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[Weekend Report]
Dear Member,
A mixed week for me. I had a very nice winner in my LEAPS trade on Lam Research (LRCX) where I was able to make about 11% in under five hours. Normally I tend to be in trades longer, like a week to five weeks, but I happened to catch a quick move on LRCX. However, that nice gain was offset when I was stopped out of two losing positions -- the most I've had in a long time. Northrup Gruman (NOC) turned down and broke through support at the $50.64 level so I sold my Jan '06 50 calls and took a $1.10 loss. In the case of my bearish put play on Marsh Mclennin (MMC), I was stopped out when the stock went above my stop at $46.01. In that case, I lost $0.40.
Interestingly, Marsh Mclennin (MMC) produced a Japanese candlestick formation known as a shooting star on Friday while it remained near resistance. A shooting star at resistance is a frequent signal for a reversal so I'll be watching for a bearish reentry early in the week. Northrup Gruman (NOC)remains near the support level it broke and produced a hammer-like candle on Friday. It, too, may be a bullish reentry candidate this coming week.
One thing I have learned in my years of trading is that I shouldn't forget a stock just because I have been stopped out of a position. I have found that I may reenter a position several times before it becomes profitable, but then it is often well worth the trouble and the relatively small losses taken to get to the ultimate end. I always try to enter a position where I believe there is a 3:1 reward to risk ratio or better. In that fashion, the small losses I take are of little consequence when compared to the ultimate gains.
The calendar spread in AZN in which I bought the Jan 45 puts (AZNMI) and sold the Sept 45 puts (AZNMI) is nearing September expiration. It is currently in good shape. Last week the stock dropped severely giving a great deal of extra value to the Jan 45 puts. Of course, the other leg (short the Sept 45 puts) also increased in price, but is rapidly running out of time value. I will need to act this coming week. I do not want the Sept 45 puts assigned to me, and will decide whether to close both legs of the position this week or whether to roll the Sept puts out to Oct or maybe even roll them out and down to an even lower strike price. Another alternative would be to just close the Sept leg and hang on to the January's as the stock falls. I'll try to find the position which best adds to the profit.
Volatility remains at extremely low levels in the market as evidenced by the VIX, VXO, and VXN. Generally, a time of low volatility is a good time to buy options because they are relatively "cheap." Implied volatility tends to regress to the mean and that is what I am waiting for in my Harley Davidson (HDI) Feb 60 straddle. One of the nice things about a straddle is that there is rarely a need to rush. HDI has been moving up in price so that benefits the call leg and hurts the put leg. However, as the price goes up, the delta of the call increases while the delta of the put decreases. Thus, gradually, when the stock goes up, the profit on the call side increase at a greater rate than the loss on the put side. I jump in volatility causes BOTH the puts and calls to increase in value. I still like the HDI play.
I still have the CYBX Sept 22.50 calls which I wound up owning for free. If they have any value this week, I will get out of them and just add to the profit I've already taken from the original spread. There is absolutely nothing to lose here.
The NASDAQ and SP-500 are toying with some resistance around 1900 and 1125 respectively while the DOW Industrials have a little to go before dealing with some resistance around 10433. As I mentioned earlier, volatility is very, very low. When volatility is this low, I look for opportunities to buy premium since a volatility increase all by itself will increase the value of options.
Hope you are enjoying your weekend and have a great week coming up.
Sincerely,
Bill
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