When not to trade…

A trade that I did not do is the ESRX 80/85 Bear Call for August.

I know I am telling you about a trade that I did not place I know it seems ridiculous and you are asking why is that important, but I’ll tell you why.

Many times it is more important to limit your losing trades than to make profitable ones in regards to longevity of your trading career. Lets take a look at the trade I did not place.

For the last two months I have placed an 80/85 BEAR Call Spread on ESRX. Selling the 80 calls and buying the 85 calls. Heres the chart…

Charts by Big Charts

Here you can see in April the stock gapped down and then continued to drop below the 200dma. In May I placed a June trade and then after the stock dropped enough I bought back the sold call and placed the July trade. July Expired in the profit last Friday so why did I not place the next trade - EARNINGS.

Here is the news on the earnings report from MarketWatch….click here

So what we have is a company that beat expectations and then increased their future outlook. So unless the company representatives said something “stupid” in their conference call I will expect this stock to fill the gap it made in April, breaking through the 200dma resistance. Another look at the stock can come if the stock does not break through the resistance line. I saved capital by not playing this trade, I will be very interested in this stock and what it does tomorrow.

OK lets try a different type of play. This one is setting up nicely.
A September Put play on ECA. Heres the chart…..

OK you may be saying what the hell am I thinking placing a put trade on this stock, especially after the earnings report from yesterday and the gains from today. The technicals are all showing a rise in the near future and it is a natural gas producer and storer and fuel prices are still high, what am I thinking?

Here is what I am thinking…
This will be a quick turn around speculative trade a day or two trade for a quick profit. What I see are large gains the last two days and a strong resistance of $54 coming tomorrow. Wait for the stock to reach that resistance and bounce, should happen tomorrow. Buy the Put and then immediately place a sell order for a 20% gain. Take your quick gain and go.

My personal rules for trading straight option plays are one month out and in the money options. If you want some more risk, since this is a speculative trade, try for the current month and an out of the money trade. We are only going to be in this trade for a day or two, three at the most, time value will not hurt us much. The key will be the timing, we have to wait for the bounce. This stock may sit at resistance for a couple of days since the technicals are showing uptrend so WAIT for the bounce back.

No Tags