Yesterday I said I would think about a few option trades, and after careful deliberation over the list I decided to place two orders. The first was 3 AMR Nov 20 2010 $6.00 calls and the second was 3 BAC Nov 20 2010 $14.00 calls. Long-story-short, only the first one was executed. AMR decided to gap up on the open and then pull back to the highs of the previous day. The close on AMR was higher than the previous day despite pulling back from the open. As a precaution, I have my GTC stop in place at a 25% loss and will wait to see how tomorrow fares for my position.
Although I believe AMR is prepared to have a short term bullish move, I am also perceiving the possibility of a bearish move in QQQQ. Because of this prognostication, I am going to also place another order for Thursday. This order will be for 2 QQQQ Nov 20 2010 $49.00 puts at a limit of $1.58 contingent on QQQQ dropping below $48.83. That is my opinion, you can take it or leave it. Disclaimer: See bottom of page. http://investorsopinion.blogspot.com
AMR - AMR Corp.
BAC - Bank of America Corp.
GTC - good til cancelled
QQQQ - Powershares QQQ Trust ETF
Showing posts with label contingency price. Show all posts
Showing posts with label contingency price. Show all posts
Wednesday, October 6, 2010
Saturday, September 26, 2009
My Next Option Pick
After I made my last post, I looked over my watch list to see if anything had a large percentage move. Low and behold, JBL dropped over 5% Friday. I then did a little technical analysis and this is what I have found.
JBL has had a very good run for the past month. However, in the past few days it has developed more than one indicator that the tide should turn. First, Friday it broke and stayed below the trend-line of lower lows. Second, it has turned down from being overbought in more than three technical indicators. Third, in at least two of those technical indicators, the direction of the trends have been divergent from the trend of the stock. This all indicates very good potential for a Put option.
For all those reasons, I have setup a BTO Put order on a JBL. But this is not my standard order. I actually decided to make a Contingency Order. What exactly is that? It is an order that only executes if a certain contingency is matched first. To make this Contingency Order, I am blending my stock order method with my option order method. Let me explain how this works.
If I were shorting the stock directly, I would sell it after it drops below it's most recent low by 10% of the ATR. (Average Trading Range) In this case, it is 11.49. But since I don't like shorting stocks, it will only be the contingency price that I use. What I need to know now is what the probable option price would be at that contingency price. To do that I do a little math.
I take the absolute value of the Delta (approximate price movement of the option for every $1 movement in the underlying stock) of the option I am attempting to purchase and then multiply that by the difference of the current price less the contingency price of the stock. (i.e. 0.4921*(11.87-11.49)=0.186998) I then take that number (rounded up to the nearest penny) and add it to the option price. (i.e. 1.84+.19=2.03). And that resulting value is my stop-in value. (The stop-in value is the minimum value I am willing to pay for the option.)
Sometimes a rule is set in place by either my brokerage account or by the market-maker, not sure which, that forces me to have to put the order in at a multiple of .05 or .10 cents. JBL is one of those stocks so, I round up to 2.05 as my stop in point. (Maybe I should ignore this side of the order so that I am able to get it at cheaper if available. Hm?) Since I am pretty confident in my math I only added a .05 cent buffer, so my limit price is 2.10. (The limit is the most I am willing to pay.)
You may ask, "why go through all this?" The answer would be that I don't want to buy the Put option if it is going to go up in price. The fact is that the start of this trend-line that was broken on Friday had a similar set-up. However, on the next trading day, the stock didn't drop low enough and it turned into this 26% bull rally to it's current price. I don't want to lose money on what could simply be the same type of pull-back from a little over a month ago. As a precaution, I have to be willing to sacrifice a little more premium to get into the position when it is actually the position that I want to be in. After all, prognosticators don't tell the future. They identify possible futures based on the known past. That is my opinion, you can take it or leave it.
Disclaimer: See bottom of page. http://investorsopinion.blogspot.com
JBL has had a very good run for the past month. However, in the past few days it has developed more than one indicator that the tide should turn. First, Friday it broke and stayed below the trend-line of lower lows. Second, it has turned down from being overbought in more than three technical indicators. Third, in at least two of those technical indicators, the direction of the trends have been divergent from the trend of the stock. This all indicates very good potential for a Put option.
For all those reasons, I have setup a BTO Put order on a JBL. But this is not my standard order. I actually decided to make a Contingency Order. What exactly is that? It is an order that only executes if a certain contingency is matched first. To make this Contingency Order, I am blending my stock order method with my option order method. Let me explain how this works.
If I were shorting the stock directly, I would sell it after it drops below it's most recent low by 10% of the ATR. (Average Trading Range) In this case, it is 11.49. But since I don't like shorting stocks, it will only be the contingency price that I use. What I need to know now is what the probable option price would be at that contingency price. To do that I do a little math.
I take the absolute value of the Delta (approximate price movement of the option for every $1 movement in the underlying stock) of the option I am attempting to purchase and then multiply that by the difference of the current price less the contingency price of the stock. (i.e. 0.4921*(11.87-11.49)=0.186998) I then take that number (rounded up to the nearest penny) and add it to the option price. (i.e. 1.84+.19=2.03). And that resulting value is my stop-in value. (The stop-in value is the minimum value I am willing to pay for the option.)
Sometimes a rule is set in place by either my brokerage account or by the market-maker, not sure which, that forces me to have to put the order in at a multiple of .05 or .10 cents. JBL is one of those stocks so, I round up to 2.05 as my stop in point. (Maybe I should ignore this side of the order so that I am able to get it at cheaper if available. Hm?) Since I am pretty confident in my math I only added a .05 cent buffer, so my limit price is 2.10. (The limit is the most I am willing to pay.)
You may ask, "why go through all this?" The answer would be that I don't want to buy the Put option if it is going to go up in price. The fact is that the start of this trend-line that was broken on Friday had a similar set-up. However, on the next trading day, the stock didn't drop low enough and it turned into this 26% bull rally to it's current price. I don't want to lose money on what could simply be the same type of pull-back from a little over a month ago. As a precaution, I have to be willing to sacrifice a little more premium to get into the position when it is actually the position that I want to be in. After all, prognosticators don't tell the future. They identify possible futures based on the known past. That is my opinion, you can take it or leave it.
Disclaimer: See bottom of page. http://investorsopinion.blogspot.com
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