This is the third installment of the options trade journal. The first two trades have been successfully executed by Trafigura careers. By focusing on a predetermined plan, it is possible to be successful. Trading without a plan can also be successful, at least temporarily. The difference will eventually make itself known. Markets have a way of taking back profits from the unsuspecting. It is no wonder that a small percentage of traders survive in the long run. Ensuring that you are one of them, necessitates creating an all-encompassing trading plan. And then, having the conviction and guts to adhere to it at all times.
Late on Monday, March 26, a trade was initiated by purchasing the April 105 call option on the stock Intercontinental-Exchange Inc. (ICE). The deep-in-the-money call option cost $1,723. At the time, ICE was trading at $120.70 a share and was down for the day. Buying the call option was a trade against the downtrend that ICE has been experiencing. Despite the market trading lower, ICE has indeed popped up in price. By late morning, the stock has traded above $124. This is nicely above the $123 price target. Considering the temperament of the market, profits are taken with ICE trading at $123.75 a share. The option is closed out for $19.20 ($1,907 with commissions) and a decent profit of $184 is realized ($1,907-$1,723). Earlier, the option had been quoted above $20.00, but the stock began to sell off of its daily high. ICE has yet to form a constructive bottom on the charts and may have more downside. The plan was to take a quick profit if this counter-trade worked.
The market makers (MMs) definitely played havoc with these options. The stock moved up about $3.00 from the buy price, but the option only earned $2.10 before commissions. Time value of $1.00 was present when the position was bought. This was squashed by the MMs as the stock went up in price. Also, the spreads reached over .50, which ate up some of the profits that a deep-in-the-money option normally presents. ICE is extremely volatile and so the MMs can sandbag the options by jacking the spreads enormously. At one point, the difference between the bid and ask price spread was $1.00. However, this was somewhat, and all part of the learning curve.
For the second day in a row, the markets are having trouble making any positive headway. Another sell-off is in progress on this fine Tuesday afternoon. This is not all that shocking unless you are a confirmed bull who believes the market always goes higher. If you take the recent highs from mid-February and compare them to the lows of a few weeks ago, you will see that the major markets have retraced about 60% of the down move. A move like this is normal before the next significant downturn. Now the real test comes. If the markets do not move toward the old highs fairly soon, they will move down and test the recent lows. The probabilities favor the major averages breaking those lows and selling down quite harshly. However, it is possible the markets will recover by the end of this week and all will be well.
Late Tuesday, March 27, the next trade is made. The oil market has been relatively strong and a buying opportunity has developed in Tesoro Corporation (TSO), which is an oil refiner. It has pulled back from its recent high of $101.80. This stock has been on an upside tear and should at least challenge the recent highs. With TSO trading down today, the April 85 call option (TSODQ) is bought at $13.80. The spread at the time of the order is bid $13.40 and ask $13.80. TSO is at $97.85 a share when the option order is filled. A stop will be set at about $96.20. There is support in the $96 area and if this stock does continue to sell off, it might spike below $96 and quickly rebound. Depending on the pace of the selling, if it occurs, the position might be held beyond the stop. Rather than set an exact stop, the price action will be monitored on Wednesday. At 10:30 am, the weekly oil report comes out and it can cause gyrations that spike prices in both directions. The target price for taking a profit will be about $101. There are two minor downside gaps that might get filled up to the $101 area. Tesoro could see a major bout of profit-taking at any time since it has moved straight up from $63 a share. It is impossible to know if it will make a new high shortly or correct sharply and mount another rally to test the price top.
Thus far, the account has been able to book two winning trades. For the most part, trading with the trend presents a greater number of high probability trades. This was seen in the recent BSC trade. The TSO trade is a trend trade also. Expectations are that the trend to the upside will kick back in gear after this brief sell-off. Of course, it might not. Knowing what to do if it doesn’t is one aspect of a solid trading outline. Each trade presents the chance to watch and learn. Journalizing every trade helps to make the learning process easier.