Thursday, June 17, 2010

Fire Up the Boosters

Like most chartists, I'm continually on the lookout for quality patterns stacking the odds in my favor while providing favorable risk/reward entries. Entering the market at random times is not only silly, it's usually a one way ticket to the poorhouse. Whether you're an Elliot Wave practitioner, a Fibonnaci fanatic, or a volatility and sentiment analyzer, we're all attempting to find an exploitable edge and bring order to the seemingly random market. All too often traders miss the mark by bouncing from one trading style to another instead of honing in on one approach. Don't make the mistake of becoming a jack of all trades and master of none. As I've mentioned before I'm a simple man when it comes to technical analysis and believe that less is more. Usually the cleaner the chart the better.

Speaking of strategic entries, I'm thinking the market may have provided participants wanting to join the bullish throng with one such entry point during Tuesday's breakout. I took the opportunity to enter a bullish risk rocket on the SPY during the surge in anticipation of some more upside over the coming days. Suppose we purchased 100 shares at $111 and bought two July 113 calls for $1.65 apiece (click image to enlarge).

As is typically the case with these risk rockets, we're looking for a one average true range (ATR) profit before unloading the stock. At trade inception the SPY had an ATR around $2.50, putting our profit target at $113.50 (111+2.50). Once the target is reached and the gain on the stock locked in, we'll consider rolling the remaining calls to some type of risk free spread. I'll follow up with an update when needed.

[Addendum: The exit for today's SPY Risk Rocket can be found here]

For related posts, readers can check out:
Adjustment Thinking and the Salvation Syndrome
The Sling Shot
Risk Rocket


MarkWolfinger said...

You cannot construct a risk free trade.

You have cash at risk when buying those calls. If they go up in value, it's YOUR MONEY.

If you do not sell, but instead construct a NEW POSITION, your money is at risk. It is never a risk free trade.

That is one of those ideas illusions that many people just cannot grasp.

I always enjoy your blog. Well done.

Tyler Craig said...

I've seen your take on this on your blog a few times and see exactly where you're coming from.
I think the difference lies in how traders view accumulated profits. In my mind I differentiate between my original risk capital and accumulated profits.

I guess anytime I use the phrase "risk free" I'm speaking in terms of my original risk capital. So while I can certainly give back accumulated profits,I can't lose the original risk capital once the adjustment is made.

Correct me if I'm wrong, but it seems from your explanation you don't differentiate between the two. So, if one had your viewpoint, then yeah there is no such thing as a risk free trade.

I guess since the majority of traders think as I do, I've never really worried about using the term "risk free". But hey, perhaps I should rethink the whole thing.

The other thing I've been thinking is even if I was converted to your view of "risk free", I'm not sure if it would affect the way I trade. I may just use the term different when writing...

As always, thanks for the comments.

Anonymous said...

May I ask how you'd manage this trade when it goes against you?...aka, "the current situation."

Tyler Craig said...

After almost achieving a 1 ATR gain (SPY rose to $113.20 while my target was $113.50) and seeing the SPY retrace all the way back to the breakout point, I exited at my entry point ($111.00). A break back into the trading range brought the validity of the breakout into question, so I just took it off the table.

I'll do a post next week elaborating on potential exit strategies.

Tyler Craig said...


The post answering your question is up now:


Wheres the fire.