I truly believe that the most difficult part of trading is not the what you buy, but the when you buy it. Often we do our chart analysis, and reach a conclusion that it’s time to make a trade. But how do you maximize the effectiveness of your timing?
Well, one way to hedge against being too early on a trade is to cut your allotment in half and make two trades instead of one. I did this the other day, and it paid off nicely for me. On October 18, sensing that the Nasdaq was becoming overbought and weakening, I bought November 19 QID calls at 2.85 (QID is an exchange traded fund that double shorts the Nasdaq 100).
About a half hour after I made my purchase, and with my position basically flat, it was announced in a British newspaper that Germany and France had agreed to boost a euro zone financial rescue fund to two trillion euros ($2.76 trillion). This was more rumor than fact, but it nonetheless caused an immediate panic buying reaction in the U.S. stock market.
Stocks blasted higher over a 15 minute period, pushing QID down from 44.65 to a low of 43.50 (about 2.5%) in only 15 minutes! My call options of course, were crushed. Before I knew what had hit me, my options were down to about 2.30! (See two day chart of QID below)
Chart courtesy of bigcharts.com
But I have learned from much experience that you don’t panic in those situations. If nothing else, the Nasdaq market makers have just bought an awful lot of quickly dumped stock that they will need to get rid of at higher prices. As they push the bid/ask spreads higher, the stocks will climb back, and at least retrace a portion, if not all, of the panic trading period.
One way to really take advantage of this is to buy the second half of your position following the meltdown. But you must ensure that there are signs of stability, so that you are not simply “catching the falling knife” and about to lose even more money.
Signs of stability will include candlestick figures such as a Doji or hammer, along with some decent sized volume on the first upside bar. But you have to react quickly, or you won’t derive the benefit of buying near the bottom. Stocks can rebound in a NY minute, as they say.
So I bought the second half of my position, at 2.35, and watched intently as the QID wiggled higher. We were near the closing bell, and I was hoping we would get out of Dodge without another wave of buying. But not to fear, after the initial panic buying, a sense of calm had returned to the markets, and they were now shrugging off the news out of Europe.
Perhaps they were now getting wind that the news was unconfirmed, or maybe the news had already been “baked” into prices.
By the time the closing bell rang, QID was at 43.97, my calls were back around 2.55, and I was much relieved. I was closing the gap on the loss of my first half position, and was making a profit on the second half. Right before the bell, the Nasdaq was getting beat up pretty good, and that was an excellent sign of what might come the following day.
The next day (yesterday), the Nasdaq gapped down on the opening, following Apple’s (AAPL) earnings report. That meant that QID was gapping up, to about 44.40. Soon thereafter, I sold my 2.35 calls at 2.70. I could have held the position longer, but I like to take my profits when they are ready for the taking.
Still holding a small loss on the original position, I held onto my 2.85 calls, sensing that we might get a much weaker Nasdaq market today. The gap up on QID gave me additional confidence that it would go higher later on in the day.
No point in taking a loss when you still feel that you are on the correct side of the trade!
I was right, but it took awhile for it all to shake out. QID traded sideways for much of the day before beginning a rally around 1:30 that would eventually take it much higher.
I sold my 2.85 calls a little bit after 2 PM at 3.25. The total profit before commissions on both positions was over 14%, not too shoddy for less than a 24 hour period.
As usual, I sold a bit too early. However, I maintain that it’s far better to give up some additional gain than it is to give back a nice profit. So I’m happy.
Lessons learned: 1) Never panic and sell at the lows. 2) It often makes sense to cut your money in half and buy your options in two separate purchases. The additional commissions are chump change when compared to the additional money you can make by buying the second half position even cheaper.
And if you happen to be correct in your first purchase, and the call increases in value, you may not have made as much money as you would have by buying all the shares at one time, but at least you are still making some money.
And that’s what Fast Profit Trading is all about!
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