It’s been a super busy week at the Tales Towers here in the Pacific Northwest. The market moved up pretty well from oversold conditions earlier in the week and most of the stocks in my long-term portfolio exceeded the percentage move from the broader market which is usually a good sign.
As always, I am being mindful with one eye on the emerging markets, one eye on the currencies and a few more eyes on various tickers that have caught my attention.
Earlier in the week there were a bunch of analysts wading into Twitter ( TWTR ) on valuation ahead of earnings. I am not one to play earnings these days but sometimes the risk/reward is worth a shot and I bought some puts on TWTR prior to the earnings release. My reasons were simply excessive valuation and basic technical analysis. The premium was covering a straddle in either direction for a 15$ move and surprise, surprise TWTR moved about that to the downside.
I bought OTM 60$ puts for March when the price was around 65$, probably not the best choice but I wasn’t risking too much.
Either way, it worked out well and I exited at 51$. The premiums were pretty insane so for getting the right direction, factoring in 5-6 weeks of time, I only managed about 800$ profit per contract on a 15$ move, not brilliant but it is what it is..
Options premiums get jacked up huge going into any pending news and there are a few ways to play this from my perspective. If I like the prospects of a stock, I’ll pony up extra dollars, buy more time so I get less ‘hit’ on the premiums when they come off after a report. i’ll often just buy out 6 months, even leaps…
I did this with AAPL when it hit 380$ when sentiment was getting pretty bad and anticipated this to reverse with catalysts on the horizon ( China mobile deal, iPhone 5 etc ). It took a while to get going but i rode it to 510$ yet if i had bought shorter term options, i would of lucked out. It’s pretty simple but that’s all I tend to do.
I refuse to play weekly options even though the profit potential is huge, the theta decay is absolutely insane, I’ve been bitten more times than not even if the thesis eventually played out.
Time is both a friend and an enemy in the options world. However, if you do have the capability to sell naked options on futures contracts, I’ve seen a few really good traders simply sell premium far out on a regularly basis every week which was pretty reliable but the risk is always one of those moves which is statistically rare and you can be in a world of hurt if you aren’t careful.
Anyway, below is a snapshot of the S&P March futures contract with a few things of note. The white line is the 200ma, i use a 3 deviation keltner channel which works pretty well for gauging extremes and use a basic volume profile to confirm various levels of interest.
The market had a bit of a rip-roaring rally back to 1793.50 or so at the close of friday – you can plainly see where the buyers came in at 1730’s with that low volume node on the profile to the right aswell as being pretty oversold on every other metric. This is why you have to go through your own homework and not get swayed by people in the media.
Earlier in the week, people were saying the market was going straight to sub-1700 etc, market was going to sell of 20-50% etc, all of this always seems to come out when the market dumps 2-3%…funny right?
That said, i am expecting another test below >eventually< and based on that, i will adjust my portfolio on a push to 1900s or the market breaks down and we head considerably lower. The convergence appears to be this 200ma rising up rapidly to the 1720s level. There was also a lot of interest around the 1785 level as you can see from the volume spike to the right. There is also a low volume node at 1812 which is where i think we'll tag before we head back to 1780s again and then chop till the next catalyst.. If we get above 1820 and hold i fully expect the high of the year to be taken out at 1846.5.. If you want to know more about advanced volume profiling then i highly recommend this guy's website FuturesTrader71 It is a gold mine of information and covers all the usual mistakes, psychology, analysis etc. He also has his own futures firm at Stage 5 Trading.
Probably about the best shot at learning market auctions you will ever have.
In summary, i am not expecting much next week, a bit of chop into options expiration with a possible probe of 1800-1810. My watch list for stocks is pretty light, Deere ( DE ) reports on Wednesday before the market opens and some of the miners report throughout the week ( Goldcorp, Newmont mining etc ) so it’ll be interesting to see how the GDX responds. If you think the miners are nearing a bottom then this should be a decent tell in my opinion.