Tuesday, November 21, 2006

Deconstructing My BIDU call option trade

As mentioned yesterday, I closed my BIDU options trade after holding it through the weekend. SimplyOptions Trader (who's got a nice options blog of his own btw, check it out!) asked about my BIDU trade, so I thought I would explain my thought process before, and during the trade.

1) Why would you be paying attention to this stock on Friday Nov 17, 2006?
Because it had gapped up the previous day.

2) Is the trend up or down? Would you be looking to get long or short this stock?
Trend is up. Would be looking to get long on BIDU calls.

3) Where would you get long/short this stock on Friday Nov 17, 2006?
The lowest risk entry would be on a break above previous day's high with accompanying volume. However, I got long when the price/action indicated to me that BIDU was not going to fill thursday's gap (at least not on Friday). So there are now two reasons to go long:
- it was challenging previous day's HoD
- price action indicated a good probability of previous day's gap up not being filled.

4) Where would you put the initial protective stop?
106.95. What that meant was that I would sell the calls and close my position if BIDU dropped below 106.95

5) Why did you hold over the weekend?
Because there was a good bullish tone to the price action.
Because it closed near its HoD.
Because the previous day's gap up did not fill.
Because the setup was there to provide a good chance of follow thru buying in the next trading session (Monday).

6) Where would you exit the position?
BIDU is making new ATH's, so there are no pre-defined exit points above current stock levels.
The reason I sold my calls @111 was because that is where the stock started to reverse, indicating that there would be a lack of buyers to push it beyond 111.

As it turns out, I closed my BIDU trade too early. And guess what? BIDU is one of those stocks that I thirst for. Why? Because it is doing now what AKAM and STEC did in Sept, and what AAPL did in Nov/05.

With my current methodology, it really is hard to hold onto a stock like BIDU for the whole month. I haven't been able to do that without taking on some extra risk. When a stock like BIDU goes on a run for 1 or more months, it seems the only way to stay on the ride for the whole time is to keep your stops loose. But the longer you are on the ride, the more you expect the ride to end !! Anyways, I'm still trying to figure out how to make the most of these multi-month momo runs when they happen. If anyone has it figured out, let me know.


Simply Options Trader said...

Hi Phileo,
Thanks for the link and the detailed explanation. Learnt a great deal abt your thought process.

When you say that the setup was there to provide a good chance of follow thru buying in the next trading session, I presume the high probability setup was due to the 3 reasons you mentioned earlier? (such as closing near its HoD)

Btw, our blog was jointly set up by myself and my hubby. He helps in the technical aspects of the blog while I trade and write the blog :)

Have a great weekend!

Phileo said...

Hi SimplyOptions,

Yes. There was no single chart pattern or technical indicator to say that this was a high probability setup, it was a combination of things. So, trader's intuition would somewhat come into play in this situation.
Your question has also uncovered something that I've been meaning to write about - and that is to share what I've learned so far about options trading all in a write-up. I will get that write-up done sometime this weekend.

Thanks again for visiting my blog!!