Trading options - SLA - Day job

[Jericho574]

Took a second peek at GILD and I think I completely screwed up the weekly chart. Here's what I see today

 

[Jericho574]

So here are my thoughts of the day regarding SLA and option trading...they are not entirely compatible and it didn't take much time at all to discover.

The idea of basic SLA is to get in on confirmation, keep you in until a pull-back (the size of the pull-back is up the the trader) and then exit once stride is broken. If the trade goes against you immediately you get out with minimal loss or accept the price of admission.

It only took 1 live trade to see the problem of this...leveraged instruments require much more wiggle room than SLA would allow for. Yesterday my entry and subsequent exit were textbook SLA (enter after the break of the SL, just above the V), then exited at my price of admission once it rolled over within 2 hrs. The stock took a quick 8% haircut and my loss was 44%.

With the floor constantly rising on options, one must be patient when dealing with volatile stocks and patience & SLA (when using in it's strictest form) don't go together. I love the method for reading price, I'm just not sure options (where one must project price's final destination) and SLA (where one draft's behind where it's going currently) work well together.

 

[dbphoenix]

What you say about the incompatibility of the SLA and option trading may be true. However, it is not true that your entry and exit were "textbook SLA". First, AMT should not be ignored; the SLA and AMT work together. The fact that price reached the upper limit of the trend channel suggested a short, not a long, as in early December. This suggestion is strengthened by the sudden dropoff in volume as price appears to break out of the channel, that is, insufficient demand. The stop is placed above the breakout bar, that is, above 12.37. The market doesn't care if this is higher than the trader likes. The market has no comment on individual risk tolerance. It's up to the trader to read price, reach his own conclusions, and make his own decisions. If one were interested in being long, he'd wait at least until price reached the median of this channel, at about 9 (the last opportunity to do so was in early February).

 

[Jericho574]

DBP- I meant no disrespect to SLA, and I'll concede my remark about my entry and exit. Ironically enough, in post #13 I was suggesting a short based on the same volume observations. Apparently I can't follow my own advice. For it to be considered a BO, it should have been a more powerful break on higher volume?

Thank you as always, I greatly appreciate hearing from your vantage point.

 

[dbphoenix]

An understanding of volume is helpful, but it escapes many people so it's not included in the SLA short form posted here. In any case, it isn't necessary here. Price moves higher above the upper limit of the trend channel, stalls, rolls over, breaks the trend, then retraces. An entry stop for the short is placed in the RET. The cover stop is placed above the danger point. And that's it. If this does turn out instead to be a breakout launching a more acute upward trajectory into a new trend, the protocols address that as well. But if every thrust is considered to be a breakout, then none of this has any value.

 

[Jericho574]

XBI- On the daily went short a few days ago and it was going well. Today price reversed hard and took me passed the DP and I'm out with a loss.

What did I learn? Trading off the daily chart there was no discernible RET for which to create a SL. Friday's close was $.10 above Thursday's...if I drew lines that tight, I'd never go more than 1 day. Dropping down to the hourly provided the necessary RET's and I could've drawn a SL and hopefully gotten out at the purple dot.

 

[Jericho574]

LVS

Weekly- Bottom of the channel

Daily- Bounced off the channel and reversed.

Could be a TO tomorrow.

 

[Jericho574]

LVS- Broke through and I entered on the retrace

 

[Jericho574]

LVS- Nice gap up this morning. Going forward, I'm going to manage this trade using the hourly. There's just too much room to fill below.

Currently up 143%

I like to have a very high (200%+) profit% to account for the losers. My break-even win rate is 20%, anything over failing 80% of the time is profit.

 

[Jericho574]

BIDU

Weekly- Hinge

Daily- Found an area of interest where price has been bouncing off, went long yesterday EOD. Not an ideal SLA entry by any means but got the nice pop this morning. Unfortunately the fade has taken me from 100% down to 8% profit. Calls expire Friday so I need one more move tomorrow to scrape together a profit. The market looks like it's been in accumulation for the last 6 days, so hopefully today wasn't a "one and done" day.

