The need for trailing stop: Expired November 2008 options post-hoc review

I have been trying to catch falling knives for a few weeks now. Every time I think we’re at a bottom, the market rally a bit to get my hopes up and then continue to drift down more. In retrospect, there are so many trading no-no’s I have broken with that dangerous mentality. My account is down significantly as of this writing and I have learned many old and new lessons throughout these weeks. In fact, I have demonstrated improving trading technique and psychology even as I was losing money overall (what an oxymoron). Rather I’m trying to comfort myself or not, the fact is that losing money is simply unacceptable in trading. So I will review these trades in this post and perhaps learn something from them.

As the title suggest, this is a post for post-hoc analysis of the options which I held into expiry (3 losing and 1 winning). I’ll do this chronologically. The longest Nov09 position I have is SLW Nov 2.5 Call. I have been a big fan of SLW as I’ve written and traded SLW numerous times.

Instead of writing paragraphs upon paragraphs, I’ve annoted my charts more than usual and will show more and write less in this post. I noted my entry point in each trade, and labelled the stop and post-hoc ideal exit/stop points.

Silver Wheaton

My effective entry point in my SLW Nov 2.5 Calls were at SLW share price of $2.90 (SLW closed at $2.81 Friday). I bought 2 Calls for $0.55 and at expiry, they are worth $0.325. A loss of $45 + $15 for commission as of this writing. I held on to my 2.5 calls and exercised them, so +200 shares of SLW for me.

Next up is ABB on the same day. The share price for ABB was at $10.31 when I entered. ABB closed Friday at $9.95. I bougt the three ABB Nov 10 Calls for $0.90. They are worth $0.05 each. A total loss of $255 + $15 for commission.

ABB Ltd.

Then we have TCK entered at TCK share price of $5.575. I bought two TCK Nov 5 Calls for $1.00 each and they are now worthless. A complete wipeout of $200 + $15 commission.

Teck Cominco Ltd.

Lastly, there’s this puny winning day trade in the last 40 minute of Friday. I bought a UYG Nov 3 Call for $0.55 and it expired for $0.95. A profit of $40 – $15 comission, so a total of +$25 so far. I held on to this call and exercised it. I have +100 shares of UYG to carry over the weekend.

Ultra Financials

As you can see, if only I have used trailing stops, I could have held onto some of the profits and not turn winning trades into a losing ones. I didn’t want to let the large swing in premiums stop me out from a big rally. That’s why I didn’t use trailing stop. However, the lack of subsequent follow-through and confirmation in the rally should have been a glaring alarm sign. I should have put in trailing stops from this lack of strength in the rally. Any counter-trend position should be carefully managed with tighter than usual risk management.

I have let my undying hope for a rally clouded my judgement. This stubborn need to be right is a very fundamental psychological flaw in trading. If I can’t stop doing that in the future, I might as well quit trading manually and focus on developing my quantitative financial engineering work. However, as I have noted, I think I’m improving lately and upon further reflection, I believe I have come up with a potential methodology to correct myself in the act … More on this as I develop on this technique.

S&P hit 820! Backed up the truck and loaded on more SLW and ABB

Silver Wheaton

Silver

ABB Ltd.

BOUGHT +2 SLW 100 NOV 08 2.5 CALL @.55

BOUGHT +3 ABB 100 NOV 08 10 CALL @.90

Another busy day today. I usually write up my entry/exit posts immediately for my trades, but I needed to keep my eyes on the market due to the fact that I went all in today.

I’m really tired after a long day and the fact that I went swimming right after the close. So I’ll cut myself some slack and refer you to my market analysis post from today instead. Long story short, I entered long because of the low volume retest of major support. I held because the price and volume showed strength in testing the resistance throughout the day.

I am heavy on ABB because S&P broke down to 820 and ABB is still above the Oct low of $10. It has held on triumphantly in this leg of market selloff. Refer to my ABB entry yesterday for a more detailed analysis of the company.

I added to SLW because the commodities are showing some strength too. I have been a fan of SLW for a while, take a look at those posts for my opinions of SLW.

My plan now will be as usual, I will unload into strength starting with my weakess position and work my way up.

