Friday, 13 January 2017

Revisiting Disney, and now Nike

Back in August, I put on a trade based on a chart setup in Disney, the link to the original post is here:

And here was the monthly setup I identified at the time:

The way I played this was long two spreads. I bought one Jan 2017 $105/$110 call spread and I bought one Jan 2017 $87.50/$82.50 put spread for a net debit of $1.57.

I closed out the call spread today for $2.95 (after commissions), while the $87.50/$82.50 put spread expired worthless. Not bad for taking a flyer. Here's what I liked about this trade:

  • I was able to profit despite being direction neutral (I was both long and short, I just didn't know which way was correct at the time, nor did I need to)
  • I was able to allow myself lots of time between trade identification and time to expiry
  • I let the market do whatever it wanted to do
Here's what I did not like about this trade:
  • I did not have an open order in the market to close out the put spread. But, this is not a big deal, as Disney never actually got down below $87.50 where the p/s would have been profitable. I think that going forward, it would make sense to at least put a GTC order in the market on both legs in case there's a spike up or down in the market.

Here's how Disney turned out:

In my play account, I'm always looking for interesting setups and ideas, and I stumbled across Nike, see below, the setup looks eerily similar to Disney pre break out:

So, once again, I am simultaneously long the June 2017 $57.50/$62.50 call spread and the June 2017 $47.50/$42.50 put spread for a net debit of $1.54 in my IB account.

The difference now is that I have a GTC order in the market to sell the p/s for $2.95 and I may do the same with the call spread so whatever direction this breaks, I may end up making something on either a move down or a move up (or both).  I may end up adjusting the GTC orders to $2.50 to at least be halfway between the two strikes on either side.

The distance inside the pattern (call it what you will), is around $20, so conservatively, I expect a move either up or down of at least 1/2 of this distance, depending on how exuberant the Fast Money traders are on the day/week of the break out. The one thing I can count on is that the idiots on CNBC will work everyone else watching them into a frenzy chasing the breakout on their say.

My ideal scenario is a sharp move down to test $44, my GTC p/s gets bought by someone in a panic, and then a sharp retracement back up to $64, and my c/s gets bought by someone else in a panic, whipshawing everyone who was positioned incorrectly by listening to Fast Money in the first place along the way.

I know this all sounds a bit evil, but it really is a zero sum game of chess.  I really don't care which way it breaks, I just care that it breaks and hits my GTC orders on one side or the other, and the more volatile, the better.

The risk to me is that it doesn't move below the short strike in either case and I lose my premium.


  1. Those are some solid blue chip stocks to hold onto for the long term. They will definitely deliver you some great returns. All the best for 2017

  2. Interesting tactic doing a short iron condor. Is it the charts telling you it should break out in one direction. Admittedly I know very little about any kind of TA, it's been on my list of things to learn at least on a cursory level for years now. Any concern that your max gain is capped at ~$3.50 assuming it only breaks in one direction. Although that would be nice for it to test both ends of your IC and give you a chance to close both out for a solid gain.

    1. Hey JC, happy new year. I don't think I'm short an iron condor, that would involve being short the spreads, so the risk gets amplified with volatility (up/down). I'm basically long two strangles going in opposite directions, but I have reduced the cost of the strangle by selling higher and lower strike puts to create a synthetic $5 distance between long and short strikes.

      Disney worked b/c I believe the position had a lot of time to work, and the setup itself was conducive to some sort of resolution either way.

      My issue with Nike will be if the move happens too quickly, in this case, the short strike gets expensive to buy in, so instead of maximizing profit, profit is limited to around 1/2 way between the spread.

      In terms of capping my profit, I'm ok with that, b/c I look at the idea as a function of return on invested capital. Invested capital is $154, so even if I only leg out of one side of the trade at $2.50, my ROIC is pretty good at $96 / $154.

      Why one contract each direction you might ask instead of 10 contracts? Well, it's a function of account size. I'm trading a play account of $15K, so $154 is 1% of capital. If I did 10 contracts and I was wrong, I'd risk 10% of capital, which is stupid.

      I will post another response on TA a little later today as I have to run. Have a great day!

    2. ok, on TA, it may be worth doing an entirely separate post on this subject. My layman's opinion is that it works, and at the same time, it doesn't work. It works by virtue of participants believing it works. I now look at TA entirely from a psychological perspective, but I never used to. There are loads of participants at any one time looking to latch onto breakouts in either direction. This type of trading fits into trend following. A successful breakout is usually followed by a trend. The problem here is that because so many participants are looking to trade breakouts, the event of the eventual breakout often occurs after a bunch of false breakouts, whipshawing traders. So I've come to believe that while trading breakouts can be a viable system, a participant must be mentally prepared to lose on the first n independent trials before the breakout actually occurs, and even then, the breakout may go in a direction which was completely unexpected by the majority of participants.

      Case in point, SPY on the night of the election, financial MSM worked all participants into a frenzy expecting a crash if Trump ended up winning, and the majority must have been positioned for a crash. The night of the election, ES was down close to 10% at one point and anyone short the hole in the futures market that night got creamed on the open.

      So my overall perspective is that TA is a function of my analyzing long term time-frames (monthly charts mostly), and making an educated guess as to how the majority of participants are positioned, and then doing the opposite in the options market. I seem to have stumbled onto this almost by mistake. I literally study all of the Dow components, the QQQ components and the S&P500 at least once a week on a monthly basis to see whether any setups look enticing. And for the most part, I can't find many enticing looking setups right now. The only Dow component that looked interesting was Nike b/c it appears to have consolidated for almost a year inside a triangle and this type of consolidation is usually followed by resolution out of the triangle (I just don't know which way, nor do I care).

      There are more elements to this, including studying setups and evaluating which setups appear more probable in terms of volatility resolution, looking at the liquidity in the options market to see whether it makes sense to play, and looking at cost of the options themselves.

      For example, I looked at the monthly setup this week on Brown Forman (BF B). It looks like a nice bearish setup on the monthly, about to break down. The problem here is two-fold, 1) if I'm noticing a bearish setup, you can bet other participants have as well, so the smart play is to either play both sides (like I have done with Nike) in case the break down doesn't resolve, and/or wait for resolution and trade in that direction, and 2) there is no liquidity in the options as the spreads are too wide, therefore the answer to the BF B problem is, don't bother playing.

      If you really want to study TA, I suggest approaching it from the perspective of learning basic patterns and then trying to figure out the psychology behind the pattern itself. If you notice that a stock is currently in a one year triangle, you can bet that everyone else out there notices the same pattern and is waiting for resolution, and you can probably bank on a good %ge of those waiting for resolution being wrong when the resolving event actually occurs. This is why trading is so difficult, because you are fighting against yourself first, and if you get married to your perspective and are inflexible, it's about as good as flushing money down the toilet.