I sold my Apache April 135/125 call spread yesterday after I had reached a 100% gain on it. I could have probably made more as oil is up even higher today, but I wanted to lock in a rare profit for me.

This trade was very attractive to me at the time when I bought it in December, it had a potential 900% gain if the stock hits 135 by April expiration, but as March options are going to expire soon theta is going to kick in pretty quickly and if I don’t start to get in the money soon then I’d be really hurting. APA has already had a nice run-up lately and in this market things don’t continue going up for very long so I wanted to take the profit I had while I still had it. Looking at it today, I would have been up only 85% so I’m glad I sold when I did.

This was perhaps the longest time period of an option I had ever purchased: 4 months! At the time I bought it APA was over $100 a share, then it swooned downed to 90 then recently rallied with oil and natural gas rallying. It’s been a wild roller coaster ride but buying that extra time allowed me to get into or near a profitable price point through the crazy volatility.

NOTE: after taking a second look at this chart I just noticed a couple of “hammers“. I just read about hammer and hangman reversal signals earlier this week in TASC and this chart has a good example of two hammer trend reversals.

I have yet to understand how an option contract can have such huge volume on such little open interest. At any rate the put action on UBS the other day was an extreme example of this. Looks like a lot of people are betting on UBS going down sometime soon.

P.S. I later learned that open interest is how many contracts had been written and were still open at the open of the market, and when there is a huge volume/open interest disparity it is a combination of those contracts being traded over and over, but, more likely, that many new contracts have been created that day after the market had opened buy new options writers (sellers of new contracts).

The ADX/DMI is a technical indicator growing in popularity. The more I read about it the more I like it and more people seem to be liking it as well. Here’s a primier on the ADX/DMI. In today’s market it’s pretty hard to find stocks in a strong positive trend, except for gold (GLD) or oil (USO) but there are plenty in strong negative trends that might provide for some good short opportunities. Does anybody know of any good ADX/DMI cross-over screeners online?

I’ve been pretty inactive with the market lately. I put on some long-term call spreads back in December and the January sell off really killed them. They are spread out to April so I still have time but they’ve got a long hill to climb and I may get out of them soon while they’re still worth something.

The market in general is pretty tough for my “take profits when you’re +100%, cut losses when you’re -50%” criteria as volatility is very high, making options pricy, and the market is not trading in any real long-term trend as it is trading in a large range with massive intraday swings, so it’s hard to make directional picks unless you can pick a top or bottom and are actively trading these things, looking for smaller but more nimble gains.

My day job has kept me pretty busy and I don’t have time to day-trade the market now so I’m on the sidelines so far. I’m looking at perhaps just selling some covered calls for some small income plays to sell volatility, or look at buying stock in some beaten down names and just keeping them protected with collars. I’ll let you know what I decide.

Nice Elliott Wave 4 Buy triggered from ProfitSource on VRSN

LATER, Jan 17: This trade went sideways then down, a total loser, expired worthless. On this note I returned my ProfitSource software within my 30-day trial period.  Elliot Waves only work in directional markets and we’re not in any certain direction right now.

RIMM’s up 15% after hours after posting earnings. This morning I bought some Jan 130 calls just because

1. I liked how the market responded to Oracle’s earnings yesterday and that instills confidence that the tech sector is still strong
2. The VIX is dropping which means a more saner market ahead of us
3. And, well, despite my better judgment, it just felt good, and I still love my Blackberry

I’m hoping I will have doubled my money by tomorrow morning. This is one of my favorite stocks to trade.

… The next day …

I sold out early this morning for a 54% gain when the stock was hovering around $117, but, hey, it was a one-day gain and in this wacky market I’ll take what I get. The stock’s at $119 now 2 hrs before market close which would have given me a 100% gain on the options but I’m OK with it. I think with volatility dropping though I would be more apt to hang on longer and not be so trigger happy.  In retrospect I should have just put a trailing stop on it to protect my profits while letting it run, but I’m not too familiar with that feature on optionsXpress yet but that’s something to study up on over the weekend.

My first batch of Elliot Wave 4 buys using my new ProfitSource software stopped out for a 50% loss. This software’s predictions are supposed to be correct about 70% of the time if you add in the Fibonacci projector and the oscillator correctly. So far I’m 0-1 with it

I had purchased a March OTM bull call spread after the green bar breakout over the EBOT (Elliot breakout trigger) thick blue line but it never really got any higher than that and retraced back to where it was previously and, in today’s market, even lower. Looking back in retrospect, this didn’t look like a good trade as the oscillator didn’t make higher highs when the stock made higher highs. I’m not sure why I didn’t see that before when I put on the trade. If I had I wouldn’t have done this. Ouch! Maybe I was too anxious to put my new software to work.

