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Friday, January 26, 2007

Options Trade: Goldman Sachs Group Inc

This trade makes me wonder whether the pain of missing out on a run-up is better or worse than the pain of giving up profits....

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1. Why did I take this trade?
Goldman Sachs (GS) gapped up on Wednesday morning. The bullish price action led me to believe that it would break above the OR bar (first 15-min candle). As soon as I realized that, plus that there was enough buy volume pouring in such that it would never fill the gap, I decided to purchase the Mar07 230 calls when GS broke above 215.

2. What was the initial stop?
Initial stop was the bottom of the first 15-min candle, just below 213.

3. Why did you exit where you did?
I closed out my options when I realized that it was not even going to be able to recover above 217, let alone a recovery bounce back to 219.

4. Is there anything you would do differently?
Hope is bad, never hope for a trade to recover!
When it broke below the OR bar on Thurs., that should have been my signal to get out. Definitely I should have closed my trade when it broke below 218. It's just that GS was acting so bullish on Wednesday that it never occurred to me to plan out what to do if the worst case scenario (ie. giving back all the gains made on Wednesday) were to occur.
For me, the threshold at which the pain (of seeing real profits slip away) exceeded the emotional hope for recovery was when GS dropped below 217. I will definitely need to train myself to have a lower tolerance for such painful mistakes.

Note that the options (GPYCF) closed higher on Thursday than the price I initially bought it for (on Wednesday), even though the underlying stock closed lower on Thursday than where I had entered. This is the first time that I have seen this happen, and I'm not sure what it really means.

3 comments:

Richard said...

Seems to me like small drops in the underlying price don't matter for out-of-the-money calls. It's all about the time they have left, and the market's best guess as to the volatility of the stock going forward. So, the call price can rise even as the stock drifts down, as long as people think the stock will make bigger swings going forward. That's one of the things that makes options so interesting to me!

Phileo said...

Yeah, I had a hunch that it had something to do with the volatility, but never followed through to research more into it. One of the problems is that options data is pretty hard to get access to, and IB is always shut down on the weekends !

Simply Options Trader said...

Like what Richard said, its likely to be due to volatility increase, so compensating for the stock price decline.

Whenever I open new trades or close them, I note down the IV and delta of the option, so I know more in depth what happened "behind the scenes".

In the IB forum, I've tried to get them to put in enhancement so that the platform can include IV and delta side by side option price. But such enhancements are based on users votes. Vote for it! :)