Sorry!! The article you are trying to read is not available now.
Thank you very much;
you're only a step away from
downloading your reports.

Reminiscences of an Option Trader: Phelps Dodge


I use a stop-loss discipline...

Often, when a stock gaps down and breaks an uptrend, the newly out-of-the money calls open on the fat side, as the "world" loves the idea of taking a cheap shot on a reversal. It is frequently the wrong idea, so I like to "fade" into them with some sales.

But what if I am wrong and the stock does reverse? I use a stop-loss discipline whereby if the stock breaks through the opening range (generally, the range from the first 10-15 minutes of trading) I either buy stock and turn my position into some sort of ratio buy-write, or I just buy back the calls and take a small hit.

Well, we had just such a setup in Phelps Dodge (PD) yesterday. For me, it had the added kicker that I was long Freeport-McMoRan Copper & Gold (FCX), so it fit me to sell PD calls and hope to be wrong. By 10 AM, some pundit Who Shall Not Be Mentioned started bleating bullish, and sure enough, PD broke through the opening high. Time to cover and I choose stock purchase as my vehicle.

Long story short, I wound up chasing it a bit, but as Phelps got back up to $145 (from $139), I decided I would prefer a long volatility posture around the strike as the last thing I expect is for PD to just sit at a level that has 0 "equilibrium" aspect to it. So I went long the strike, sold my stock and went short. That left me with a long stock vertical (I remained short the $150 calls from earlier) vs. short stock. Not the worst position ever, as the big risk is if the stock explodes and that is not something that concerns me at this point.

It also gave me ammo to short some puts, by virtue of my short stock. So I completed the day by selling puts into down drafts. Now I effectively own the "butterfly" minus the "wings" at a reasonable price, and with both time and volatility weighing on the options, I will probably wait and either buy them later and cheaper, if at all.

When the dust settled, I took a small loss on my original trade, but flipped it around into a position that I am now comfortable with. Proudest moment in my trading history? No, of course not, but I am happy with the way I took a "loser" and morphed it into a position that suits me.
< Previous
  • 1
Next >
No positions in stocks mentioned.
The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.

Copyright 2011 Minyanville Media, Inc. All Rights Reserved.
Featured Videos