Wednesday, February 25, 2015

Wednesday's Finalists

Some days, many are call, none are chosen.

My analysis of Tuesday's markets was unusual in that a full 20% of the bull or bear signals made it past the early screens. (See "Wednesday's Prospects".)

And most those 10 survivors continued to perform the next day, all but two confirming their signals by continuing to trade beyond their 20-day price channels. The two laggards are TDY and CDNS.

However, none made it to the finals, for reasons that mainly had nothing to do with price movements.

My second round of analysis includes a look at factors that show suitability for my present strategies: Liquidity and the bid/ask spread.

If I'm trading shares, then liquidity is of minor importance. The universe I analyze has already been pre-screened for average volume of 100,000 shares a day or greater. Any stock with six-figure volume is certainly tradable.

If I'm trading options, then the requirements are tighter. Options, as derivatives, are always less liquid than shares, and that fact imposes a need for greater caution on the part of the trader.

For options-based strategies, I prefer to trade strike prices with open interest near the money of 100 contracts or more.

I also require that open interest cover enough strike prices for me to construct spreads of various sorts. My rule of thumb is to require that at least four of the seven out-of-the-money strike prices that are nearest the current price have three-figure open interest.

Turning to the bid/ask spread on options, I require that the front-month at-the-money bid/ask spread on calls be be under 10% -- no double digits allowed. It's a rough and ready rule of thumb that gives me a quick assessment of an options grid.

Of the 10 symbols under consideration today, two had overly wide bid/ask spreads: IDCC and KLAC. The other eight all had insufficient open interest.

I plan to open no new positions based on Tuesday's markets. There are no potential trades from among my list of innovative companies, and no potential volatility plays among the company's announcing earnings after the close today or before the open tomorrow.

-- Tim Bovee, Portland, Oregon, Feb. 25, 2015


My shorter-term trading rules can be read here. My longer-term trading rules can be read here. And the classic Turtle Trading rules on which my rules are based can be read here. My volatility trading rules can be read here.


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

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