Looking at the 1-min chart, I probably should've noticed the double top followed by the LH and exited north of the median @ 176.

 

[Jericho574]

Well market rolled over these couple of days. BIDU will be a zero (I was greedy and terribly mismanaged that trade as a result), and LVS has filled the gap and has actually left me in the red (although I have 2 weeks of theta left).

LVS analysis- 1) It reversed off the low of the weekly channel. I got in and got a pop. While I made and lost a lot of money over those two days, the SLA theory still is in play...it hasn't RET yet so I'm in the POA phase where either it hits hit DP and I'm out or it retraces up and makes a new high.

BIDU- Took a trade mid-hinge, got a gift and greed kept me in too long. Lesson learned.

I know this market isn't the smoothest, thus I would ask DB how does one trade this instrument when the floor is constantly rising and gaps/whipsaws are prevalent? (Yes, I know the most obvious response is "dont trade that market/instrument combination" lol)

 

[Jericho574]

So I'm totally in discovery/observation mode. I'm using TOS OnDemand and basically practicing (which also helps with money management considering my instrument is options)

I'm currently replaying a recent scenario on LVS and was hoping I could have DB or Gringo chime in:

Weekly- Bottom of the channel
Daily- It breaks stride pretty hard, RET, and then I get in (see green entry and danger point)
Daily 1- After a couple days I have no HH to provide a DL or LL to stop me out so I'm now thinking AMT
Daily 1A- A few more days and it looks like a hinge within the channel. I'm already in the trade so there's nothing to do yet.
Daily 2- Price breaks out and now I have a DL for which to manage the trade.

Is that applying SLA/AMT correctly?

Thanks!

 

[Jericho574]

Here's how my trade actually played out

Entered a little early, got my early pop, suffered for 6 days of chop (and watching my P/L go red), exited the first chance to become profitable.

What did I learn? Regardless of my actual entry or my hypothetical entry from the above post, at the time of my exit, price had never made a HH to indicate demand is in control (and provide a DL) nor did it hit my DP to indicate supply was still prominent. Once in the trade, I should've waited for one or the other.

Why did I exit? This was my reasoning at the time- From a weekly perspective we were at the bottom of the channel. It reversed as suspected (the dog was barking). However it immediately reversed (gap filled) back down, and then sputtered for 5 days (the dog went silent). That put me on high alert because if price is having trouble advancing at a level where demand was supposed to be greatest then maybe the move was not what I thought. My expiration was 1 week away and because the floor is constantly rising with options, my position simply could not endure a trip to the bottom of the daily channel. The point of SLA is to minimize losses and in this scenario my DP was not hit, yet my position was in the red. I felt that I should take my small winner and move on.

Edit- Also I spent too much time analyzing the hourly. On the hourly, price was spending a lot of time on the bottom half of the daily channel. It then put in a double top and at that point I was looking to escape.

Thoughts?

 

[dbphoenix]

Is that applying SLA/AMT correctly?

Yes. However, the DP is not the bottom of what is not yet a confirmed RET; it is the bottom of the REV off the trend channel, 51.35. The trader must determine what action will tell him that he was wrong. However, there is "wrong" about the entry and "wrong" about the trade. If price had dropped below the bottom of the unconfirmed RET, you may have been wrong about your entry, but you might still be correct about the trade itself, i.e., a long after the REV, and as price would have an opportunity to bounce off the trend channel again without dropping below the DP, there's no reason to panic just because price might test the REV further. If hanging on even if price had dropped below the "RET" had been outside your risk tolerance, exit the trade and re-enter off whatever subsequent RET there might be. And if price had dropped below the DP, your loss would have been much less than it would have been otherwise.

 

[dbphoenix]

Here's how my trade actually played out

Entered a little early, got my early pop, suffered for 6 days of chop (and watching my P/L go red), exited the first chance to become profitable.

What did I learn? Regardless of my actual entry or my hypothetical entry from the above post, at the time of my exit, price had never made a HH to indicate demand is in control (and provide a DL) nor did it hit my DP to indicate supply was still prominent. Once in the trade, I should've waited for one or the other.

