UPDATE: BOT +1 GME 100 JAN 10 24 CALL @2.46 CBOE, GME MARK 24.68 Other Longs de-activated by OCO Added to WMB BOT +1 WMB 100 JAN 10 20 PUT @2.05 PHLX, WMB MARK 18.95
UPDATE: BOT +1 WMB 100 JAN 10 20 PUT @2.40 ISE, WMB MARK 18.38 This is a bit of a late update (actually filled an hour ago), but them's the breaks when you work full time. Since doing these updates live is a pain from work, from now on, I will just make one post before the open (to show the setups) and one post in the evening (with a pic of my TOS statement) to show updates, execution times, etc.
FILLS: 10/28/2009 NOK gave a reversal setup, so it will be a short tomorrow below 12.77 (closed at 12.8). SPY has major support at 102,99,98,96. As we near those levels, I will keep an eye on my short positions and will tighten my trailing stop.
SYSTEM: STOPS Stop losses in my system come in 3 flavors: INITIAL: Placed at 2*ATR(14) above/below the entry price (above for short, below for long). REVERSAL: Occurs when the price closes outside my reverse point and then triggers beyond that the next day. TIME: If the market is stagnant after a week or two, I will close the trade to minimize my exposure to option theta. I use a "3-strikes-and-out" approach. This means I can stop and reverse twice before bailing on this stock entirely. Many times a stock will fake once or twice before the actual sustained move, and this is ok because my initial position is small. When my setup occurs, I expect the move to occur within a couple of days afterwards. If a move has not occurred by this time, this usually means we are entering a consolidation period, which is bad for long options, so I exit.
SYSTEM: MONEY MANAGEMENT & POSITION SIZING Money management is the system component which allows you to weather a storm of losses and preventing you from being over-leveraged. It consist of two components: Position sizing and position limits. Position Sizing Every trade position is sized with regards to the potential risk (initial stop size) in the trade. The initial stop size is volatility based and is twice the 14 period Average True Range (ATR). The ATR is directly related to how volatile a stock is and this allows us to keep our stops outside the ambient noise while keeping ourselves protected against disaster. I use a fixed risk fraction (0.25 to 0.5%) on each trade and position size is computed as: C = Rm / Rc where C = number of option contracts Rm = % of account risked per trade. Rc = risk per contract if a 2*ATR move occurs. Rc is computed using the Black-Scholes model for option prices. You simply take the theoretical price before and after a move of 2ATR in the underlying stock and subtract them. This is easily accomplished using built in ThinkOrSwim functions. This levels the playing field for every stock, independent of price and volatility. Higher priced and/or more volatile stocks will have a reduced number of contracts. I keep my stock prices to under 100 or less, since a 2ATR move in the higher priced stocks (AAPL, GOOG, etc) exceed my risk with even one contract. Position Limits While most stocks move track the market to some degree, individual stocks can be adversely effected by news events (unlike ETFs, which are more diversified). Because I pyramid my position as a stock moves in my favor, I limit the maximum number of additions I can make to prevent over exposure and keep my overall position in any one stock to 5% or less.
SYSTEM: PYRAMIDING A common theme among successful traders such as Jesse Livermore and Richard Dennis (The Turtles) is that of maximizing a position when you are correct. This ensures that your winners will exceed your losers by a fair margin and allow you to profit, even if your winning percentage is less than 50%. Position sizing must be approached carefully, though, and always within your risk guidelines. After the initial entry, I pyramid my position every 0.5ATR once price has moved 1.0ATR in my favor. At each 0.5ATR increment, I add 1/2 the initial number of contracts. I will pyramid up to 5ATR, at which point I consider myself to be position limited. The reason I begin at 1.0ATR is that I use a trailing stop of 2.0ATR using the Chandelier method (subtract/add 2.0ATR from the most recent price high/low). Assuming I entered with N contracts at an initial stop of 2ATR, and I add 0.5N contracts when price has moved to 1.0ATR, my risk maxes out at 3ATR. This is in contrast to the Turtle style (for example), where they added the same number of contracts at 0.5ATR increments. This would result in larger winners because you really piled on in the initial stages, but does lead to increased exposure. There is always the chance of a large reversal in the first initial stages, of course, but this is offset somewhat by the fact that you are slowly building your position and one of the main reasons I do it in this fashion. I consider this to be a fair compromise between the "pedal-to-the-metal" Turtle method, and hamstringing your winners by adding on too slowly. As my trades progress, I'll show some charts with pyramiding in action to demonstrate the method.
Very nice strategy. Good to see things are going well with it. Curious, I still don't understand the reversal thing @ 1 ATR. What qualifies it to be a reversal? An initial move in your favor? Sorry about the confusion, I've just never trade options with a reversal before.