80% Profit on Facebook Swing Trade and Diversifying an Options Portfolio — June 09 Trade Log
The market has been on a vigorous rally for the last week or so and it was pushed even further after May reported an increase in payrolls; market bulls benefited largely from this news and went to lock in further profits until yesterday’s session. The rally slowed down today on a confusing trading day, tech stock continued to climb on to further historic highs such as AAPL and some others broke out to continue climbing like FB that has been trying to break out its historic high.
Mixed indices and a great percentage increase in the VIX further confirms growing uncertainty in the market as investors wait for an important conference tomorrow. Federal Reserve chairman Jerome Powell is set to talk tomorrow in New York, investors are looking forward to confirming that the worst part of the pandemic is behind us and hints that the FED will start to take care of flattening the treasury bonds yield curve.
Stocks are expensive at the time, most which have been rallying lately look like they need some room to breathe and keep climbing further, but betting on short trades can be a risky move on such a bullish market, the return can be minimal and timing has to be precise for a good trade; it was a confusing day to place trades but we had to take action.
We had a few puts with losses from last week’s trading. We sold them with losses today and bought closer to expiration PUTS as well.
The whole idea of buying closer to expiration contracts is to profit from the higher volatility of these with a much smaller investment. Since corrections are shorter but stronger moves and we are on a bullish market buying long puts would be like swimming against the current and not very likely to generate any profit. Close contracts are just a cover for any price fluctuations.
We replaced many of the contracts and bought a few more, all off those contracts cost us a total of $287. We bet on many sectors and stocks to correct, not all of them will do so but diversification gives us greater chances to profit on many of these.
An amazing advantage of trading options is that we have the opportunity not only to diversify on the underlyings and different expiration dates but we also have the chance to diversify our positions on the direction. We are not sure how the market will react to Jerome Powell’s conference, it may be positive or negative but nothing is certain. In order to cover our bearish positions we bought several CALLS with a further to expiration date.
The further expiration date on these contracts give us further room to breathe. If prices do correct then we will profit from both sides, we will be able to sell the PUTS and load further our long positions and if they don’t then we will cut losses on the PUTS or drive them to expiration and still profit from the CALL contracts.
Since we do not know exactly where the markets will take off with the news we are only relying on volatility in either direction to profit and this is something given in markets lately.
Swing Trades
Facebook 290 CALL
After a long time waiting on FB to continue its ascending pattern the stock finally gave in.
Ever since the March lows FB had an extreme bullish run that even broke out through the all time highs; following the price channel it rebounded on the top resistance and instead of continuing the pattern it flattened out and formed a bullish flag, we bought the CALL at around $230 and waited for about a week for the trade, today it finally broke and surged almost 5% on higher than usual volume, a great signal.
We sold the CALL and locked in an 81% profit on the contract (Bought at $0.97 and sold at $1.76), later on the afternoon webought another one cheaper and closer to expiration; FB has a price target of $253 and on a bullish market the stock has room to keep going.
Takeaways:
- Diversifying is key and options allow for both in underlyings and direction. It is important to know this and try to use it for the benefit of trading.
- Small accounts struggle diversifying due to the high costs of many stocks and nominally do not perceive great appreciations, options although riskier allow small accounts to buy many different underlyings, manage risk and take in more significant profits.