There’re a lot I want to write down, but my mind is blank now. So I’ll leave this as is.

Covered SLW, FRO, and WFC short puts

S&P

S&P intraday

The market broke my intraday support line today (pink line, first graph). What appeared to be a good Monday turned out to be very disappointing. I cleared the last of my short puts (i.e. long) about 5 seconds before the close when the market gained some footing. These plays are purely for risk management purposes, each individual stock looks ok to me to be accumulating at this level. But I’m in for the swing trade and it haven’t worked out. So I’m selling them all mainly because the overall market looks weak.

To illustrate, today’s intraday market data looked particularly bad. I thought the market would turnaround after the TICK retested a -1200 low for the day at noon on lower price, but the price continued to drift down afterward. Then the 2pm rally didn’t even break 930 (resistance from yesterday) too. That was the last draw for me and I decided to exit all risky positions from then on to minimize my risk. So I covered all my options into the close.

The first of which was Dec SLW 5 put at 15:48 for $1.70, which I bought at $1.55. I still have my 166 shares of SLW, so it’s an obvious choice for me to unload the options. I don’t want to be too heavy on precious metal for now. SLW is still holding the $3.4 level and marked a higher low in the afternoon. So it’s actually looking good.

Silver Wheaton

Next I sold FRO at 15:59:27. The low of today looks like a test of a daily trendline, pink line below on the right daily graph (Update: I forgot to attach the graph. I added it a day later below). I normally would have only sold if it breaks it, but again, the market looks bad. So a retest of $30 (highest volume in recent months) seems possible. I covered the FRO short puts bought at $7.90 for $8.00. On another note, I mistakenly placed a sell order on the put rather than a buy (to cover) at $8.10. So I quickly covered that accidental trade at $8.30 regardless of that fact that FRO was moving up at that time. I’ve learned my lesson in accidental orders and would cover immediately regardless. I won’t try to convince myself like my CAF trade.

Frontline Ltd.

Wells Fargo

I covered my Nov WFC short put bought at $3.60 for $3.00 at 15:59:55. Fee $7.50.

I almost didn’t want to give up my WFC position. It was the strongest and the one most profitable of my Friday’s swing trades. In particular, last Friday’s turnaround has by far the most volume in several months. The $28.0 support looks almost impenetrable. Indeed, today’s low of $28.04 looks safe and we only tested it at very low volume. Indeed, I really don’t think we’ll see this low again in the short term. Looking at this more carefully now, maybe I should leave it open … Oh well, I can always get back in.

SOLD -3 SLW 100 DEC 08 5 PUT @1.55

SLW

Short puts on Dec SLW stroke 5 for $1.55.

Upside: The move from $4 to $3.78 was low volume and $3.78 is a support level from yesterday. S&P also dropped from 940 to 920 and stayed there for a bit on low volume.

Resistance: $4

Downside: Silver price down slightly. Market in short term down trend.

Support: $3.7.

Bottom line: This is a short term trade with a small position to test the water. Mental stop is S&P 916.

Update: S&P dipped to 913 briefly then returned to 917 level. I was hungry so I went to lunch and left this as is. S&P is back to 920+ level after an hour. I think I will let this play out without hugging the monitor every minute. I’ve got other work to do.

BOUGHT +5 SLW 100 DEC 08 7.5 PUT @3.40

SLW

Silver

Covered my short puts SLW @ $4.00 for $3.40 today. Fee $7.50.

This is to reduce my risk on the current weak precious metal market. Silver is failing to break above $10.6 so far. Gold is down $14 or so to below $750, an important support level.

The weakness seen today after the election is likely a shakeout for an imminent rally. However, my leveraged position in SLW is too risky due to weakness in both the equity and precious metal markets, even for the short term. So I’m unloading it for now to wait for a re-entry. My strategy with the options is to hold it as short as possible for the most profit. So I’ll be taking swing positions and trade in and out.

In any case, I still have my SLW shares to ride the wave if we do make a move.

Update: S&P is down 33 to 972 from around 988 when I sold. Yet, SLW is holding up nicely. This is a very good sign for SLW.