Wednesday, January 18, 2012

Summary of MasterCard trade

if you were following along with the charts ive been posting on MA then this should be familiar. have been watching while stock was above 370 for a pullback to the 50day /support area at 360ish.. entered the 335/340 credit put spread on 4jan for .75 credit. again, i look for entry points that are a higher probability of profit vs just taking a shot whenever.. higher probability does not mean guarenteed, does not mean picking the bottom, etc., so i was patient and entered in the area i was watching. next part of strategy is to select the short strikes that have a worthwhile premium and IDEALLY are positioned below some other technical support indicator such as another moving average, a trendline, or another lower support line. for this trade there was some support near 343area. so the short strike was to be the 340 level. as we all know, support is not a concrete wall, sometimes bounces off to the penny, sometimes crosses by a few percent, sometimes goes sideways for a while, sometimes goes right thru. point is to have some logical reason for why you are picking that short strike level.. so for me picking a strike right under a support level makes more sense then just a random level because the premium is good.. i let the chart pick the strikes, not the premium available.
   next thing to consider is i want there to be enough time left before opex for the stock to recover if it moves against me after entry since i have to assume that i did not pick the bottom. there are trades where you put on the spread and the stock takes off, the same day or same week and you can take profits quickly but i will assume that is not the case all the time. so after entering, the stock dropped another 20points in next week. by having enough time, i was able to hold and let time decay kick in, volitility come down a bit once it started moving sideways, and finally on todays up +7 day was able to close the spread at .25
   this is also an example of why i do not use stops.. first you can always roll the spread to the next month or sell some call spreads to make it an iron condor.. but in this case after entry and the 20 point drop it would have looked like a huge loser after 2-3 days where many would have taken the loss and moved on fearing greater loss at opex.. although that can happen and has happened.. my stats/history show that i made huge amounts by holding to near opex vs selling for a loss after a few days.
    this is a quick summary of how i approach these trades. you may not have the same patience, you may have different hedges, or you may simply not have the desire to wait for a recovery, but ive made more money by not doing anything than by trading just to trade.. you have to be comfortable with your system. i am confortable with this method.

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