Statistical analysis of Trades and Levels

Discussion in 'Strategy Development' started by oraclewizard77, Dec 9, 2010.

  1. oraclewizard77

    oraclewizard77 Moderator

    This will be a thread concerning statistical bias in creating higher probability trades which can include stocks, options, and futures. Some real money positions will be discussed. Also we will look at trading levels for futures.

    ES for today.

    R4 1372.75
    R3 1317.75
    R2 1262.75
    R1 1243.00
    PP 1207.75
    S1 1188.00
    S2 1152.75
    S3 1097.75
    S4 1042.75
  2. oraclewizard77

    oraclewizard77 Moderator

    Now lets look at creating a low risk option trade based on possible FDA approval.

    MNKD is looking for possible approval by the end of the month. I purchased 2 Jan 6 calls, and sold 1 Jan 10 call to help pay for trade. MNKD was delayed last time they were looking for approval. I selected Jan do to any small delay and to avoid decay of time premium for trade.

    Stop will be a limit order to sell options if there is another long delay or non approval.

    Statistical bias is positive due to no safety concerns, main component of drug has been approved for years and we are looking at just a different system to transmit the drug into the human body. Also all studies show system is effective. Studies were large with over 4,000 patients, so small size not a concern. Also, company did do cancer study showing no cancer issue due to another company removing similar drug due to this risk. If delay, but possible approval, will look to buy longer dated options to try again.

    CPIX is also seeking drug approval this month. Previous bought the stock since no options available to buy or sell as far as I can tell. Sold the stock prior to approval on both run up to approval and concern that doctors are already prescribing the drug to their patients off label so the current revenue report for the company may not get any upward boost due to this issue. Also, generic competition is a concern going forward for CPIX.

    Statistical bias is now negative based on this information which I received yesterday on CPIX, so had order to limit sell today which was filled.

    If statistical bias is neutral leading up to approval, and options are not over priced, buying both a call and a put can hedge your risk and provide reward no matter which way the FDA rules.

    Rules for statistical positive rating = drug must have no safety issues and must show that is effective based on Phase II and Phase III studies. (look to buy calls)

    Rules for statistical neutral rating = having no bias on approval or having certain concerns that require an FDA panel review. The options could also be used for the panel review instead of for approval. (look to buy calls and puts if price is reasonable)

    Rules for statistical negative rating = drug has safety concerns and/or low rating for being effective. (look to buy puts)

    The benefit of buying the options is that your risk is the cost of the option rather than for example losing 90% value of the stock if you own the stock.

    If you own the stock you could also hedge your risk by buying puts.

    For levels, we look at market being positive if it opens above the pivot, and market being negative if it opens below the pivot. One could trade to the level or off of the level based on their own system. Currently all real money trades this week on futures have made money. What has helped is revising my rules of trading from 20 pages down to 2 pages and including a .jpg image of a high probability trade.
  3. oraclewizard77

    oraclewizard77 Moderator

    Let's look at one more for today, and then I will post levels for Friday later for your review.

    BBVA is a Spanish bank. Longer term 5 year chart shows that the stock has traded between $ 25/sh - $ 6/sh - $ 18/sh - $ 9.50 and is now trading above $ 10/sh.

    When BBVA went under $ 10/sh, I sold naked Jan puts. This equates to an 8..7% possible return.

    Statistical bias is positive based on TA in that my cost bias was around $ 8.50 if I am forced to own the stock with then a possible bottom at $ 6/sh and possible upside at least back to $ 18 - $ 20/sh.

    Looking at the bank less than 50% of net positive income is actually from Spain.

    There is no stop on this trade, I am more than happy to own the stock at a discount. Only sell naked puts on stocks you want to own, or if you are willingly to kill the trade if it goes against you based on your rules of risk analysis for example if each put is selling for $ 1 when you made the trade and they are now selling for $ 2 or $ 3 and you don't want to own the stock, it might be better to take the loss instead of fighting the trend.

