On May 4th I quickly observed a short trade on the SPY while interacting with another trader and this is what I found.
Price action had revealed many buyers in the 212 area and provided a short entry on May 4 or very quickly at the open on May 5 if after hours trading was not acted upon. Here is the initial trade setup:
- Stop 212.6
- Short Entry 211.35
- Initial Cover Target 208.53
- Risk to Return 2.26x
Again this is under the 3x limit, but let’s see how the trade worked out.
Price action immediately cascaded lower and quickly created 2 lower shelfs (210.94 and 210.31) to park your stops behind and immediately be profitable. Price action did not hit the initial profit target and slightly retraced creating another shelf to hide your stops behind at 209.95 after cascading lower and taking out previous lows and ultimately hitting the revised profit target of 207.71.
The question now, are there too many buyers once again and is another short setting up? That remains to be determined.
The last Thursday of April I entered two types of trades on BABA.
- 84/83 debit call spread for $.43 at $82.4 expiring 5/15/15
- 81.5 straddle for $5.73 at $81.65 expiring 5/8/15
The initial price target was 88 and the stops where loosely defined as I used the premiums for the stops. At the trade evolved so did the proper stop and ultimately the better trade location near 80.
On May 5 price action dropped quickly as remaining stop limits may have been hit. I speculate this was a wash, nevertheless, it revealed something very important, Buyers. Furthermore, buying price action increased from the 78 lows in the form of gradual higher highs and higher lows slightly above the line of maximum excursion (magenta line). This was the buy signal near 80 the day before earnings.
This trade location offered a Risk to Return of more than 3X with a price target of 88 and a stop of 77.85. This trade would risk 2 points to make 8 compared to my actual trade location risking 3.65 to make 6.5.
See chart here
After the EPS announcement price action immediately hit the 88 price target and at the open the spreads limit order of .90 was hit for a 109% trade. The straddle did not get exited until expiration friday as I determined that taking the stock would result in a sub optimal trade location given the cost of the put, so I exited the trade for a 6% gain relative to an 8% price move gain from the actual trade location, and a 10% price move gain for the better trade location in the 80’s.
The trade location is certainly important, but more important is focusing on sharpening and improving my skill.