I don't want new Members to get the wrong idea…
We don't day trade a lot at PSW, EXCEPT during option expiration weeks so call it 12 times a year we turn into day-traders as the front-month premiums get low enough to make the trades interesting. The rest of the time, my usual motto is "I'm not a day trader but I'm certainly not adverse to taking profits in a day." Our goal with any option trade is to make a 20% profit and we put up at least 20 trade ideas almost every week so that's over 1,000 opportunities a year to make 20% – that means when we do make it – getting back to cash and moving on is a wise strategy as there will certainly be something else to trade tomorrow.
During expiration weeks, we have a unique (if 12 times a year is considered unique) opportunity to gain tremendous leverage on trades that have good risk/reward ratios to hopefully give us a series of small, quick wins so our focus shifts away from the longer trades (and we are often waiting out the week before rolling our longer positions anyway) to zone in on these wonderful opportunities.
This is covered under our Strategy Section so I won't rehash it here but I thought I'd use my new chart tools to try to illustrate what we're doing by going over a few of today's trades. As we do discuss in the strategy section, allocation of assets is key and no single trade should ever be more than 5% of your virtual portfolio and day trades should be more like 2% so, in a $100K virtual portfolio, these quick trades should be opened in blocks of $1,000 or $2,000 entries. Ideally, we want to be comfortable doubling down if the trade goes against us right off the bat (and we still believe in it).
Our first trade of the morning was a short on USO. At 9:42 I made a comment to Members: "Jan USO puts have little premium left (the $41 puts are $1.06 – .19 premium) and can be played as a mo trade but I’m in the Feb $39 puts, now $1.01, patiently waiting to make .50."
The January trade was, of course, the riskier trade but these plays aren't taken in a vacuum. We had been discussing oil as overpriced for days and we were watching the global market, the oil futures and the news out of China and I had mentioned in the morning post that CFTC data showed that oil speculation is at record bullish levels so don't confuse our brand of day trading with random picks – these are trades based on taking advantage of fundamental stories that we see shaping up for the entire month and the ones we trade on expiration week are the ones we feel have the best chance of success.
We had entered this trade on Monday at .85 so this was the second call on the same stock. We love to short USO off silly spikes in oil and we got a good one to open the week and the Feb puts give us time to wait patiently for a pullback although up 50% in 2 days is hardly what I would call waiting…
Our second play came at 9:53 when I said to Members: "I’m still liking the Qs as an upside play. Tech doesn’t have AAs problems and the $45 calls are still the way to go at $1.03 with a stop at $1 or if they don’t break $46 on this run." Those calls topped out at $1.15 at around 11 and finished the day at $1 – not very exciting but you can see on the QQQQ chart that we had a nice, clear signal to exit – one of the most essential elements of good day trading!
At 9:42 I had reminded Pharmboy and our other DIA players to take the money and run on our DIA longs from Monday as the Dow peaked out, as you can see from the chart below, that was great timing but there's no trick to it other than not being greedy. The DIA calls were up over 40% from our afternoon entry and we were testing the upside of the range so there was no sense risking the huge profits. I had already warned in my 9:39 Alert to Members that: "We’re getting mixed signals in a low-volume reversal back up at the moment (probably won’t last)."
Just like my 9:39 Alert, at 10:13 my comment to Members went the other way and I said: "10:10 volume is pretty strong 43M on the Dow and we’re right on the line at 10,650 so watch out for a rejection here." That led to my 10:19 Trade Idea, where I said: "DIA/Pharm – at this point, I like a reload on the $106 puts at .56, out if Dow break 10,650 is easy stop." We talked about that trade for the next 3 hours, watching it closely but at 1:32 I called the end of it saying: "Done with DIA puts at .80 – maybe reload later."
We made another stab at the DIA $105 puts at .35 but they stopped out for a quick, .03 loss as my 2:17 comment was: "Back in those DIA $105 puts at .35, happy with a nickel and out at 10,600." At 2:30, with the put side already not working I flipped positions (I'm not stubborn) and put up the following Trade Idea: "DIA – Above 10,600. as a bullish play, I like selling the naked Jan $107 puts, now $1.40 so about $1.35 as they have .25 in premium, which is a nice cushion but also a .77 delta so you get a lot of bang for your buck – 10,600 MUST be your stop line for plays in either direction!"
Whenever possible, we like to sell premium rather than buy it and, as I said in the Trade Idea, the $107 puts had a .25 premium so that was our "buffer" on the trade as we know for an absolute fact that that .25 will go away by Friday's close. On these plays, as we get near the close, we're really just looking to make a quick dime or even a nickel on the smaller positions. It may not seem like much but, make a nickel 20 times and that's $1 and if those nickels and dimes are 10% of your entries, then every 10 wins is a 100% gain – nothing wrong with that on these quick trades!
Unfortunately, everything went so well today that we didn't get a chance to scale or roll or double down to save any positions. Oh well, maybe next time…
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Joining as a PSW Report Member will also lock you into our current Membership pricing ahead of our March price increase (current members will not be affected but we are getting full once again and need to curb new entries) that will affect all categories of Membership and, once you are a Member, there are many ways to earn discounts on continuing Membership and even ways to make money by referring others to PSW - one of the many ways we help our Members fight the recession.