    Assuming the stock is put to me which now seems unlikely, I would look to sell covered calls to reduce risk and increase profits.
  4. oraclewizard77

    oraclewizard77 Moderator

    MNKD is now up over 5% in 1 day since I mentioned it here. Possible that its now FDA pre-approval run up, or maybe ET investors reading this thread decided to get long.

    I will be holding the options through Dec and into Jan looking for actual approval.

    At this point I wish I went heavy into this trade, but hindsight is always 20/20 and I was more risk adverse until I found out more information about the company.

    For futures, I guess today I was more happy to be right than make more money. I killed a trade early at a profit to maintain my 100% winning streak. I actually woke up today, and did not want to trade since I did not want to take a loss going into the weekend.

    I did not update the levels today, and will try to do so going forward. Plus if others are interested in other levels, please post the request here. You are also free to post statistical information on this thread this is not a journal.
  5. oraclewizard77

    oraclewizard77 Moderator

    Let's now look at managing the MNKD trade as new information comes in. New info was a massive insider buy by the CEO as we are within weeks of an FDA decision.

    I was able to get out of my covered call at a small loss of around $ 30. I no longer want to limit my upside.

    On the other hand for IDCC, I had a DEC 40 call on my in the money Jan calls.

    Now, IDCC is very close to $ 40/sh and I could have waited till Friday to see if it would have stayed under $ 40/sh to be able to let my covered call expire worthless. However, I was able to book an $ 85 profit on the call by closing it now, and I also was able to sell the Jan in the money call for around a 300% profit. I closed the options in this case, not because I was afraid of losing money on the covered call, but because I was afraid of losing money on the in money call if the market went down on Friday. I wrote the covered call because I would be happy to sell if the stock hit $ 40. We are close to my target, and the problem of holding the longer term Jan call is that time decay would start to eat into my profits, and we reached target level without having to wait to see if the court ruled in favor of IDCC or not. This means by closing the trade now at a nice profit is an available option to do without risk of trial delay or adverse ruling which could wipe out my profits. So it was an easy decision, plus I need some money to pay some bills.
  6. oraclewizard77

    oraclewizard77 Moderator

    Let's take a look at trading the news. Tonight S Korea is conducting drills which has riled the market. Obviously, for this trade, we also what to use a technical setup which I did. I was 1st thinking of shorting CL, but it moved too fast down without me. So then I was looking at the EURO and waited for a signal. I got the signal and took a scalping trade. Its possible I could have made more money if I held longer but sometimes I rather be right.
  7. oraclewizard77

    oraclewizard77 Moderator

    The costs of HBI raw product cotton is going up. I bought the April put in this stock.
  8. oraclewizard77

    oraclewizard77 Moderator

    I previously sold the HBI put for a small profit as I was trying to keep only positions I felt could move significantly.

    MNKD Jan calls were closed out at a profit. I then bought the stock plus Feb calls. I am starting to think its better to own the stock or longer dated options since the FDA seems to like to delay for 4 weeks or so to kill current month premiums.

    We had weakness this afternoon in ES futures so bought the SPY Jan puts after a major breakout on possible consolidation this week.

  9. oraclewizard77

    oraclewizard77 Moderator

    I sold my SPY put yesterday for a small profit and then shorted a MNKD Jan put since the decision should happen after Feb, this seems somewhat safe.

    I also covered my BBVA puts at a profit instead of waiting for expiration as the stock again went under $ 10/sh which is a negative sign.

  10. oraclewizard77

    oraclewizard77 Moderator

    With the stock having gone up both my call options in MNKD and the Jan naked put that I sold have done well. I heard some rumors that the FDA may actually have a ruling soon, so I closed all options at a profit.

    The Feb 6 puts cost around $ 91 each so to be more professional, I did take protection against my long stock. I don't think I will need this protection in that I do now believe this drug will eventually be approved, however the cost is now cheap and 1/2 of it was paid by closing out the Jan naked put.

    The above strategies I used created profits before the drug even reached a decision. I see some of the run of price due to insider buying, and more optimism since the last delay, that a decision will actually occur.

    Obviously, holding till the decision could give even more profit if approval is given, but that is why I am still long the stock with option protection to get the extra money without risk.

    #10     Jan 18, 2011