Would anyone like to share their favorite short positions?

Like Spreadtrader said … I would be VERY careful shorting stocks against the overall trend of the market. The market is in a strong uptrend and not showing signs of breaking down yet. While every knows the market is overbought and is “due a correction” the market will do what it wants. It could run for another 6 months, but nobody knows! You will get burned if you try to predict the way of the market, and you will get burned going against the overall trend of the market. That's a fact…

Post edited 7:55 am – October 2, 2009 by spreadtrader

I'll bite on this because the herd has started running for cover, probably in sympathy with what occurred in these markets a year ago. Who knows where they'll run. I like seeing confusion in the markets. It increases volatility, which increases option premium. It also usually signifies an impending buying opportunity. Recall the “VXO indicator”. It might be worthwhile to watch it now.

Understand, I'm not advocating selling stock short. However, I trade situations and one of the things I'm seeing is weakness in some sectors and stocks, especially in relation to the present “digestive correction”……(pass the Rolaids, please). Under these circumstances, I prefer to buy ATM puts. First, there is leverage with no margin. Second, as prices fall, volatility rises so we make money on two of the elements of option value.

November should be far enough out there. I imagine that the market will be ready to hum again within 45 days, but you never know. So at least compare December with November prices when you check out these potential short term trades.

Next we start screening for likely candidates; and the first screen is using stocks with options. Then I look for weakening stocks within unfavored or overbought sectors. Weakening how? I like stocks that are overbought, with recent negative weekly momentum. Ideally they are on a sell signal, having just broken through their downtrend line. I like buying options cheaply so after the breakdown I particularly like it if the stock has reversed into a column of X's (or re-testing a broken trend line on a candle chart).

So how do we find those stocks? Anyone who uses DWA must discover the “query” function. It saves LOTS of time. Go to the “query” page using the link at the top of the main page and start refining your search. After I selected “optionable only” stocks, I next moved to the “Trend Chart” section and selected stocks on a “sell” signal in either a column of X's or O's in a “negative” trend from 1 to 14 days. That's it. It gave me 33 stock charts to look at.

Interesting list of stocks and I'll discuss four……

RAH…….the food sector is unfavored and the stock is breaking down as described above. Once this closes below 58.00 it should move to 53.00 – 51.00 and if it breaks below that area it could quickly move to 47.00. I really like the December 55 puts for 1.50 or less. This is my #1 trading candidate on this list.

BG……..the food sector is also one of the most overbought so I'm picking on it. If this stock breaks below 60.00 it should go to 54.00. I'd like to buy the 60.00 puts at 3.00 or less, so the stock will have to jump up some, but if you can get those puts below 3.00 sometime next week, the favorable risk/reward is pretty obvious if you do the math.

UGA…….the oil sector appears to be weakening at least temporarily and the seasonal tendency for gasoline is negative. I'd look at the November 32 puts for 2.00 or less. If this breaks below 30.00 it's headed to 25.50 – 27.50. This is my #2 trading candidate.

POT……..while the chemical stock sector is favored, it its overbought and this stock in particular looks to be in trouble. In addition to fulfilling my screening criteria above, monthly momentum (longer term) has just turned negative. I'd like to buy puts if the stock will jump up to the 88.00 – 90.00 area. If it closes below 86.00 it may be headed to 75.00 – 78.00. So I'd like to buy December 85 puts and sell December 75's for a spread debit of about 3.75 or better. You can adjust strike prices and calendar months to fit your risk tolerance.The risk/reward is almost 3/1 risking all of the premium (you may not want to do that).

OK, we'll talk about five. Another one on the list to look at for comparison to POT is MOS, where earnings are out next Monday. The stock has started down so it may already be anticipating a negative earnings report. However, October 45 puts are 1.55 and they don't expire until the 16th. This would be a trade for gymnasts………questions if you have 'em.

…….enjoy the weekend.

Post edited 1:06 pm – October 2, 2009 by smiling2bank

Spreadtrader,

How do you determine the amount that you are willing to pay for a given month and strike? 

For example, you are willing to buy RAH December 55 puts for 1.50 or less. 

How did you determine that 1.50 was a fair price?

ST:

I also noticed that you don't like to buy options with expiration dates too far out because of the extra premium attached to the longer expiration.  So based on the present price of the stock, the strike price and the asking price for the put option, you determine how much the stock has to fall in order for you to make money with the put. Since there is good correlation between movements of the stock and associated NTM and ATM options close to the expiration date, one can, with experience determine the probablility of making money. I am trying but still lack the experience to know if a say, $2 gap is closeable within 6o days or so.

