11% Return on SPY Option Swing Trade, Bad Practices to Avoid and Interesting Stocks — 5 de Mayo Trade Log
After an unusual 3 day selloff we expected stocks to gain today, luckily, our expectations were on target; we entered the day holding a few positions from last weeks trades, two SPY CALL contracts, we were poorly diversified and dependent on markets starting off positive, if not we would’ve had to make the decision of whether to cut our losses or hold.
The SPY started trading at around $286, our JUN 30 2020 290 CALL was 4 strikes out of the money and the trend for the day was in our favor, we had to take a decision, lock in profits or hold; looking back at our last trades most of them were losers, we did not want to be stubborn and lose a winning trade so we waited for a good time of the day to sell. We took advantage of the rally and the usually high prices for option contracts earlier in the morning and we locked in $119 dollars of profit, the contract sold at a price of $11.45, we were happy with our results but made a rookie mistake that could have had a high cost.
There are many types of orders one can place when either buying or selling stocks, or contracts in this case, but most of them derive from the basics, STOP, LIMIT and MARKET orders (this is not intended to be a tutorial on these orders or what are the best practices, as you will see, we are no experts, maybe in future posts we will discuss more profoundly this subject but for the time being, it is important to know the really basics, at least for this trade log). We mostly use LIMIT orders, to buy and sell, when buying, these orders are placed at a lower price than the current one and are triggered once the stock or contract hits that price and tries to buy at the same price or lower; when selling, we also use LIMIT orders, we place the trigger price above to the target we set and this order will guarantee (as long as the stock reaches the desired price) a sell at the same price or even better. We use STOP to set a limit, this meaning that if the stock or contract were to drop the price quickly and we were not on top of it, the STOP would have us covered and cut losses, it tries to sell at a similar price of the trigger but if it drops too fast the trigger will be activated and it won’t look for a better price, it will sell on the last BID which can really affect. Finally MARKET orders, we don’t use these at all, these types of orders are risky, it fills in the first BID in line, so it won’t guarantee a specific price and chances are that it won’t play in your favor. The picture below may help to understand better the concept.
Having explained that, we can continue with today’s trading session. We had placed a LIMIT order, we were trying to sell the 290 CALL contract, we saw the spreads closing and less active so we adjusted the price until we made the sale, once we did we were happy for locking in profits but we had forgotten a really important detail, we placed a STOP order at $11.20. We left the computer thinking that we were done with that transaction and did not cancel the STOP order, when the price of the contract dropped, it triggered the order and it sold a NAKED CALL contract (basically shorting a CALL), something really risky for a small account that can easily burn it out, we were lucky that there was a low volatility by that time of the day, HOURS after we found out and sold it with a loss of only $61.
It had been an active morning and the day had not yet come to an end, we had plenty of transactions left, since we haven’t been properly day trading (buying and selling the same security in a single day) we were allowed to make plenty of moves. We sought other opportunities, but with different characteristics than what we had done lately, once again, we wanted to test new strategies and their profitability. Markets are set for another correction, many people believe this and after a record breaking April, it is even more confirmed, Covid-19’s global impact hasn’t yet been fully perceived by the markets. It is believed that Q2 results will trigger this but stocks usually get ahead of the world itself so any moment this quarter they can begin to drop. The SPY which we closely follow did have an incredible rebound but still hasn’t reached the February highs, it still has a lot of room to keep running, betting against the current may not be as profitable, also, the contract premiums trade higher, which for a small account like ours, represents a big portion, on the other hand, some technology stocks in our watchlist have already tested the pre-covid levels or a strong resistance and have since turned on a descending pattern, almost as if they were getting ahead of the market in general into the correction.
Applied Materials (AMAT) and Advanced Micro Devices (AMD) are on a downward trend, according to the MA Crossover indicator, using a 3 month 4 hour candle chart we can confirm a strong downward trend. The strategy consists of buying cheap really out of the money contracts that we can easily let run and won’t mind much for their price. We found contracts with premiums worth only $100, their low prices would allow us to let them run far and appreciate, if things were to go sideways, the amount is so small we wouldn’t mind losing it, we see it as the cost of testing.
