Friday, January 14, 2011

GE Watch

Last week I discussed the possibility of selling a February call covered by my General Electric Co. (GE) call LEAPS, which expire in January 2013.

Today the stars aligned and I made the trade.

ppspfe trendpfe loc

I'll be brief. This sort of set-up is quite specific to my position, but it is an illustration of how long-term holdings can be used to generate short-term income.

I opened the LEAPS with the stock price at $18.35. Today it has moved up to $18.83 -- the top of range -- and then pulled back a bit. With three-day weekend coming up, I was interested in getting in now so as to take advantage of the time decay. By selling a call, I profit from the passage of time.

I sold the $19-strike call for a premium of $41 per contract, with expiration in 35 days. The short is covered by a long position in the $20 calls that expire in January 2013.

This sort of position is called a diagonal: Long the far-out expiration, short the near-term expiration, with different strike prices.

Had the stock price broken through the top of the range, I would have waited. But I don't have a huge amount of faith in a near-term breakout.

See last week's discussion for how the position can play out. My trade went through with the stock at $18.79.

  • pps - Person's Proprietary Signal.
  • pfe trend - Trend of the polarized fractal efficiency line.
  • pfe loc - Location of the polarized fractal efficiency line.

Key to the PPS/PFE tables
pps bull phase
bear phase
pfe trend uptrend
no trend
pfe loc +100 and above
+50 to below 100
0 to below +50
below 0 to above -50
-50 to above -100
below -100

PPS/PFE Analytical Tools

The analysis uses the daily Person's Proprietary Signal (pps), developed by John Person.

This is a black box signals -- the "proprietary" means that Mr. Person knows how it works under the hood, and I don't. But it has shown a fair degree of success in identifying good entry and exit points, and I find it useful.

For confirmation, the analysis uses an indicator called the polarized fractal efficiency (pfe) technical tool. It uses the fractal math of Benoit Mandelbrot to measure how efficiently move between levels. The higher the efficiency, the more directional the price trend.

The math for the pfe is public knowledge, but it is well above my math knowledge, and so to me is also a black-box signal.

This is a relatively new technical tool, based on fractal math. Investopedia has only a cursory explanation. Wikipedia is silent on the subject. ThinkOrSwim has a fuller explanation.

PPS/PFE Trading Rules

These rules are very preliminary. I’m still trying to figure out how the polarized fractal efficiency signal works.

When Person’s Proprietary Signal (pps) is in bull phase, enter when the polarized fractal efficiency (pfe) line crosses the zero line in an uptrend trend) A pps signal and pfe uptrend have less strength but greater upside potential when the pfe location (pfe loc) is below +50, and greater strength but less upside potential when the pfe location is at or above +50.

When the pps in in bear phase, enter when the pfe trend crosses the zero line in a downtrend. The set up has less strength but greater downside potential when the pfe loc is above -50, and greater strength but less downside potential when the pfe loc is at or below -50.

How should the pfe line be treated when it has flatlined at either end of its range, around +100 or -100. My preliminary observations are that the price by then has had a large run and tends to present a picture of exhaustion. However, by the description of the pfe, a high level should indicate a continued strong trend.

This is something that I’ll figure out as I go along.

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 decision decisions for his or her own account, and take responsibility for the consequences.

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