Sold 12 CVE.TO Puts @ 2.90 Mark $27.50, +10% gain

I closed my short Cenovus Energy (CVE.TO) position this morning as crude oil broke below \$80 briefly and the Dollar Index rose above \$84. Myoriginal target was \$27 for this short. But considering the fact that I mistakenly doubled my position size, I am closing this trade a step above at this \$27.50 support level (see Figure 1 for CVE.TO support lines). Furthermore, the time decay on the options premium is accelerating so I needed to sell this soon. The final profit on this position is \$858.15 (after \$63.80 commission), or just over 10% in my RRSP account. Although this trade is profitable, it is a horrible trade for the following reasons.

[caption id="" align="aligncenter" width="570" caption="Cenovus Energy (CVE.TO)"][][][/caption]

  1. I accidentally bought more contracts when I intended to sell.
  2. Not correcting my mistake immediately.
  3. I risked too much at 3% (of account) initially and then 10% after my mistake.
  4. Peak drawdown was over \$1000 (12.5%) at one time.
  5. Too eager to add to my position once it moved.
  6. Reward-to-Risk ratio is less than 1.0, so I threw big money for smaller gain.
  7. Commission ends up eating 7% of profit away. That is too much.

As you can see, I made one, two, ... seven too many mistakes in this trade. Luckily, I did manage to do some things right.

  1. Patience. There were a few days when the price moved sideway. I didn't succumb to my emotions and dump the shares when it was nerve whacking to hold onto a loss. The price was still below my mental stop so I held.
  2. After the initial shock of doubling my position as the price moved away, I mentally accepted my loss and was able to study the market objectively since.
  3. Didn't take profit too early once the price moved back in my favour this week.

I won't be as lucky every time. Learn from my mistakes and exploit on my strengths. That is the lesson from this trade.

Posted 05 May 2010 in stocks.

I just made a grave fundamental mistake in my CVE.TO trade

Cenovus Energy (CVE.TO) tested 27.50 support and then bounced back to break the short-term downtrend line above 28.50 or so, see Figure 1. Naturally, I don't want to turn a profitable trade into a losing one. So I wanted to sell my puts options on CVE.TO while I can still exit at near breakeven. However, as I am new to Questrade and unfamiliar with their interface, I made the careless mistake of buying six more contracts instead of selling the six that I have!

[caption id="" align="aligncenter" width="570" caption="Cenovus Energy (CVE.TO)"][][][/caption] I realized my mistake soon afterward from checking my account. Imagine my surprise to find that I am an owner of 12 puts contracts on CVE.TO. So I wanted to cut my losses immediately. Unfortunately, the energy sector (XLF) and crude oil just broke above some key resistances and CVE.TO bumped up a few more points. The right thing to do is to ignore my unfortunate losses and just exit the position, as that was what I intended to do. But I didn't. I decided to not panic and analyze the stock yet another time. CVE.TO is definitely weak. It is lagging behind others in the sector. Other energy companies are breaking above resistance levels but CVE.TO is still below its 29.50 resistance. Yet, the fact is that the trend in the sector is upward. Which is very bad for me. I am still holding this short CVE.TO position over the weekend as it hasn't broken my 29.50 mental stop yet. I can give my bearish reasons here upon observing the tape this afternoon (e.g. Goldman Sachs Canada is dumping shares), but they would just be excuses under the current circumstances. In any case, this is an embarrassing confession as I've violated one of the most basic rules of trading. This position is near breakeven on paper as of the close. But who knows what can happen over the weekend. Rather than risking 3%, which is already too much, I am now risking a maximum of 10% on this trade. What have I done... The high commission in trading options is affecting my decision. If this were a forex position, I would have dumped it all without giving it a second thought. This is a sign for me to stop trading options altogether. It is better to stay with a long-only equity strategy in my RRSP than get eaten up by commissions or take excessive risks as I am doing now.

Posted 23 April 2010 in trading.

