About two hours into trading, AMGN inched above its stop/loss and so is no longer in bear phase. By the rules, positions should be closed.
| sym | chan | adx | traj | psar |
|---|---|---|---|---|
| AMGN |
However, is it an immediate exit or a wait and exit? Or a "rules are made to be broken" non-exit?
I wrote in February, after AMGN moved to long-term bear phase but almost immediately to near-term bull phase, about the impact of a complex options structure on exit decisions.
Well, now more than ever, the options spread that I own is driving the decision-making.
First, a postulate: The increase has shot well above the speculation about a dividend. Which may or may not happen. Don't know yet. Probably will when earnings are released on April 21, after my options expire.
Second postulate: There's lots of room between now and then for people to take profits, or to speculate against a dividend, or for analysts to come out with some trash talk, or whatever. Reuters has characterized Amgen as a company whose days of rapid growth are past.
So, to the position. I own a bear call spread, composed of options that expire April 15. I am short the $52.50 call and long the $55 call.
With the stock trading around $53.75, I am in a losing position now and will be a bit more lossy at expiration. The difference between the two is about $1.20 per contract. So, is it worth selling out now for a sure loss of $1.20 below my expiration loss, or should I take a chance that my loss will lessen in the next one month four days.
I'll take the chance. The difference is not enough money to break the bank. If it were, then I shouldn't be trading.
Key
- chan: Channel phase, with green for bull trend, red for bear trend and yellow for neutral trend.
- adx: Average direction index location, indicating the strength, or the temperature, of the trend. Orange for 40 or greater, aqua (light blue) for 30 and up but below 40, magenta (light purple) for 20 and up but below 30, and brown for anything below 20. (Mnemonic: Orange for the overhead sun, blue for the surrounding sky, purple for sunset on the horizon and brown for the earth.)
- traj: Trajectory of the ADX, green for strengthening, red for weakening or yellow for unchanging. Note that if the adx column is orange and the trajectory column is red, then the position must be closed.
- psar: The parabolic sar, either green for bullish or red for bearish.
- bday: Breakout day, the day the price broke through the upper or lower 55-day price line.
- blevel: Breakout level, the price level of the line that was broken through.
- stop: The current stop/loss price. Early in a bull or bear phase, this will be 5¢ below the low or above the high, respectively, on breakout day.
- 2-day?: Marked with an "✔" if the two-day rule is in effect. Under the rule, if the price closes below the breakout level on each of the two days following breakout day, then the position must be exited.
About channel analysis
Read a detailed explanation of my channel analysis method, including trading rules.
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 decision decisions for his or her own account, and take responsibility for the consequences.
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