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Short-Term Trading in Options.

Wednesday 19 January 2011

For the sake of simplicity, we are going to focus our options trading blog on one trading system, what we call M5 3 ASP LT 2a, which is currently up 28% trading options since 12/20/10.  It isn't our best system; but it IS our best intermediate-term system.


CGTS OPTION  PORTFOLIO (Since 12/20/10) Active
% Gain 1/18/11 Profit Trades
30.30% Option Trades $548,413 181
27.59% M5 3 ASP LT 2a $82,764 30


M2F 14% Trading System.      
Bought CPA  Jan 55 calls @ 2.95 on 12/27/10.  Sold 1/18/11 @ 4.4.  Gain of  49%.
Bought ELY Jan 8 calls @ .45 on 12/28/10.  Sold 1/18 @ .2.  Loss of 56%.
M4 Accum 00 14 Trading System.      
Bought UNH Jan 14 calls @ .21 on 12/21/10.  Sold 1/18/11 @ 2.94.  Gain of 1299%.
Bought NBIX FEB 7.5 CALLS @ .7 on 1/3/11.  Sold 1/18/11 @ .4.  Loss of 47%.
M5 3 Combo Trading System      
Bought SAH FEB 12.5 CALLS @ 1.35 on 1/3/11.  Sold 1/18/11 @ 1.15.  Loss of 15%.
TBT M5 3 ASP LT 2a 39.06 Long  
TBT Feb 30 calls 9 Long  
UPS M5 3 ASP LT 2a 73.02 Long  
UPS Feb 70 calls 3.56 Long  
CEW M5 3 ASP LT 2a 22.49 Long  
CEW APR 22.16 CALLS 0.55 Long  
EPP M5 3 ASP LT 2a 47.11 Long  
EPP 45 CALLS @ 2.55 2.55 Long  
HAL M5 3 ASP LT 2a 40.04 Long  
HAL FEB 38 CALLS 2.85 Long  
HD M5 3 ASP LT 2a 36.02 Long  
HD FEB 35 CALLS 1.1 Long  
HME M5 3 ASP LT 2a 55.51 Long  
HME FEB 50 CALLS 5.75 Long  
LWSN M5 3 ASP LT 2a 9.36 Long  
LWSN FEB 7.5 CALLS 1.65 Long  
NIB M5 3 ASP LT 2a 42.9 Long  
ROK M5 3 ASP LT 2a 74.46 Long  
ROK FEB 70 CALLS 5.45 Long  
VIX M5 3 ASP LT 2a 15.87 Short  
VIX Feb 15 puts 3.1 Short  


First, we'd like to say that our Buy Signal on VIX puts -- and our Buy Signal on TBT calls, long-term TBond interest rates -- are indicators that the current trend has some more legs with which to run.

We like NIB above here also -- the Cocoa ETF -- but NIB does not offer options so we might stop following it.

Pricing of Options: We wanted to buy TBT Feb calls but wondered which one of the near-term in-the-money or slightly out-of-the-money made more sense to buy.

The table below looks at the call Feb options for TBT and their current listed prices (note: we work with the close, but if the close is not in the bid/offer range then we average the range).  We looks at strikes between 20 and 36.  TBT is currently trading at 39.06 -- so the far right column simple subtracts the current price (39.06) from the strike (the 20 strike subtracted from 39.06 gives us 19.06).  So the 20 should be trading at least for 19.06.  It is not; it is trading only for 19.  Which gives us a premium to buy this call (a premium of .60; see the first column, listed as 'Real Cost'.  The Feb 28 call is trading at a premium of 11.06 (39.06 - 28); but the Bid/Ask on the call is 11.1.  We're paying .04 for Time Value here.  Which is where most of the calls are trading.  But look at the Feb 33 calls.  6.06 is the current differential; but the ask price for this option is 6.15.  We'd be paying .09 for Time Value to buy this one.  Feb 35 calls would cost us .34 over the current literal difference.  We decided to buy the Feb 30 calls at 9.  These should be trading at, at least, 9.06.  When we put in our order we put a limit order to buy them at 9.0.

Stock T BT    
Close 39.06   LIT
Options Strike Cost DIFF
FEB calls      
Real Cost      
0.06 20 19 19.06
-0.04 28 11.1 11.06
0.06 30 9 9.06
-0.04 31 8.1 8.06
-0.04 32 7.1 7.06
-0.09 33 6.15 6.06
-0.14 34 5.2 5.06
-0.34 35 4.4 4.06
-0.44 36 3.5 3.06

Why do we like options?  See the chart of UNH below.  We gained 1300% in about two weeks.  We'll be telling your later reasons we don't like options.

UNH calls: gain of 1300%.