Bought +3 CVE.TO 10JUL17 Puts 30.00.MX @ 2.45, Mark $28.64

Update: Cenovus offers an explanation of why it tanked almost 5% today (Apr 22). I doubled down on my short Cenovus Energy (CVE.TO) position this morning. The price of CVE.TO moved in my favour a day after my initial short entry. It then bounced back up strongly (about 2.5% rise in a day) yesterday to test \$29.50. However, it has backed down since. The fact that it didn't touch the \$30 price level is a good sign. Crude Oil (CL on NYMEX) made a similar move. It tested the 50% Fibonacci resistance at 84.5 and backed down. This is again a good sign for my short as it signals the downtrend is a go.

[caption id="" align="aligncenter" width="570" caption="Cenovus Energy Inc. (CVE.TO)"][][][/caption] However, crude prices became very choppy in the afternoon today as shown in Figure 2. So perhaps there is still room to move up. I will keep an eye on the 84.50 and 85.50 resistances for crude and 29.50 and 30.00 for CVE.TO in the coming days. [caption id="" align="aligncenter" width="512" caption="Crude Oil"][]1[/caption] A couple of other signs that I watched on this addition to my short position.

  1. this morning, the Bank of Canada gave strong hint that they will raise interest rate in June. However, USDCAD made a marginally new low briefly and then bounced back up above parity. This is bullish for USDCAD.
  2. EnCana earnings topped estimates but the stock dived after the opening rush with at least 3 times morning volume as compared to the past five days. ECA.TO is hanging on to the 31.5 support level before noon but closed above it today. This is not a good sign for the energy sector on the TSX.

A confirmation with this down move would be a break of the recent low at \$28 for CVE.TO and \$82 for crude oil.

Posted 21 April 2010 in stocks.

Bought +3 CVE.TO JUL 30 Puts @ 1.75, mark $30.10

I made my first trade in my RRSP! It is a short on Cenovus Energy (CVE.TO) via buying puts options. I chose the July expiry with the intention to dispose of this position in May. Two reasons for that. 1) Before time decay accelerates (about 60 days prior to expiry), and 2) before the summer starts (low volatility in summer, premiums are discounted). The following facts/opinions constituted my decision for this entry.

  1. TSX index is toppy according to weekly RSI
  2. TSX is losing steam this week versus the S&P 500 (see Figure 1), but this is probably due to the forex market
  3. MX Implied Volatility Index is testing 10.00 support again
  4. Energy sector is weakest of all 3 prominent sectors on TSX (Energy, Financial, Material) in intermediate term
  5. Oil is showing negative divergence on weekly chart
  6. U.S. dollar index is in uptrend and testing support at 80
  7. USD/CAD is testing major support at parity
  8. CVE.TO looks weakest amongst top 5 traded Oil/Gas on TSX (for liquidity)
  9. Negative divergence as seen on CVE.TO chart (Figure 2)
  10. \$30 is a strong resistance level (Figure 2)
  11. CVE.TO v. Crude Oil chart shows an intermediate term steady down trend

[caption id="" align="aligncenter" width="512" caption="TSX Composite v. S&P 500"][][][/caption] Stop: \$32. Target: \$27. Commission paid is \$12.95 on this trade (double that for a round trip). A rough estimate of the premium by May expiry if CVE.TO is priced at \$32 then would be \$0.80. Thus, I am risking about \$240 of my \$8,000 account in this trade on a worst case scenario. Which is 3% of my RRSP account. This is significantly more than my usual risk appetite (less than 0.2% per trade in forex trading). But any less would be pointless due to the high relative commission for options. I had the choice of shorting the market using options or leveraged bear ETF. The deteriorating value of a bear ETF made it less favourable for holding for more than a few days. So I traded options due to a lack of choices in my RRSP. Anyway, that's my thought on this. Yet nothing matters but the price. Let's wait and see how this goes. I plan to make one trade per quarter in my RRSP. This one is for Q2.

[caption id="" align="aligncenter" width="570" caption="Cenovus Energy Inc (CVE.TO)"][]1[/caption]

Posted 15 April 2010 in stocks.