Please continue to impart your wisdom on the rest of us.

Allow me to answer.

Dorsey Wright Associates as in http://www.dorseywright.com

You can sign in and get a 21-day free trial. Lots of useful lessons in PnF charting.

spreadtrader said:

Post edited 7:55 am – October 2, 2009 by spreadtrader

---

I'll bite on this because the herd has started running for cover, probably in sympathy with what occurred in these markets a year ago. Who knows where they'll run. I like seeing confusion in the markets. It increases volatility, which increases option premium. It also usually signifies an impending buying opportunity. Recall the “VXO indicator”. It might be worthwhile to watch it now.

Understand, I'm not advocating selling stock short. However, I trade situations and one of the things I'm seeing is weakness in some sectors and stocks, especially in relation to the present “digestive correction”……(pass the Rolaids, please). Under these circumstances, I prefer to buy ATM puts. First, there is leverage with no margin. Second, as prices fall, volatility rises so we make money on two of the elements of option value.

November should be far enough out there. I imagine that the market will be ready to hum again within 45 days, but you never know. So at least compare December with November prices when you check out these potential short term trades.

Next we start screening for likely candidates; and the first screen is using stocks with options. Then I look for weakening stocks within unfavored or overbought sectors. Weakening how? I like stocks that are overbought, with recent negative weekly momentum. Ideally they are on a sell signal, having just broken through their downtrend line. I like buying options cheaply so after the breakdown I particularly like it if the stock has reversed into a column of X's (or re-testing a broken trend line on a candle chart).

So how do we find those stocks? Anyone who uses DWA must discover the “query” function. It saves LOTS of time. Go to the “query” page using the link at the top of the main page and start refining your search. After I selected “optionable only” stocks, I next moved to the “Trend Chart” section and selected stocks on a “sell” signal in either a column of X's or O's in a “negative” trend from 1 to 14 days. That's it. It gave me 33 stock charts to look at.

 

Interesting list of stocks and I'll discuss four……

RAH…….the food sector is unfavored and the stock is breaking down as described above. Once this closes below 58.00 it should move to 53.00 – 51.00 and if it breaks below that area it could quickly move to 47.00. I really like the December 55 puts for 1.50 or less. This is my #1 trading candidate on this list.

BG……..the food sector is also one of the most overbought so I'm picking on it. If this stock breaks below 60.00 it should go to 54.00. I'd like to buy the 60.00 puts at 3.00 or less, so the stock will have to jump up some, but if you can get those puts below 3.00 sometime next week, the favorable risk/reward is pretty obvious if you do the math.

UGA…….the oil sector appears to be weakening at least temporarily and the seasonal tendency for gasoline is negative. I'd look at the November 32 puts for 2.00 or less. If this breaks below 30.00 it's headed to 25.50 – 27.50. This is my #2 trading candidate.

POT……..while the chemical stock sector is favored, it its overbought and this stock in particular looks to be in trouble. In addition to fulfilling my screening criteria above, monthly momentum (longer term) has just turned negative. I'd like to buy puts if the stock will jump up to the 88.00 – 90.00 area. If it closes below 86.00 it may be headed to 75.00 – 78.00. So I'd like to buy December 85 puts and sell December 75's for a spread debit of about 3.75 or better. You can adjust strike prices and calendar months to fit your risk tolerance.The risk/reward is almost 3/1 risking all of the premium (you may not want to do that).

OK, we'll talk about five. Another one on the list to look at for comparison to POT is MOS, where earnings are out next Monday. The stock has started down so it may already be anticipating a negative earnings report. However, October 45 puts are 1.55 and they don't expire until the 16th. This would be a trade for gymnasts………questions if you have 'em.

…….enjoy the weekend.

 

Here is an update:

RAH Dec 55 put is up 40%.

BG Nov 60 put is down 40%

UGA Nov 32 put is down 32%

Pot Dec 85 put is down 23%

Hi Will,

Long on what puts? You don't tell us what you bought.

Before you answer, how many times have you read one of my posts where I recommend that you have a PLAN for every trade? For the trades that you did, what was/is the PLAN?

Never enter a trade that you don't have a plan for exiting if it doesn't go your way. The plan could be “let the option expire worthless”………but have one.

Looking at the DGX, MCO, USL, FDO and CLH charts, there's only one that I see where I'd definitely not be holding naked long puts. Do you see which one?

Think about it over the weekend. The markets will be there on Monday.

Post edited 3:05 am – October 18, 2009 by Will

spreadtrader said:

Hi Will,

Long on what puts? You don't tell us what you bought.

