« 2009 September: Options Trading Picks »
Friday, October 2, 2009 at 02:50PM | Asher Pinto The markets extended the bull run by a few percentage points in September. Over half a dozen decent options picks were closed during the month.
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 closed in the month.
The momentum indicators were showing that the markets had gotten rather overbought by mid-Aug. A dip on the first day of September put the butterflies in the stomachs of the bulls. It proved a one-day event, however, and the markets were able to bounce off the centerline on RSI. The S&P-500 was able to rally 7% over the next three weeks or so, before a negative divergence developed on RSI and a bit of a correction took place into the end of the month. The final tally was a 3.6% net gain for the index, over its closing level from August.
Bullish Options Picks
Let's start with selected bullish options pick(s) that were closed during the month, before moving on to bearish and volatility-based options picks.
WYNN was showing a head & shoulders bottom on the major trend. Needless to say a large move was to have been expected once the breakout above the neckline occurred. Notice that we didn't wait for a breakout. Instead, confident that the trough of the right shoulder had formed, we entered a Long Calls position in long-term Calls - in the JAN series, which was around 6 months to expiration. The stock started to rally bit time, almost immediately. We made a couple of adjustments (detailed on the chart) along the way, mainly to lock-in profits, and the end result was a nearly 500% profit in two months. A very nice trade indeed.
HAS had started to move off intermediate support and was showing a positive centerline crossover on RSI, when we initiated a Long Calls pick on the JAN 22.50-strike, in mid-July. A long-term series (6 months to expiration) was chosen because of the fact that the stock was also showing a potential long-term triple bottom that called for a big move over the ensuing months.
The trade started off well, but the uptrend started to stall a week into the trade. The stock formed what had looked like a potential bearish wedge but thankfully that formation failed by mid-August and the stock was able to rally further until another wedge formed in September. We decided to book profits (60%) when the stock broke out of that pattern.
RIMM, which had bounced off support from the centerlines on RSI and MACD, respectively, was set to break minor resistance at 78.20, when we featured an aggressive bullish options pick on the stock. The SEP 80.00 Calls were barely 9 days away from expiration when we featured the trading pick. After a week or so of stalling, the stock finally started to rally and a very nice profit of 200% was available on the day before expiration.
WY was featured as a bullish options pick when the stock was showing a positive divergence on MACD and a positive centerline crossover on RSI, in mid-July. There was also the appearance of an inverted H&S pattern on the long-term charts, which was why we featured a Long Calls strategy on the JAN series (6 months to expiration) 30-strike.
The stock rallied nicely for the first three weeks of the trade, but after a false break of intermediate resistance (neckline of long-term H&S bottom), the underlying traded sideways for three weeks. We closed the trade on Sept 1st, when a potential negative divergence became apparent on MACD. An optional protective strategy was suggested along the way. Depending on whether the protective strategy was used or not, a profit of 56-87% was available on the trade.
GD had just broken intermediate resistance, when we featured a bullish options pick on the stock in early September. Unfortunately, there wasn't much follow-through over the ensuing three weeks or so and we dediced to close off the position, with a small profit.
NOC had broken out of a double bottom in the third week of August. The stock came back and tested the neckline of said pattern, two weeks later. Support was found at the neckline - and from the centerline on RSI - and this instigated a bullish options pick. A long position in the OCT 50.00 Calls, which were slightly out-of-the-money and around 5 weeks from expiration, was featured. The stock rallied a couple of points before a tight protective stop was triggered and profits of over 40% booked.
Bearish Options Picks
Market conditions during the month did not really permit the implementation of bearish options strategies, so there aren't any to report. Let's move on to a volatility options pick that was featured.
Volatility Options Picks
A couple of volatility options picks made it onto the list late in September, but since they were still open at the end of the month, the results of the same will be available in a later month. The following is a look at a volatility-based options pick on SU, which was opened and closed in the month of September.
SU had apparently broken out of a head & shoulders topping formation at the end of Aug and so we were keen on making a play on any move to the target of 26.00, derived from the pattern. Negative centerline crossovers on the momentum indicators added to the likelihood of a bearish move. However, we also noticed that the stock was at its lower band band and therefore there was the potential for the bearish break to fail.
So instead of utilizing a bearish options pick, we went for a long volatility pick - Long Strip (two puts to every call) - on the front-month, at-the-money SEP 30.00 strike. Two days in the trade, the wisdom of choosing that position was evident when the stock moved back above the neckline (30.60). Three sessions later, the stock was at the upper bollinger band, which was our alternate target, and the Calls were closed at a price slightly higher than the price of the entire Strip. We hoped for a bearish reversal, so that the Puts could have been closed with some value as well and profit grown further, but that was not to be the case, as the stock continued to rally. In hindsight, had we held onto the Calls for another week, a 100%+ profit would have resulted, even though we had originally expected a move in the opposite direction.
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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 the 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.'