Why did I exit? This was my reasoning at the time- From a weekly perspective we were at the bottom of the channel. It reversed as suspected (the dog was barking). However it immediately reversed (gap filled) back down, and then sputtered for 5 days (the dog went silent). That put me on high alert because if price is having trouble advancing at a level where demand was supposed to be greatest then maybe the move was not what I thought. My expiration was 1 week away and because the floor is constantly rising with options, my position simply could not endure a trip to the bottom of the daily channel. The point of SLA is to minimize losses and in this scenario my DP was not hit, yet my position was in the red. I felt that I should take my small winner and move on.

Edit- Also I spent too much time analyzing the hourly. On the hourly, price was spending a lot of time on the bottom half of the daily channel. It then put in a double top and at that point I was looking to escape.

Thoughts?

These charts don't match what you posted earlier.

 

[Jericho574]

These charts don't match what you posted earlier.

The charts in post 32 are how I would have applied SLA/AMT as of today. Thank you for correcting my DP point.

The charts in post 33 are my actual entry, and exit. I also threw in an hourly to explain my train of thought for exiting.

Below, I'm just thinking out loud and recording my observations.

The next issue I'm finding is money management with this derivative instrument. My entry is ~$54.20 (.55 per contract for my instrument) and my DP is $51.30. If my stop is hit, I lose 5% (stock). However as of Friday, the stock was down a whopping $.20 from my entry, but my position would have been down 56% (time decay). Ergo, a DP at $51.30 that's hit, yields a 100% loss for me.

SLA/AMT is for trading price not predicting the future.

 

[dbphoenix]

I suggest you re-assess your goals and your preferred means for achieving them. Time is not an aspect of the SLA. If time is important to you, then the SLA will not likely be of any value unless you daytrade, and if you daytrade, you will likely lose more than you would otherwise. If time is important only because you're trading options but you don't have enough money to trade the underlying, I suggest you look at ETFs.

 

[Jericho574]

I suggest you look at ETFs.

I'm guessing because their movement is less volatile than individual stocks?

 

[dbphoenix]

Because time is not a factor.

Again, what do you want? If you don't know, re-read "Developing A Plan", p. 21 of the SLAB.

 

[Jericho574]

I'm just writing down my thoughts

I truly believe one can successfully trade price this way but it requires you to adjust your way of thinking. I've been judging my perform on P/L% but that isn't exactly fair for this type of instrument. I'll make up numbers to illustrate my point- A $500 loss on a $1,000 play is obviously a 50% loss and sounds horrible....HOWEVER had one been trading the underlying their investment would have been substantially higher and the loss would've been minimal from a P/L perspective.

I look at my most recent LVS trade.That would've been $32,400 (600 shares * $54) if trading the stock. My DP was below $51.35...call it $51.00 for simplicity. So if price hit my DP, SLA would have had me out at a $3 * 600 = $1,800 or 5.56% loss.

Options give (and take) profits far superior from a P/L standpoint and you dont have to front the capital. The obvious drawback is having an expiration and strike price. That's where money management and having realistic expectations come into play. It's not realistic to think I can a make 200% profit while having a 5% stoploss. The stop would be hit if price goes sideways for 1 day.

My last trade was a 30% winner and I gave away an additional 250% as of today. I got out because I was scared of the loss. Had I stuck to the rules, I'd have stayed in as my DP was not hit, and it hadn't even made a HH to draw a DL. Going forward I will decrease my trade size and follow the rules without question.

Which brings me back to the money management. I plan to utilize SLA/AMT for entries and mid-trade management. Having a DP is essentially useless as I'd already be taking a total loss and at that point the last few % would better be served hoping for a morning gap. Also because I have time to worry about, I may exit prior to price breaking stride when it makes sense. If time is running out and there's a lot of space between price at a DL then it goes to say that a RET would destroy my position. If price has already gone my way and I'm not concerned about an upcoming expiration then I will follow SLA rules regarding exiting.

I guess I'm not trading SLA in it's purest form but I'm trading price in some form.