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David Kern
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David Kern is a self directed investor with the goal of capital growth. He posts all his trades and results at: www.abjectavarice.com. A lifelong entrepreneur, David was hailed by Lawnmowing International in 1988 as "a rising celebrity within the inner circle of lawn maintenance... More
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Abject Avarice - Thoughts on trading amidst fear and greed
  • UAL is Cleared for Takeoff 0 comments
    Jan 1, 2011 4:44 PM | about stocks: UAL

    UAL looks good to me right now, and I’ve initiated a position with a bit of a different strategy here.  I thought taking a minute to explain the technicals and the mechanics of the option position would be helpful.  First off, here’s the big picture point and figure chart:

    My chart notes should say it all, but this has all the makings of a strong stock that’s getting stronger.  More importantly, after showing its strength – Mr. Market has generously given us a second chance to buy low.  For the other P&F technicians out there, can you identify the recent buy signal I failed to mark on this chart?

    Working in from big picture to smaller detail, here’s fairly heavily marked up daily candlestick chart of UAL.  Click on it for a better view.  What I’m trying to show here is how UAL has a recent history of responding predictably to technical analysis.  There are plenty of stocks out there that can make you money, but if they’re not moving is ways your brand of technical analysis can identify – they’re no good to you.

    In particular, this daily chart shows that UAL has a history of falling back very precisely to Fibonacci retracement levels (the 61.8 in particular) prior to resuming the previous trend (in this case UP).  What’s even more noteworthy here is that the 61.8 is closely aligned with the 200 day moving average – another place we would expect buying interest to pick back up.  All of this is within the context of the broader markets continuing to be “on offense”, with rising bullish percents telling us that buyers are still in control.

    The way I chose to play this one had more to do with necessity than habit.  The quiet markets around the holidays have left me holding some positions I really like and not much cash to put into new ideas.  In this case I chose to make up for that limitation by using a low cost bullish vertical spread of call options.  This last chart shows how this works.  Because I’m expecting a strong move up over the next month, I used nearby (January 2011) options to minimize my time cost (theta for option geeks greeks).  By purchasing in-the-money calls at $22.5 and selling and equal number of calls at $29, I’ve removed much of the rest of the option premium.  This essentially creates a very low cost position about the same size I would normally hold – using very little of my capital but potentially reaping all the benefits.

    As always, you can track this on my stock portfolio page – though Google docs doesn’t make it quite as easy to track option pricing.



    Disclosure: I am long UAL.
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