Where is everyone?? I am beginning to "hear" echos in this empty "room". The market has been nice to me today. I jumped in again on some options on Wallmart (WMT). I missed part of the run up.
Here you have a stock in a strong growth phase (good momentum), that is exhibiting good strength in the market even on weak market days. The stock at the end of Friday bounced off of its previous resistance level which is now support. The 1-minute graph shows several 50,000 blocks along with one 100,000 blocks after a healthy bounce that it moved up from at the end of the day. This along with the excellent technicals, including strong money inflow and good OBV and a still intact momentum trend, should of been enough for me to jump in.
This is where an investor can shoot themselves in the foot by changing from a familliar strategy. On my normal investments, I would wait until one or two days after the bounce before making a decision on my entry point. I said to myself that this stock is going to move up quickly (again) from here. But I must follow my rules until I change them, and only after serious thought. This approach does not work for the kind of trading that I have been doing with these options.
So I missed a good part of the predictable run up of the stock. I then looked at the next strike price up from the call option I was interested in. Not about to "chase" a stock, I waited for the stock to correct and demonstrate another bounce off of a higher support level (a previous resistance level earlier in the day). After this did happen I jumped in by purchasing three options on this stock. The stock bounced back down from a predictable resistance level where there was some normal profit taking at the end of the day.
I now see a resistance level just above the strike price of my option, which is good. I also thoughtfully purchased the option where my "break even" point, if I were to convert it into stock, is right near the significant resistance level of its previous high a few days ago. This is good, because what a stock like this usually does is ride up against the next significant resistance level in its attempts to break throught. At this critical juncture, I will be keeping a close eye on the price/volume action of the stock and looking for weakening technicals. If it has not broker through, I will have time to dump it and more than likely salvage most if not all of the cost of the option.
If WMT does break through, it IMO will be good for a run up of at least a couple of points. If it looks like it still will continue up and has formed a new resistance level at about 40 or above, then I will convert my option into shares of stock. In this way, I have used the option on the stock as a "hedged" entry into this stock. Worst case, this type of entry loses me the cost of the option. Most likely because of a correctly chosen option purchase with repsect to the S&R of the stock and its trend in momentum, I will lose nothing. With this approach, I can "lose" a few times before I have a "winner" and still be way ahead.
After the stock has shown signs of a break in momentum, I will start writing call options on it in order to generate cash from the holding of my stock. If I do this intelligently (lets hope so), I will be able to continue writing options off of it and still keep the stock with a small risk in being called on the options that I write, which means a forfiture of the stock at the strike price of the option. When the stock finishes consolidating, or correcting, I cover the outstanding options that I have written and ride the stock up some more, if this happens.
So my goal with this "grand experiment" is to learn a little in trading skills, and to learn how to use options as both a hedge and an extra source of income (profit) from my stock. For I believe in this speculative marketplace, it is important to know about the "tools" that one can use to manage risk.
I would not recommend this approach to anyone unless they are confident in their TA abilities, and have some money they can afford to lose in their experimentation with this approach.
Bob Graham |