Before you answer, how many times have you read one of my posts where I recommend that you have a PLAN for every trade? For the trades that you did, what was/is the PLAN?

Never enter a trade that you don't have a plan for exiting if it doesn't go your way. The plan could be “let the option expire worthless”………but have one.

Looking at the DGX, MCO, USL, FDO and CLH charts, there's only one that I see where I'd definitely not be holding naked long puts. Do you see which one?

Think about it over the weekend. The markets will be there on Monday.

ST:

My mistake was that I was lazy. I just look up the DWA PnF charts for all 5 of the above and decided that MCO, FDO, CLH looks good. If I had look at the VXO chart, I would have noticed that the x is awfully close to the BRL and infact crossed the BRL on Oct 2, the day of your post (but I only learned about VXO yesterday). If I also had looked at the candlestick charts of MCO, FDO, and CLH, I would have noticed that all three had a long series of down days from a previous high (almost 3 weeks where supply exceeds demand) so to expect the stock to go down much further is probably not reasonable. I actually pulled the trigger on 10/6/09, by which time the candlestick charts had clearly taken an upward path.

All three were hovering around a certain support level and by 10/6/09 were clearly rising away from the support. If anything, a NTM call option would have been the appropriate choice.

As for my exit strategy, these are my plans:

CLH: I bought Nov 55 put for 2.50. Current price of CLH is 59.97. The next resistance is 60.00. If it doesn't past that, it may go down quickly to 55. If it gets past 60, the next resistance is 61.50. By the Nov expiration date, the price of the stock will probably be somewhere in the 56~57 region. I can probably recoup some of my capital a week or so from expiration. A Dec NTM put could be considered. Selling an OTM put is an option but I may not get much for it. Besides, I hate to own this stock if and when it was exercised.

FDO: I bought the Nov 25 put for 0.65. Current price of FDO is 28.36. Resistance at 28.75. If it doesn't get past this, it is likely to drop back 26, by which time, I might be able to recoup 50% or more of my capital. I could buy a Dec NTM put to capitalize on the downswing.

MCO: Since May, MCO has been making lower highs and lower lows. I bought the Nov 20 put for 2.00 and the current price of MDO is 24.02. The previous local highs are 26, 27.5 and 29.50. If it get past 26, it would have bucked its trend of lower highs and lower lows. If it couldn't get past 26, it could be heading down. I could buy a Dec NTM put to profit from its downswing.

Morale of my story: Do not be lazy. The carpenter's rule applies to stock trading as well. Measure twice and cut once. In stock trading-Look up PnF chart, candlestick chart, and understand and determine relevant support and resistance levels, and last but not least seeks advice from fellow Gumshoers who are more experience than yourself

BTW, Smiling2bank  is correct that USL is breaking out so you wouldn't want to hold naked puts for USL.

IACI

Insider selling of IACI shares by 1 person totals almost 1 million today with a total of 4.5 million over the last three months. Question is why just one person selling?

DWA analysis of IACI as follows:-

IACI is trading above its bullish support . Relative Strength against the Market is on a Sell signal and the Relative Strength chart is in column of O's. Weekly momentum turned negative on 09/18/2009.

Stock closed at 18.80 today. Next support level is at 18.20 and resistance at 19.80. If the support level couldn't hold, we are looking at the next support of 16.

A NTM Dec 17.50 put at 0.30 or a Jan 17.50 put for 0.40….or

an ITM Dec 20 put at 1.40 or Jan 20 put at 1.60 which is the better choice? I suppose it really depends on how it open tomorrow morning.

spreadtrader said:

I wouldn't be selling now (unless you're taking profits) until the market tries to recover (which it will) and there is additional indication that the sky is really falling. (Sorry “tweety”, I'm not trying to jinx the market ).

………hang onto your hats, the ride is getting bumpy, eh?

Does “I wouldn't be selling now” refer to selling puts or selling in general.   Your overall tone makes me think you're doing more than hunkering down…

I realize 'he (or she) who hesitates is lost'.  Have the indecisive among us missed the opportunity to sell?

Nice come back yesterday for the market , lets keep it going .
JUNP i believe should have a good day, they came out with great news twice this week .
triples their work force this quarter and the growth in North Carolina .
RSI LINE is bullish 50.21 just might be worth keeping an eye on it !!!!!!

I think Optionzone was also recommending puts on MCO.

smiling2bank said:

I think Optionzone was also recommending puts on MCO.

DWA is also recommending going short on MCO. The recent rally by MCO up to 23~25 has increase the reward/risk ratio. The next support level is 18.50 while the next resistance is 27. Last is 23.86. The Dec 23 put at 1.30 or better looks attractive