Blog Posts

If you are not already aware, I now blog using Wordpress. You can find my new blog location at http://1nvestor.wordpress.com

The squeeze play

From Wikipedia:

Squeeze play (baseball)

"In baseball, the squeeze play is a maneuver consisting of a sacrifice bunt with a runner on third base. The batter bunts the ball, expecting to be thrown out at first base, but providing the runner on third base an opportunity to score. A bunt can be attempted with two outs but it is uncommon because there is a significant chance that the batter would be thrown out at first base, ending the inning. Likewise, such an attempt is unlikely with two strikes because a bunt attempt that is fouled off is an automatic third strike. The squeeze play is said to have been invented on the baseball field at Yale by George B. Case, who later went on to found the white-shoe law firm White & Case.^[1]
In a safety squeeze, the runner at third does not take off until the batter makes contact bunting, waiting for more certainty that the ball will go to a location from which it will be difficult for the fielding team to make an out at home plate.
In a suicide squeeze, the runner takes off as soon as the pitcher begins to throw the pitch, before releasing the ball. If properly executed, a play at home plate is extremely unlikely. However, if the batter fails to make contact with the pitch, the runner is likely to be put out at home plate (hence, "suicide"). Therefore, the suicide squeeze usually requires a skilled bunter who can make contact consistently, even on difficult pitches.
These plays are often used in the late innings of a close game in order to score an insurance, winning or tying run."

In order for the above play to be executed with success, it takes practice, skills, preparation and timing. And although success is not guaranteed, teams will attempt the play for a variety of reasons (some noted above) as part of their strategy for winning the game.

When compared to stock trading, there are a lot of similarities for traders to follow. However, for this post I wanted to focus on the something quite relevant: the Bollinger Band squeeze play. Below is an example of a chart showing a severe tightening of the Bollinger Bands on the Daily chart for AIG (American Internat Group):

As you can see, the upper and lower Bollinger Band have constricted the price into a VERY tight range. What attracts me to this setup is the expected outsized move out of this tight range - it could be up or down. Price moves out of these squeeze patterns are usually significant and thus provide a good Risk / Reward in my opinion.

 

In scanning for these patterns, just instruct your scanning software to look for stocks that have an upper Bollinger Band that has been decreasing for 5 days, and a lower Bollinger Band that has been increasing for 5 days. Obviously you can play around with those settings to expand your results list.

 

Another example from a trade today was with MILL (Miller Petroleum). Here is an updated chart showing the up move:

 

Although the stock printed a massive Shooting Star on this Daily chart, the point here is that the move out of the Bollinger Band squeeze was significant.

Stop and take notice

One of the key elements to my trading strategy involves the use of Stops. The graphic above provides a brief description of a Trailing Stop, from the Investopedia web site. This week has certainly provided a lot of good examples for why stops are so vital in capital preservation - either to lock in gains, or to keep losses to a minimum.

As stated many times on StockTwits, cash is indeed a position.

As far as how to set stops, whether it be on a percentage basis or a dollar amount, that is something that I leave up to you. Some folks use mental stops as well. Each person has their own Risk/Reward strategy (hopefully) and should stick to that no matter what trading ideas are obtained. For me, I try to anticipate what the stop hunters are going to do - and I just try to stay ahead of them the best I can. Obviously I am not always successful in winning each "battle" - but as long as I win the war I am fine.

Parting the Red sea

As many of us stare at our trading system screens, it is clear today that we are in the midst of a RED day for most stocks. It can certainly be frustrating to see positions in the red, with rays of goodness here and there as some positions are surviving the selling pressure.

One of the real challenges for traders is to accept the reality of the day, and yet still be able to focus on new setup opportunities (at least for those that have cash to put to work). I found myself this morning with a nice list of 20 or so setups, but with a plan to execute that did not call for a down market. Although I did have several short setups in the list, the majority of the stocks on the setup list were for long positions. Now what?

