Titan Machinery: A Trade’s Not Over Til It’s Over

On September 7, 2012 the idea below was originally given to premium customers. After closing it yesterday it is time to review the trade.

One name that reports Monday before the open, Titan Machinery, $TITN.

Titan Machinery, $TITN

Titan Machinery, $TITN, has a lot going on in the chart. First the Inverse Head and Shoulders from earlier in the year was negated by the recent push down below the right shoulder. That pullback retraced a bit over the 61.8% Fibonacci level at 28.71, consolidated and is now moving higher. If it continues the Andrew’s Pitchfork still has a long way until the Median Line is a stronger attraction than the Lower Median Line. All told, it may be turning higher but there is some work to do. The Relative Strength Index (RSI) is still bearish but rising, with a Moving Average Convergence Divergence (MACD) indicator that is about to cross to positive, both supporting more upside. This is set up for the upside but I would not bet the farm yet, as the downtrend is still in tact. Resistance is found at 26 and 28.75, both near Fibonacci levels. There is support lower at 123.70 and 23 followed by 21.50 and 20.25. Short interest could help it higher at about 15%. The reaction to the last 6 earnings reports has been a move of about 14.9% on average or $3.55 making for an expected range of 20.70 to 27.80. The at-the money Straddles suggest a roughly $3.00 move by Expiry with Implied Volatility at 75% above the historical at 46% but close to the October at 56%. The bulk of the activity in options is on the call side today with over 1000 September 25′s purchased.

Trade Idea 1: Buy the September 25 Calls for $1.30.

Trade Idea 2: Buy the stock and write the September 25 Calls for $23.19.
A 7.8% return if called away.

Trade Idea 3: Sell the September 20 Puts for $0.20.

Not a lot to look at here. If you want to play I like #1 or 2 best

I took trade #2, the buy write and got a fill at 23.13. The chart below illustrates what happened from there.

1. This is the initial buy at the top of the channel anticipating a breakout. As you can see the following Monday it instead gapped lower. Bummer. The bottom of the channel continued to hold with the RSI becoming oversold so I chose to hold for a bit as there was still time.

2. On September 10 I did buy back the short calls at 10 cents, moving my basis in the stock to 23.23, just in case. Four dollars in the hole or $4.10 did not make a difference to uncap the upside.

3. As the bottom continued to hold and made a higher low, on October 1st, I entered a strategy to accelerate the upside. I bought a November 20/22.5 Call Spread and also sold the November 22.5 Calls against the stock. The transaction added 35 cents to my basis, bumping it to 23.58. This step is very useful when you own a stock at a loss that looks positive including when you get put stock.

4. The stock made a higher high and a higher low before ramping up over the top strike. As that happened I sold the call spread for $1.50, reducing my basis down to 22.08 versus a stock price of 22.93, much better.

5. The stock went on to make another higher low and higher high before seeming to consolidate at the 23.60 level. So on November 7th I bought more time rolling the short November 22.50 Calls out to December 22.50 Calls and gathering a 95 cent credit, further reducing my basis to 21.13. This turned out to be a bad tactical move as the stock continued lower and the November options would have expired worthless. oh the benefit of hindsight.

6. the stock continued to move higher off of the bottom on November 15. Still holding stock and short December 22.5 Calls the day before the next earnings report, with a positive chart ans options action biased to the upside I rolled the December 22.5 Calls to December 25 Calls for a cost of 1.15. This raised my basis again to 22.28 but gave me upside to 25.

7. With a solid report and a move higher in the pre-market my plan on December 6th was to unwind the whole trade. the broad market had been acting fickle and it was time to book a gain and be out of the name. I put in my sell to close order on the current buy write (stock against December 25 Calls) at 23.55 and got a fill less than 10 minutes into the day. After a lot of stress, continual review, and several adjustments, a 5.7% return over 3 months or 22.8% annualized.

There is some luck and some skill involved here but mainly more correct reactions to the price action than incorrect ones. The big lesson to take away from this trade is that a trade that immediately moves against you is not always a lost cause. Using options combined with technical analysis there are many alternatives to work out of a jam.

The idea of a detailed trade review came from a subscriber and these will be an occasional part of the process for clients only going forward, especially when there is a learning event to discuss.

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Dragonfly Capital Views Performance Through November 2012 Expiry

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The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

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