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Trades and
Follow-up Commentary for
January
30, 2005
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Issue No.
5 (UPDATE G)
Last
Updated: 02-12-05 18:00
PST
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To all HOTS
Subscribers:
As you
probably recall, in our previous publication I
said:
"It has been my experience over
the years that the greatest potential for an
"accident" exists during times that the market
is undergoing a change in "character." It is too
early to tell whether the U.S. equity market
topped out at the opening on Monday 1-3-05, but
it is not too early to be cautious."
It has
been my observation, that during transition
periods in the market, quantifying risk
accurately is a daunting task because during the
"transition" we are actually dealing with two
sets of data points, not one. One set of data
points is associated with the previous market
"mode" with its own risk profile and another, is
associated with the mode that the market is
transitioning into, with a different risk
profile. During periods like these, when market
risk is not only elevated, but it is also
tougher to quantify, traders need to adopt a
defensive strategy, by having a portfolio whose
risk, is lower than that of the market, and that
was the reason for selecting a portfolio of
options that was 0.74 as volatile as the SP500.
Three weeks later, market risk remains elevated
but we have enough data points to quantify it
more accurately, and thus, I have adopted a
neutral strategy by selecting a portfolio of
options whose volatility is roughly equal to
that of the S&P-500 (see RiskGrades
portfolio rating below)
In addition, we have
two trades (GOOG, TASR) that on the surface may
appear complicated, and some of you may have a
tough time figuring out what in the world I am
trying to accomplish with them. There are three
reasons behind the way they are
structured:
a) I do not believe that
either stock will trade above, or below, the
strike prices of the options that we are selling
short, if they do, since we are "covered" we
have the luxury to re-evaluate at that time, and
decide if it makes sense to buy them back, and
let our profit on the long side run.
b) I
believe there is a good chance that at least one
of these two stocks will trade above the upper
and the lower break-even points during the next
3 weeks, and this way we can take advantage of
the move in both directions
c) Maximization
of the position's return per unit of risk.
I
would like to elaborate on "c" using GOOG as an
example, the same exact principle applies to the
position on TASR, so, I won't bother explaining
that, too.
One would say, why are you putting
on 4 trades when for the same amount of money
you can buy one 200 FEB. CALL, and one 180 FEB.
PUT, and keep it "simple?" Well, "simple" is
nice, I like it. Unfortunately, "simplicity"
doesn't always maximize profits. My job, and
yours -if you are a serious investor/trader- is
not to be "simple," but rather, to maximize
profits PER UNIT OF RISK. Take a look at the
comparative P/L between the two trades:
As
you can see, if you bought one 200 FEB. CALL,
and one 180 FEB. PUT, you would be putting
approximately the same amount of money at risk,
however, if you keep it "simple" you are risking
$1,300.00 to make $1,700.00, by doing it the
complicated way, you are risking $1,420.00 to
make $2,580.00. Need I say more?
In
conclusion, if you are going to put your money
at risk, do it in a way that maximizes your
return per unit of risk, if you do this each and
every time you trade, you will find out that
even if your ratio between losing and winning
trades remains the same, your profits will
increase, and the compounding effect over a
period of time can be staggering.
Good trading to
all.
Ike Iossif
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| Company: XL Capital Ltd.
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| Stock
Symbol: XL |
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| Suggested
Trade: |
| Long: February 75
Puts |
| Special
Conditions/Other: NO | |
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Comments: |
| The stock
has failed at the 80 resistance level for times.
At minimum, it ought to re-test support at 72.5,
and more than likely it will decline further to
70, or, 67.5. |
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Trading
Strategy:
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We
will buy 5 contracts of the February 75 puts,
our "exit" point for a stop loss will be a close
above 75.5. |
| Strike |
Symbol |
Last |
Chg |
Bid |
Ask |
Vol |
OpenInt |
| 75(P) |
XLNO |
2.05 |
0.60 |
2.05 |
2.25 |
34 |
623 |
| OPTIONS
Expire at close Friday, February 18,
2005 |
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| Company: NCO Group,
Inc. |
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| Stock
Symbol: NCOG |
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| Suggested
Trade: |
| Long: March 22.5
Puts |
| Special
Conditions/Other: NO | |
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Comments: |
| In my view,
the chart indicates a topping process that has
gone on for 16 months, and it ought to result to
a re-test of support at 20, and perhaps
17.5. |
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Trading
Strategy:
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We
will BUY TO OPEN, 5 contracts of the March 22.5
puts, our "exit" point for a stop loss will be a
price close (stock) above 25.
