Tuesday, November 30, 2010

URBN Watch

I've closed my bull position on Urban Outfitters Inc. (URBN). This was a successful earnings play dating from mid-November.

ppspsarmacd obvh-a trend ma20ma50ma200
URBN $38.12

There was no urgent reason to get out. The stock remains in bull phase.

On the other hand, for my specific position, after this there ain't no more. I got out because the vertical spread that was my vehicle had reached its maximum gain.

The vertical was a bull put spread. I sold the December $31 strike price puts, and hedged by buying the $29 puts. Opening the position gave me a net credit of $47 per contract.

This structure gives me a defined maximum gain and a defined maximum loss. It is an invaluable tool for managing risk.

My rule of thumb for exiting successful spreads is to be happy with 85% or more of my maximum gain.

In the case of URBN, the stock has shown some very preliminary signs of weakness of late.

After hitting a swing high on Nov. 26, the stock has opened lower two days in a row. And today saw a red Heikin-Ashi candlestick for the first time since the earnings announcement, and that combined with a declining (although still bullish) macd.

Taken together, along with the lack of any upside profit potential, those signs on the chart tipped the balance toward an exit.

Now, exiting a wildly successful vertical can be a problem. As the spread becomes more successful, its value drops toward zero. In fact, this morning my URBN spread was worth exactly nothing on the open market. Later in the day, its price increased to $2.50 per contract.

So to exit -- to buy the spread back -- I had to be prepared to offer a substantial premium in order to attract a seller. After two days of dancing, I nailed it this morning at $7 per contract.

My maximum potential gain, had I held the contracts until expiration, was $47. My actual gain was $40, about 85%. So my rules are satisfied.

My net profit on the amount risked was 26%, on a position that lasted 11 trading days. I could annualize the yield to 550%-plus, but that would be too ridiculous, so I shall refrain.

Why exit at all? The December options expire on Dec. 17. Just wait a couple of weeks plus change, and I would get to keep the entire $47.

But consider the possibility of a black swan event: Unexpectedly bad Christmas sales numbers, a collapse of the euro, war in the Koreas, another successful terrorist attack, earthquakes and riots devastating URBN's supply chains, really really bad jobless numbers this coming Friday, a hung-over analyst who hates his job filing a negative report out of season -- the list goes on forever.

There is no limit to the mischief that the world can cause a winning trade.

And if the world did indeed do its worst, my $47 per contract could easily melt to $20, or $5, or zip.

To me, it is worth 15% to get out while the getting is good, and to preserve that profit for future trades.

Greed may be good, but when it overstays its welcome, greed can also be devastating to profit.

Tim Bovee, Private Trader tracks the 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 decision decisions for his or her own account, and take responsibility for the consequences.

  • h-a trend - Heikin-Ashi trend.
  • obv - On-Balance Volume.
  • pps - Person's Proprietary Signal.
  • psar - Parabolic Stop and Reverse
  • ma20 - 20-day moving average
  • ma50 - 50-day moving average
  • ma200 - 200-day moving average
  • macd - Moving Average Convergence-Divergence

About the glance: The colors indicate the state of each signal.
  • Signal Section:
    • pps, psar, macd: green for bull mode, red for bear.
  • Confirmation Section:
    • obv: green for uptrending, red for downtrending.
    • h-a trend: green for uptrending, red for downtrending.
  • Environment Section:
    • ma20, ma50, ma200: green for above the average, red for below the average.

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