Tim Bovee, Private Trader: Tuesday's Finalists: GDX, APO, FITB

Tuesday, December 16, 2014

Tuesday's Finalists: GDX, APO, FITB

Gold once again is the most attractive among the survivors of my early rounds of analysis. (See "Tuesday's Prospects".)

Yesterday it was the gold miner GG. Today it's an exchange-traded fund composed of many gold-mining companies, GDX. Also making it to the finals are the investment manager APO and the banking company FITB.

In other words, money rules!

At this point in the markets I'm looking for some very specific characteristics.

I want a very clear trend on the chart. Just as in the past I've avoided the upward hook, where a stock declined and then rose a bit, giving a bull signal, I'm now avoiding the downward hook, a rise that has ended with a decline on the daily chart that has not yet fallen past any significant support levels.

I rejected four symbols because of their charts: RLGY, CA, SNE and ATO.

One symbol, PBF, failed confirmation by moving back within its 20-day price channel. Those two tests alone brought the count of potential trades down to the three finalists.

I also want a stock whose options grid will allow me to construct a specific type of trade: An options spread sold for a credit and expiring in the front month, or earlier if the inventory includes weekly.

Frankly, at this point, I'm reluctant to tie money up for the longer term. The markets are extremely changeable at this point in their history. A downtrend has begun, but it has not yet entirely taken hold. I prize the flexibility that a short term trade gives me.

That options strategy also gives me great freedom in hedging the position so it will still make a profit even if the price moves against me to a certain extent.

To do such trades, I require implied volatility in the 60th percentile or greater of the prior rise to a peak, open interest in the hundreds or greater in the front-month, at-the-money strikes, and a bid/ask spread under 10%.

I've changed my way of calculating the percentile, which depends in part on the period of time I'm analyzing. I had been using a standard week (1/52nd of a year) as my period. I'm now using the actual period until expiration of the option under consideration (365/actual_days).

I discussed this issue in a post last night, "Failed Trades: Lessons learned".

FITB and APO failed because their spreads are too wide, 17% for FITB and 39% (!) for APO.

Among the two most liquid, FITB has the highest implied volatility, at the 60th percentile. GDX falls way short, with volatility in the 16th percentile.

Bottom line: None of the three makes it past the post. FITB and APO fail due to wide spreads, and GDX due to a low implied volatility.

I won't be placing any trades today based on Monday's trading signals.

-- Tim Bovee, Portland, Oregon, Dec. 16, 2014

References

My shorter-term trading rules can be read here. My longer-term trading rules can be read here. And the classic Turtle Trading rules on which my rules are based can be read here. My volatility trading rules can be read here.

Disclaimer

Tim Bovee, Private Trader tracks the analysis and trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.

No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decisions for his or her own account, and take responsibility for the consequences.