We like HD, Home Depot, very much here.  This is probably our chart focus today -- meaning we'd take this over the other trades if limited to one trade.

Everything looks good in the HD chart except M2F ALT (third pane down), which is at an overbought level already, where it can remain for some time.  Both M5 3 (red line) and M53 Average (blue line), both in the top pane, are turning up and getting ready to rally.  M4 Accum (black line, top pane) has tried to turn down and has run into heavy buying instead.  A horizontal stalling is a positive with this indicator.  M4 Sum Plus 21 (rev), black line pane two, has had its downturn and has bounced back up, right where you want it if you are going long.  M2F ALT is overbought, as I have said.  The Chart Meter, brown line, fourth pane down, and its average, Chart Meter ASP, are rallying.  The ChartScrum has broken back up to the positive side.  And the final indicator, bottom pane, M2F ALT vs 14%, compares two short-term momentum indicators.  When it is up, the probability of a price increase is heightened.  Our M2F ALT 14% Trading System is up 48% since 12/20/10.

We have some 'bonus' charts tonight: buy calls on TBT.  This suggests the high interest rate environment will continue, in terms of long-term bonds.  Is this because bond vigilantes are avoiding treasuries as an indication that they consider Dollar-bashing by the Fed to be a form of default?  Or is it because traders fear coming inflation with the economy making such a dramatic recovery?  Well, bond yields in Greece, Portugal, Ireland, Belgium and France seem to have nothing to do with a projected economic expansion -- so the same in the US may also be true.  The chart says nothing about the underlying reasons for this weakness in treasuries.  Clearly China is not buying as much as they have.  Apparently, even with Ben Bernanke buying US TBonds hand-over-fist, demand has slackened; and this chart says it will continue to slacken.

UPS, United Parcel Service, has a beautiful chart also, for bulls, quite similar to the HD chart above.  Note how M5 3, red line, top pane, has been 'predicting' a decline for three weeks by sliding down.  But notice also the buyers resistance to selling.  M5 3 is a warning shot.  If the trends (two red lines, second pane from the top) don't decay, then this is a positive.  We had a 'selling time' and no one sold.  Now M5 3 is bottoming; M4 Accum (black line, top pane) is also bottoming.

VIX, CBOE Volatility Index (the anti-stock index) is giving a shortsell signal.  We've bought puts (Feb expiration) -- and we read this as confirmation that the rally is intact.  Not much positive in this chart, except that M2F ALT, brown line, third pane down from the top, is oversold.  But note the extent of the M2F ALT rally last time.  Overbought is 100.  The last VIX rally carried to 68.  An inability to reach overbought levels is bearish.  M4 Accum, top pane, black is also topping.  M5 3 is breaking down again (red line, top pane); and the M5 3 average (blue line, top pane) is rolling over again.  Trends continue to be negative (red lines, second pane down).

A Disclaimer of sorts:

I will update these positions regularly, so we can all see how we are doing with our short-term speculating.

I am bullish on gold long-term (until Bernanke is fired, and more generally until about 2019, the end of the deflation cycle) -- and I'm relatively bullish on stocks until QE is abandoned.  QE does many things, one of which is to try to make sure that stocks and bonds don't decline.  The Fed, quite likely, has guaranteed to bankers the advance of stock prices.  As long as the Fed is willing and is allowed to backstop stock prices, short positions are very dangerous, except in isolated cases.  Bond vigilantes are showing Mr. Benanke that his designs may not be able to proceed without resistance however.  Rising rates are a slap in the face of American power; the slap is welcomed by those of us who think debt is the problem that needs to be addressed, destroyed, rather than expanded and extended.

Trading options is highly speculative and can be dangerous.  Pricing of options is never very clear; buying options is almost always less prefereable than selling options, in terms of likely profits.  But buying options gives an investor a HUGE BANG FOR THE BUCK.  Getting accurate price data on options (especially those thinly-traded) is also often a problem, with which we'll have to work.  Typically we work with the last close, if it falls between bid and offer.  If it does not, then we average the bid/offer.

If one knows what direction a stock is moving, short-term options can be profitable.  The problem with options, of course, is that they, like ourselves, decay with time.

The cheaper options expire more quickly (one can always buy long-term options is one wishes to speculate on long-term stock or market moves).  I like short-term expirations, cheap options, and getting in and out (with profits).

I have many short-term trading systems.  I will use several in this Options Corner.  The first I start with I call "M5 3 Chart Trade" which really relies on the M5 3 Momentum Indicator to trigger the trade, always in the same direction of the major trends.

Successful trading!  We know the game is fixed; but let's ride on the back of the dragon for as long as we can.

More information on the CGTS systems can be found at:

Clark's Gate Timing System
Hanoi, Vietnam
84 4 221 92210