Monday, April 15, 2013

No trade on Monday

There were two symbols that survived my initial screening of bull and bear signals from Friday's trading. (See Saturday's posting here.)

Both confirmed their signals on Monday -- today -- by trading beyond their 20-day price channels. But neither symbol is a practical trade. Here's why.

The two were split between a bull signal and a bear signal.

The potential bull trade was the Velocity Shares 3X Inverse Crude Exchange Traded Note (DWTI), a fund linked to the S&P GSCI Crude Oil Index Excess Return.

It's a fairly arcane product, but the reason not to trade it is the volume. DWTI trades only 2,900 shares a day on average. It has no options, so it can't be leveraged or hedged. The bid/ask spread on the stock, which is going for $53.24 as a right, is quite reasonable, at less than half a percent.

But still, with volume that low, there's a huge risk that any trader owning this fund will be left without an easy exit from the position. Also, I can see why some people would want to track the opposite of crude oil multiplied three times. I'm not one of those people.

So, no trade on DWTI because of low liquidity.

The bear signal came from McEwen Mining Inc. (MUX), a Toronto-based gold and silver miner. It has plenty of liquidity, on average trading 2.6 million shares a day. But its price is low, only $2.09 a share as I write.

Short positions can be constructed in two ways: Put options (or spreads that profit from declines in the stock price), and short sales of shares. With MUX, neither is practical.

Options on low-priced stocks are difficult to trade. For MUX, the strike prices are a dollar apart, as is common for stocks under $20. But that means each run of the options ladder is about 50% of the share price apart.

Compare that to AAPL, whose $5 step in the strike is only about 1% of the share price. Big difference, and one that makes it totally impossible to construct a reasonable options spread on MUX.

The out month, where I would trade at a delta of 68, has a 10% bid/ask spread, which is somewhat higher than I like.

Open interest is running to the three figures, but on such a low-priced stock, I'm not sure how many traders that represents. We track liquidity by shares and contracts because that's all we've got. But really, true liquidity is the number of brains making decision about whether to buy, sell or hold.

Liquidity is traders, not shares or contracts.

Turning to the stock itself, there's no way to do a short sale on the shares. Shorts are possible only on symbols with very high liquidity. My broker tells me that it's impossible to borrow shares of MUX for a short sale, and so that possibility is also closed.

Bottom line: No trade on MUX because of its low price. I might consider it for a bull play as shares, but not as long options in either direction.


My trading rules can be read here.  A discussion of recent modifications to my trading methods, which haven't yet been incorporated in the original write-up, can be found here.

And the classic Turtle Trading rules on which my rules are based can be read here.

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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