sold it at $32= +$1650

This trade ended up as a $100 winner for a 10 lot, by “scalping” stock in afterhours made this trade from a loser to a winner.  Hope this helps for Options 101 

Morning Rage 2.3.2012

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 Chart of the Day – Gold Here is an excerpt of the The “A Game” Market Intelligence Report which came out Sunday evening: I initially wrote about the high probability bounce, within 3 points, in gold to end a precipitous fall here:  http://northingtontrading.com/2011/12/30/gold%E2%80%99s-connecting-flight-it-just-landed/ Since then, Gold has rallied over 10% and has now reached a significant multi time framed level of resistance. Significant volume is also confirming large players are acting in concert at this level. This will be an important level to watch. The take-aways are:•The trend outlook is mixed and choppy•Multi time framed resistance is being tested oThis will be very bullish and serve as support if broken.•Trend compensated momentum is neither extremely overbought nor oversold•If this MTF level holds, you could see significant more downsideoFirst down to 1600 which is volatility-based support (daily), then down to 1500 which is transactional and volatility based support (weekly). This is interesting because it would have direct effects on many other markets, including ours, just as in the case of the USD scenario aboveTo find out more about The A Game Trading Letter click here http://metaswing.com/site/a-game-trade-letter/


Cam at the Close 2.2.12

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Orange_Black_ChartIt was a very choppy day in the markets today with no clear direction. Gold and Silver continue to show signs of strength. GLD closed up another 0.87% to $171.05 while its crazy cousin silver closed up 2% to $33.41. It appears as though Natural Gas (UNG) has made a short-term bottom around $5.00. UNG closed up 7.32% to $5.42. It carried many names up with it. Alpha Natural Resources (ANR) broke its 20-dma and closed up over 7% to $21.66. The most explosive natural gas play today was GMX Resources (GMXR). The stock gapped up 10% to $1.10 in the morning and then EXPLODED 50% higher to $1.54 by the end of the close. The stock traded 13 million shares, which is 13-15x normal volume.  Watch this name closely for tomorrow; there could be a continuation. Over the last two days, the SPY has failed to rally into the close. This is a shift from the normal behavior that we have seen so far in 2012.

Earnings Trade of the Day (WYNN) 2.2.2012

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Reason I like this Trade: WYNN is a stock that has not moved that much on earnings within the past couple of quarters.  As I talked about on Bloomberg during my Interview, it is a sloppy chart and it will not break through the 100 Day Moving Average at $120, I wanted to make a play that it will not have much movement, so I am making an even money bet that this stock will not move the implied 5% move.  If you have any questions please email me at [email protected].

UPDATE 2.6.2012 On Friday this trade expired and WYNN closed right at $115 even.  I decided to buy the Feb 115 Puts I was short for $.10, so I did not have to determine if I was going to be assigned on those Puts over the weekend or not.  When I am short an option and it expires right at the strike, it is a guessing game to know if I get “assigned” on the option over the weekend.  If I am LONG the option and it closes at the strike, I determine if I want to exercise the option or not.  So, I turned $.10 into $2.45 and the trade is over.  Time to move on to the next trade.  

Cam at the Close 2.1.12

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The market was very strong intraday, but then sold off at the end of the close. In the last hour of trading the DOW sold off 50 points. I am starting to see some signs of exhaustion in the banking sector. Take Goldman Sachs (GS) for example. Stock has been very strong since breaking from its descending trend line on January 10th. Once it cleared its 100-dma it looked like a straight shot to the 200-dma at 116. This is exactly what happened today, except it failed to close above the 200-dma. This failure clearly shows that there is intense selling pressure in the $115.50-$116 area. The Directional Movement Index is also near extremes as you can see below. I also still strongly believe Sears Holding Corporation is a great short here. It failed to get above resistance at $43.50 after breaking through this area yesterday. The problem with SHLD is that finding shares to short is extremely difficult. I believe the majority of traders who were heavily short this stock have covered when the stock went from $30-$50 in seven trading days. SHLD could very well make new lows. Technically some would argue that SHLD is developing into a bull flag, but I feel the fundamental issues of SHLD outweigh technical in this specific case.

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 The gap between the (DI + and DI –) has not been this high since March 10, 2010 When the Reading was DI + (41) and DI – (9) which = a spread of 32. At this time Goldman was trading in the $170-$180 range. In the two months after this extreme reading was read Goldman fell 40 points and ended up in the $130-$140 range. Currently the spread of (DI + and DI -) is 30. The failure of the 200-dma could be the first sign that Goldman is about to switch directions and head to the downside.