(non)Trade Review and Your Rules!

Yesterday in the premium blog I posted the following trade for into earnings., $CRM
crm, $CRM, is moving back higher after a Tweezers Bottom just over the 100 day Simple Moving Average (SMA). With the Relative Strength Index (RSI) trying higher but trending longer term lower it is suspect and the Moving Average Convergence Divergence (MACD) indicator is negative with the signal line trending down. A downside to neutral bias exists intermediate but short term looks higher. Support lower comes at 163 and 160 followed by 156 and 150 before 140. Resistance higher is found at 171 and 176 before free air. The reaction to the last 6 earnings reports has been a move of about 7.00% on average or $11.70 making for an expected range of 156.50 to 181. The at-the money March weekly Straddles suggest a similar $12.30 move by tomorrow with Implied Volatility at 150% above the March at 51%. There has been a lot of activity in the March1w 180 Calls.

Trade Idea 1: Buy the March1w 180/185 Call Spread for $0.90.

Trade Idea 2: Sell the March1w 145/185 Strangles for a $1.45 credit.

Trade Idea 3: Buy the March8w 175/180 Call Spread for $1.68.

Trade Idea 4: Sell the March1w 145/185 Strangles and buy the March8w 175/180 Call Spread for $0.23.

Trade Idea 5: Sell the March1w 185/200 Call Spread and buy the March8w 175/180 Call Spread for $1.00.

I like #4 best as it works with the 180 Call bias and offers upside protection to 190 against a move tomorrow. You can add a 140 Put on March1 to cap any downside to $5 or take #5.

Trade # 4 turned out to be a spectacular winner. At the close Friday the strangle expired worthless and the Call Spread could be closed for $4.20. A 1725% gain. Lights out! Except I did not take the trade. Why? My rules did not allow for it in the account I was trading. Bummer.

Rules did prevent this trade from happening, but they were created to prevent disasters from occurring. In this case the it was the short straddle that was eaten up by position size rules. In hindsight I could have capped the risk for a small cost and still made over 1000%. It was already a 4 option combination though and adding 2 more would have added to the cost measurably. So it did not happen. That is a learning experience. I am ok with missing out despite that. I designed the rules for a reason and I know I will never see all of the possibilities ahead of the trade that are so clear in hindsight. Add to the experience and move on to the next trade.

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Dragonfly Capital Views Performance Through February 2013 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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