There are certainly several options to traders on days like today. Here are a few:

• One could just decide to stay out of the market altogether, nothing wrong with that.
• One could decide to only trade options on any dip buys that look attractive.
• Another option is to just dig in and really push yourself to find the most opportunistic setups. This will certainly take more work than usual with a market that is taking it on the chin.

I chose SPRD (Spreadtrum Communications Ads) and APKT (Acme Packet) as moving average bounce buys. SPRD was in play right out of the gate, but APKT took quite some time this morning to finally work its way to a bounce price area. Here is a chart of SPRD posted on February 20, 2011 that shows what I was looking for in terms of a move:

For APKT, I had to have a lot more patience today as this settled down just above the 68 level this morning. This my chart from earlier in the day:

I ultimately took the 22 print on SPRD to close the long position as it appeared to stall. I remain in APKT as it tries to hold the 69 level, with a stop at the LOD (low of day).



Are the markets open yet?

Since the U.S. markets are closed on Monday for President's Day, traders are enjoying a 3-day weekend. It is a great time to wax the car or do maintenance on the lawn mower. Crazy thought, I know. Whatever, the lawnmower can wait. LoL.

For me, my plan was to take advantage of the extra day to do a deeper review of all my trades for the year up to this point. In doing this review, I have uncovered a surprising statistic (to me) on my trade breakdown %:

Long    71%
Short   29%

In no certain terms did I expect this result, and I actually reviewed the spreadsheet calculation several times looking for errors. Despite my perception that I have been primarily Long this year, just over 1/4 of the time the trade I put on was bearish (this does include option trades, not just equity). To further confuse myself, several of the ETF trades that I am long are bearish ETFs (like ERY & SDS). LOL.

Primary criteria in the calculation % was based on position size and when the trade was closed.

So in summary: I am Bullearish. And I do think Tuesday will have folks chomping at the bit, more so than usual -- so be prepared for that.

Code Name: OpEx

Each month there is an event for option traders that adds a LOT more excitement, frustration, whipsaw action to trading options: Options Expiration. February 19, 2011 is the day for this month. I do a great deal of option trading, either as a straight option only trade, or as part of a combination or hedge trade so I am right in the middle of the mayhem. I typically spend a great deal of time in the prior weekend planning my option trade tasks so that I am prepared to deal with any remaining trades that I have on.

This month I have 7 put spreads sold that I expect to expire, thus allowing me to keep the premium collected when I sold them. I do have several Feb put trades that are in place for protection on long positions, so I will be rolling those to March. I have 2 Feb call positions left that I am currently rolling to March as well.
The remainder of my option trades are for March or future dated months so I do not need to address them at the moment.

I do employ several strategies with my option trades and here are a few:

• Selling put spreads as a bullish bet. The goal is primarily to keep the premium collected at expiration, but there are times where I am able to take off parts of the trade (buy back puts at a lower price for example) and then put the trade back on at a strategic moment.
• Buy call spreads when I want to make a heavier bet in a stock.
• Stock replacment. I often do this when I am long a stock that makes a large up move. I will sell the common and take some of the profit to buy calls.

The above is certainly not a complete list of all the reasons for trading options, but certainly are some of the top reasons why I choose to do so.

Friday OpEx is usually a very wild day as stocks try to pin to certain strikes, so strap in and hold on.

Do you have the time?

One of the important tasks in reviewing the chart of any stock is to be sure to look at multiple time frames. A noted member of StockTwits, Brian Shannon (twitter handle @alphatrends) covers this in great detail in his book.

Over the past several months, I have added several columns to my stalk list spreadsheet to include a ranking system based on the charts from different timeframes (daily, weekly, monthly, quarterly, & yearly). The more corelation I see, the higher the ranking I am going to give a stock - in terms of the increase in probability of the direction in the stock price movement. An example below for WEBM:

As you can see in the 2 charts above, a nice pennant has formed on both the Daily & Weekly charts. This helps to see a confirmation of a high probability for price to continue heading in to the apex of the pennant/triangle.