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| Strike |
Symbol |
Last |
Chg |
Bid |
Ask |
Vol |
OpenInt |
| 22.5(P) |
GCQOX |
1.00 |
0.00 |
0.80 |
1.00 |
0 |
20 |
| OPTIONS
Expire at close Friday, March 18,
2005 |
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| Company: Chicago Mercantile
Exchange |
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| Stock
Symbol: CME |
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| Suggested
Trade: |
| Long: February 210
Calls |
Long: February 200 PUTS
(1:2) |
| Special
Conditions/Other: NO | |
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Comments: |
| The stock
came down to support, and it held. When support
holds, usually, the stock attempts to re-test
resistance, which up in the 225-230 zone.
However, if the rally fails and it doesn't even
make it up to 225, then it will go back down
again, and this time support may not hold, which
means it can go all the way down to 150. In
either case, whether it goes to 225, or, to 175,
I expect the move to take place within the next
5-10 trading days, so, we ought to be able to
make money with the position. |
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Trading
Strategy:
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We
will buy 1 contract of the February 210 calls,
and 2 contracts of the February 200 puts
at market. |
| Strike |
Symbol |
Last |
Chg |
Bid |
Ask |
Vol |
OpenInt |
| 210(C) |
CMJBB |
7.40 |
0.20 |
6.90 |
7.40 |
754 |
2,478 |
| 200(P) |
CMJNT |
4.00 |
0.50 |
3.60 |
3.80 |
499 |
559 |
| OPTIONS
Expire at close Friday, February 18,
2005 |
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| Company: Google,
Inc. |
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| Stock
Symbol: GOOG |
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| Suggested
Trade: |
| Long: February 210
Calls |
| Short: February 220
Calls |
| Long: February 170
Puts |
Short: February 160 Puts
(1:1:1:1) |
| Special
Conditions/Other: YES | |
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Comments: |
| GOOG failed
at resistance three times, and then it broke its
up-trend which suggests a test of support at
160, or, at 150. However, earnings will be out
Tuesday, February 1, and anything can happen.
Therefore, I want to have a low risk position
that allows me to be flexible and re-adjust if
necessary. |
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Trading
Strategy:
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We
will BUY TO OPEN, 4 contracts of the February
210 calls, we will SELL TO OPEN 4 contracts of
the February 220 calls, and we will BUY TO
OPEN, 4 contracts of the February 170 puts, and
we will SELL TO OPEN 4 contracts of the February
160
puts.
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Conditions: |
| If the
stock closes below 175, we will buy back to
close two of the FEB. 160 puts, and if it closes
above 205, we wil buy back to close 2 of the
FEB. 220 calls. |
| Strike |
Symbol |
Last |
Chg |
Bid |
Ask |
Vol |
OpenInt |
| 210(C) |
GOUBB |
3.90 |
1.20 |
3.80 |
3.90 |
7,588 |
11,787 |
| 220(C) |
GOUBD |
2.20 |
0.60 |
2.10 |
2.25 |
6,628 |
13,509 |
| 170(P) |
GOQNW |
3.60 |
(0.10) |
3.50 |
3.60 |
1,567 |
10,017 |
| 160(P) |
GOQNY |
1.85 |
(0.15) |
1.85 |
1.95 |
823 |
5,108 |
| OPTIONS
Expire at close Friday, February 18,
2005 |
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| BONUS
TRADE 1 |
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| Company: Taser International
Inc. |
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| Stock
Symbol: TASR |
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| Suggested
Trade: |
| Long: February 20 CALLS
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| Short: February 22.5 CALLS
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| Long: February 15 PUTS
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Short: February 12.5 PUTS
(1:1:1:1) |
| Special
Conditions/Other: YES |
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Comments: |
| TASR
experienced a pretty severe break, in most cases
such break is terminal, and it also results in
an increase in short-term volatility. The odds
are better than even that TASR will re-test
either support at 14, or resistance at 22, or
even both, over the next 5-10 tradings days.