LATER….

Well, it’s back up from where I sold it but too bad, I had to follow my rule and get out when a position is down 50% or more, so no crying over spilled milk.

The implied volatility on Research in Motion (RIMM) is through the roof! What a great time to sell some options. However, I don’t want to go naked so I’m considering some OTM covered calls that expire this week after buying some stock and just hoping they expire worthless. Or, if they get exercised then so be it, I still get to pocket my credit from selling these crazy-expensive options here. Earnings come out Thursday, options expire on Friday.

The question I should ask, as any good trader would, is “how much can I lose?” Well, my Optionetics pals don’t look on covered calls too well because they have unlimited risk (the stock has no downside protection). I can remove the unlimited risk by using a collar instead but then I have to put up extra money to buy the put to protect the downside.

I guess I’m not too worried about RIMM going to $0 anytime soon or to anything close to that and feel OK just placing a nice stop loss in case it goes south.

On Wednseday morning Lehman Bros (LEH) released quarterly earnings. There was a lot of negative sentiment against LEH going into earnings and I considered getting buying some puts on Lehman but I didn’t do it soon enough and I don’t like buying options the day before the announcement due to the risk of getting caught in a volatility crush.

Shortly after the earnings announcement in the morning, the stock was down $2.08, almost a 3% move down. However, the December front-month ATM and OTM puts, which should have gone up, actually went down in price. The reason is that once the earnings came out uncertainty went down, which decreased volatility. Volatility affects options closer to expiration . This teaches 2 things when trying to time the market with options:

1. When volatility is high (like the market is now) beware of volatility crushes like these
2. You’re more likely to be a victim of volatility crushes when playing with options close to expiration

I had been the victim of a crush in the past and didn’t know what it was and didn’t understand why when the underlying stock of my calls went up why my call options went down in volume. That’s because as a beginner I often traded front-month option near earnings. Sometimes it worked as an earnings surprise was announced, surpassing all of the volatility premium I had paid for. However, on other times what the company announced was what everybody expected, or worse, and I got caught in a crush.

Biogen (BIIB) had been on a tear the last few months on speculation they were going to get bought out. I sensed that when they announced earnings earlier this week the stock might pop one way or another, but wasn’t sure which way. When we think a stock is going to move but we’re not sure which way then we can put on a straddle, or it’s more aggressive sibling, a strangle. I didn’t get around to putting on a trade since I have only recently learned this strategy and I was nervous trying to put on a trade so close to earnings.

Turns out the stock dropped hard after they announced on Thursday morning before the market’s open that they had not received any bids to be purchased. This caused all of the buyout speculation to wash away for a one-day $17 (approx 22%) drop.

Ok, since hindsight is 20/20 let’s look at how our supposed straddle or strangle migh have worked out for us.

On Wednesday, the day before the announcement, the stock closed at $75.05. A straddle, which buys calls and puts of the same strike price, usually ATM. So on Wednesday an April $75 straddle looked like this:

BIIB April $85 Straddle
Wednesday’s Closing prices
APR 75 Calls - $6.82 for a $682 debit
APR 75 Puts = $5.00 for a $500 debit
Total Debit = $1,182.00

Thursday Late Morning prices
Apr 75 Calls - $1.00 worth $100
Apr 75 Puts - $16.97worth $1,697.00
Total Straddle Value: $1,797.00
Total 1-day Gain: $615.00 or 52%

BIIB April $65/$85 Strangle
Wednesday’s Closing prices
APR 85 Calls - $2.40 for a $240 debit
APR 65 Puts = $1.90 for a $190 debit
Total Debit = $430.00

Thursday Late Morning prices
Apr 85 Calls - $0.30 worth $30.00
Apr 65 Puts - $10.01worth $1,010.00
Total Strangle Value: $1,040.00
Total 1-day Gain: $610.00 or 142%
So while the strangle made as much money as the straddle, the strangle made almost 3 times more money on a percentage basis because we would have risked much less money to get the same dollar return as the straddle.

P.S. I looked at April’s strikes to avoid a volatility crush so close to earnings and to buy some time in case our expected move doesn’t happen and we may want to modify or adjust our trade.