I closed the position one trading day before the peak. FB pulled back that same day, moved sideways for six days, and then crashed down in a single day below the 10-day channel, signalling that any bull positions must be closed.
Over the seven days I held the position, FB shares gained 9%, or 471.1% annualized. My bull put option spreads produced a 16.4% yield on risk, or 856.1% annualized.
Update 9/20/2013: I've opened a bull position in FB, structured as a bull put spread expiring in October and sold for credit, short the $46 put and long the $44 put. FB was down most of the day and began to rise only in the last hour before the closing bell. It had a very sharp rise beginning in the last 10 minutes of trading, which was the momentum I was waiting for.
I'm preparing to bend my rules, although with luck, not to the breaking point.
Four days ago I noted that Facebook Inc. (FB) had met my basic criteria for entry. It had moved above its initial public offering opening price of $45. (See my post "FB hits the mark".)
Under my rules a bull signal is a break above the 20-day price channel, which FB did on Sept. 5 when it exceeded $42.26. Arguably, however, my IPO price criterion sets $45 as the meaningful breakout level.
From the $45 standpoint, FB broke out on Sept. 11 but failed confirmation, falling the next day and hitting a very near term low of $42.43 on Sept. 16.
 |
| FB 15 days 30-minute bars |
It then resumed its rise, broke above $45 again on Sept. 18, confirmed it by trading higher the next day, and today has traded higher still, although with an intraday decline.
Facebook announces earnings on Sept. 21, so this is really my last chance, under strict rules, to open a position before hitting the 30-day earnings exclusion period.
The Elliott wave count on the chart suggests a very near term correction is underway, or, if it's not, that there's fairly limited upside potential.
A note on usage: 3 is the highest level wave within a rise than began in September 2012, the parenthetical Arabic numerals, such as (4), are several levels below that in a rise that began last August, and the lower-case Roman numerals are a level still lower in a rise that began Sept. 17.
Elliott wave doctrine says that the third wave cannot be shorter than the three rising waves in an uptrend. Either the first or the fifth wave must be longer.
Wave i on the chart is longer than wave iii, which has covered $1.52. Wave v so far has covered $1.12. If it exceeds $1.52, then wave iii would be the shortest, making the wave count invalid.
Wave v has hit a high so far of $46.55. It can go as high as $46.95 without invalidating the count.
The intraday decline in today's trading so far suggests that a correction of wave 3 is underway in a move that could easily take $10 off the price. If the price reverses and moves to a higher high, then that count is wrong and something else is going on; most likely wave iv has not yet begun and wave iii is continuing its rise.
My practice is to make my trades in the last half hour of trading, and to defer a trade if the price is moving counter to the direction of the trade as the market nears the closing bell.
And that is the rule I shall apply to FB today.
FB's implied volatility is 42%, slightly below the midpoint of the six-month range. It has been zig-zagging higher since early August.
Options are pricing in confidence that 68.2% of trades will fall between $40.31 and $51.37 over the next month, for a potential gain or loss of 12.1%, and between $43.18 and $48.50 over the next week.
Both calls and puts are trading actively today, at about 60% above their five-day average volume.
Decision for my account: I intend to open a bull position in FB if momentum has resumed in the last half hour before the closing bell. I will structure the position as a bull put spread expiring in October and sold for credit.
If FB fails to regain momentum, if it fails to exceed its opening price of $46.32, then I'll return the symbol to my Watchlist and trade another day. Monday is 28 days before the earnings announcement. If I cross my fingers, I might bend the earnings exclusion zone to that extent. But if I don't trade by Monday, then an FB trade will have to wait until after Oct. 21.
References
My trading rules can be read here. And the classic Turtle Trading rules on which my rules are based can be read here.
I use the number 68.2% in using applied volatility to calculate the expected trading range. This comes from statistics and refers to the one standard deviation boundaries, which are expected to contain 68.2% of whatever is being studied. Putting it another way, given an item (a trade or whatever), there is a 68.2% chance that it will appear within those boundaries.
Elliott wave analysis tracks patterns in price movements. StockCharts has a good explainer. The principal practioner of Elliott wave analysis is Robert Prechter at Elliott Wave International. His book, Elliott Wave Principle, is a must-read for people interested in this form of analysis, as is his most recent publication, Visual Guide to Elliott Wave Trading.
By preference I place my trades in the last half hour before the closing bell in New York. See my essay "When is the best time to trade" for a discussion of the practice.
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.
No comments:
Post a Comment