2009 October: Options Trading Picks »
Monday, November 23, 2009 at 04:03PM | Asher Pinto The markets experienced a choppy month. There was a drop early in the month, following by a sharp rebound to new highs, which was then followed by a decline in the last two weeks. When all was said and done, most stock traders would have felt satisfied with a net unchanged portfolio at the end of the month. We were able to pull off a few winners on the Stock Picks front; but as you'll see below the Options Picks lists had several very handsome winners.
Market Action
In order to get a feel of market conditions during the month, let's take a look at the action on the broad S&P-500 Large Cap index, before moving on to a selection of options trading picks from the month.
SPX had closed September at a level of 1056. The index had a harrowing first day in October, losing around 25 points. Thankfully, the bulls will testify, it wasn't quite a sign of things to come in the rest of the month. The markets quickly found support from their lower bollinger bands and bounced strongly towards the upper bollinger bands.
Resistance was found at the upper bands once again, however, and prices began to fall over the last two weeks. The index ended up with a net loss of around 2% for the month.
Bullish Options Picks
Let's start the review of options picks from the month of October, with bullish options pick(s) that were closed during the month, before moving on to bearish and volatility-based options picks.
This trading pick - Long OCT 1050 Calls on the S&P-500 Index - was featured as soon as SPX retested the rising intermediate trendline as well as the lower bollinger band, which was rising at the time. Notice how prices turned around virtually immediately and rallied towards the upper bollinger band. The trade was to be closed when the index reached its upper bollinger band. Depending on whether you closed the pick on Dec 13th or the 14th, a big profit of between 185% and 350% was to be had. By the way, this pick was included in our model portfolio as well.
A Long at-the-money Calls trade was featured on MMM, which was showing a coiling pattern after a decent rally in the stock leading up to August. The underlying brokeout to the upside as we'd have liked but there wasn't even follow-through to had left more than a small profit, before we decided to exit the setup.
Bearish Options Picks
There were many highly profitablt bearish options pick(s) this month. Let's take a look at them now...
AAPL, which had enjoyed a solid run up in the preceding several months, had finally pushed its luck too far, when it blasted through its upper bollinger band - even leaving a big gap on the chart - in mid-October. We noticed this move as a potential blow-off top on at least the minor trend and featured a slightly out-of-the-money Long Puts trade on the underlying. The stock trailed sideways for a couple of days before promptly falling 20 points and eventually allowing us to close the trading pick with a profit of over 170%, in around 10 days.
RIG was showing a negative divergence on RSI, similar to one that had shown up on the chart in early-June, when we featured a Long NOV 90.0 Puts options trading pick on the underlying, in mid-October. The stock promptly moved a few points, when we decided to lock-in some profits by selling [shorting] NOV 85.00 Puts - and in the process creating a de facto Bear Put Spread - a few days later. The underlying eventually found support from its lower bollinger band, near the 83-level and profits of nearly 100% were booked on the trade.
DISH had found resistance at a level just above 20 and had gone on to make a negative centerline crossover on RSI, when we featured an in-the-money NOV 19.00 Puts trade on the stock. A nice little profit was booked a couple of weeks later, when the stock found support at around the 17.20-level.
AMGN was set to fall out of a descending triangle, when we featured a Long NOV 57.50 Puts trade. The underlying moved six points over the next few sessions and profit of over 210% was available barely 10 days into the trading pick.
CHK could have had a much better result had a trader played the setup perfectly. We featured a Long at-the-money Puts trading picks when the underlying showed a negative divergence on RSI in mid-September. The stock traded sideways for a week or so, before finally dropping a couple of points and even trading below its 20dMA for a whole day. A profit of 100% or more was actually available on the trade, before a quick rebound took the stock back towards the strike and, after a triggering of the trailing stop, a loss of 18% was left on the trading pick.
TOT was showing a negative divergence on RSI when we featured a Long at-the-money Puts trade on the underlying. The stock dropped around 3 points before finding support from its lower band and triggering a closing of the trade for a profit of just under 40% in two weeks.
HIG had started to roll over and was showing a negative divergence on MACD and a negative centerline crossover on RSI, when we featured a Long at-the-money Puts trade on the stock. There was a profit of around 100% on the trade, before the stock had one good day that brought about a closing of the trade for a smaller profit.
HD was showing a head & shoulders-like top and negative centerline crossovers on the momentum indicators when we featured an at-the-money Puts trade on the underlying. A profit of over 100% was booked on the trading pick within two weeks.
This setup on NKE was based on a negative divergence on RSI. While there wasn't a big decline in the underlying, the fact that implied volatility on the stock is quite low, meant that there was still a profit of over 80% within two weeks, when the stock found support at its lower band.
WAG was showing negative divergences on RSI and MACD when we featured a Long NOV 39.00 Puts trade. A profit of just over 40% was available in less than two weeks.
Volatility Options Picks
And to round out the list of options picks for the month, here's a look at a volatility-based options pick(s).
BAC was trading within a coiling formation, which of course beckoned a long volatility pick. A Strangle was chosen and, despite the fact, that the stock first moved in one direction and then abruptly swung around to the other, a profit of over 20% was available on a trading strategy that has options on two legs.
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That was a look at selected options trading picks from this month. For a look at stock trading picks closed in this month and trading picks from other months, please take a look at our Past Trading Picks.
For a more in-depth look at our trading methods, we invite you to read the write-up - 'Identifying the Best Trading Opportunities.'
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Reader Comments (2)
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