Therefore, I want to have a low risk position
that allows me to be flexible and re-adjust if
necessary. |
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Trading
Strategy:
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We
will BUY TO OPEN, 10 contracts of the February
20 calls, we will SELL TO OPEN 10 contracts of
the February 22.5 calls, and we will BUY TO
OPEN, 10 contracts of the February 15 puts, and
we will SELL TO OPEN 10 contracts of the
February 12.5
puts.
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Conditions: |
| If the
stock closes below 14, we will buy back to close
five of the FEB. 12.5 puts, and if it closes
above 22.5, we wil buy back to close five of the
FEB. 22.5 calls. |
| Strike |
Symbol |
Last |
Chg |
Bid |
Ask |
Vol |
OpenInt |
| 20(C) |
QURBD |
0.70 |
(0.15) |
0.65 |
0.70 |
1,993 |
19,698 |
| 22.5(C) |
QURBX |
0.35 |
(0.10) |
0.30 |
0.35 |
928 |
17,915 |
| 15(P) |
QURNC |
0.85 |
(0.05) |
0.80 |
0.85 |
805 |
20,067 |
| 12.5(C) |
QURNV |
0.35 |
(0.00) |
0.30 |
0.35 |
889 |
9,265 |
| OPTIONS
Expire at close Friday, February 18,
2005 |
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| BONUS
TRADE 2 |
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| Company: Affymetrix
Inc. |
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| Stock
Symbol: AFFX |
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| Suggested
Trade: |
| Long: February 45
Calls |
| Special
Conditions/Other: NO | |
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Comments: |
| AFFX closed
marginally above resistance, and if the break is
for real, the upside is 50, within the next 5-10
trading days. If the trade works out the
return-to-risk ratio is 40:1, which is
extraordinary. However, so, is the risk, and
that is why we are only risking a total of
$200.00! |
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Trading
Strategy:
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We
will buy 8 February 45
calls. |
| Strike |
Symbol |
Last |
Chg |
Bid |
Ask |
Vol |
OpenInt |
| 45(C) |
FIQBI |
0.25 |
0.00 |
0.20 |
0.25 |
118 |
448 |
| OPTIONS
Expire at close Friday, February 18,
2005 |
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| BONUS
TRADE 3 |
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| Company: Pharmion
Corp |
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| Stock
Symbol: PHRM |
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| Suggested
Trade: |
| Long: February 35
Puts |
| Special
Conditions/Other: NO | |
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Comments: |
| This is a
stock with a horrendous looking chart, with just
as horrendous fundamentals. It will take -in my
view- a miracle to save the stock from
obliteration, which of course is known to happen
on Wall Street, especially when one of the
stocks you are heavily short happens to be
involved! If the trade works out, the
return-to-risk ratio can range from 10:1 to
20:1, which is extraordinary. However, so, is
the risk, and that is why we are only risking a
total of $290.00! |
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Trading
Strategy:
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We
will buy two of the February 35
puts |
| Strike |
Symbol |
Last |
Chg |
Bid |
Ask |
Vol |
OpenInt |
| 35(P) |
JUTNG |
1.30 |
0.15 |
1.25 |
1.45 |
92 |
127 |
| OPTIONS
Expire at close Friday, February 18,
2005 |
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Positions as of the Close of Friday,
February 11th, 2005
| Symbol |
Last |
Change (ECN) |
Paid |
Value
(ECN) |
Gain (ECN) |
Cnts |
Name |
| CASH |
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$60,105.00 |
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| QURBD |
0.05 |
0.00 |
0.00% |
0.75 |
$50.00 |
($715.00) |
-93.46% |
10 |
TASR Feb5 20 C |
| QURBX |
0.05 |
0.00 |
0.00% |
0.25 |
($50.00) |
$185.00 |
69.81% |
-10 |
TASR Feb5 22.5 C |
| Total: |
$60,105.00 |
$10,105.00 |
20.21% |
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Please note the
following:
1) The recommended starting
capital is $50,000.00.
2) All
transactions include transaction
costs
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