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Tales of a Technician: The July that Was

August 7, 2018

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I’m resurrecting a fan favorite series of days past. It’s a monthly retrospective on my trading that entails four parts: The Monthly Theme, What I Did Wrong, What I Did Right, and Trade of the Month.

Rather than re-hash the glory that is this monthly missive, I’ll link to the last one in my 2017 series (see here). You can find a link to all my previous pieces at the bottom of the article.

Finally, the margin account I’m highlighting with these articles is an active trading account where I deploy a few cash flow systems and discretionary trades.

Monthly Theme

From a performance perspective, July was my best month of the year. The reason for the rousing results isn’t surprising given how benign the market was. In case you missed it, last month was arguably the easiest trading month of the year if your portfolio was leaning long and you were short premium (via naked puts, credit spreads, and the like). For starters, we had the least volatile month of the year, with one or two tiny dips. Next, look at the utter lack of distribution days. Every other month this year had a handful of high volume selloffs, but not July. Finally, implied volatility (I’m using VIX) entered the month near 18 and exited at 13.

Let’s put my recent musings on formula building to work.

Rising Prices + Falling Implied Volatility + No Distribution = Easy Profits

What I Did Wrong

Trading missteps fall under a variety of categories. Some involve emotional, spur-of-the-moment decisions. Others are born of mistimed entries. Fortunately, I sidestepped any major mistakes this month. Instead of allowing you to have some fun spotting my stupidity, let’s look at one of my losing trades this month.

On July 17th, LULU was on the verge of a breakout and carried a low IV Rank (20%). With the stock near $130, I bought a Sep $130/$135 bull call spread for $2.30. The hope was that LULU would breach resistance and head toward $135.

Sadly, the stock soured immediately after I entered. Since the selling was controlled, I let the stock settle for a few days until July 24th when a mildly higher volume, wide-bodied candle ushered the stock to the lower end of its trading range. I called it quits and exited the bull call for $1.96 locking in a 67 cent loss per contract.

The only thing I could have done differently is waited for LULU to probe above resistance at $130.49 before entering the trade. Had I done that I wouldn’t have been triggered in. Some would say, “Hey! That’s what you get for taking the anticipatory entry, you dum-dum.” My response is – it’s not that easy. Even with breakout triggers, you can still see pattern failure. In hindsight, I’m pleased with my management and content to chalk it up as a reliable setup that just didn’t work.

What I Did Right

It would be easy to say I planned all my trades and followed all my plans, but that wouldn’t be instructive for you (even though it was true this month). So, let’s dig deeper.

First, I executed my cash flow systems, and due to the benign market conditions, they all delivered.

Second, I closed out 18 discretionary trades with eleven wins, four losses and three scratches (i.e., breakeven).

To provide a sense of my approach here are the tickers and strategies I closed out this month:

Naked Puts: EEM, XOP, DBX, T

Covered Calls: IWM

Bull Puts: FDX, FB, GLD

Bear Calls: FDX, FXE, GLD, SBUX

Bull Calls: NKE, LULU, IWM

Put Calendar: UAL

Long Calls: BAC, IQ

Long Straddle: TWTR

Iron Fly: QQQ

Trade of the Month

I’ve already spotlighted two trades this month (see here and here), but here’s another to tickle your mind. This one illustrates an oft-beaten drum of mine known as sector rotation. In bull markets, you want to look for reasons to buy beaten-down sectors with the expectation that they will eventually be lifted higher by the rising tide.

I did just such a thing with a bullish play on Bank of America (BAC).

On July 6th, financials were beaten-up, and BAC scored a failed breakdown. It had very low implied volatility, and I reckoned it was ready for a rebound. The minimal cost of the call option I purchased kept the risk small. I bought the Oct $27 call for $2.04. By using October, I was giving the stock plenty of time to mount a recovery.

Lady luck was on my side, and I nailed the exact low. Two days later, my call was up 50% and BAC suffered a dark cloud cover reversal candle. To hedge, I rolled my long call into a bull call diagonal spread by selling the Aug 30 call against my Oct 27 for a 50 cent credit. This reduced my overall risk from $2.04 to $1.54.

At that point, I hoped that the pullback in BAC would be shallow and it would eventually work its way higher to $30.

On July 16th, BAC reported earnings. Because of the small risk in the trade and the tendency of banks to not move much following these quarterly events, I decided to remain in the position.

Fast forward to July 23rd, BAC pole-vaulted to $30.75 and I decided to ring the register. Here are the results:

Long Oct $27 call: Bought @ $2.04, Sold @ $4.05. $2.01 gain

Short Aug $30 call: Sold @ 50 cents, Bought back @ $1.13. 63 cents loss.

Total Gain: $1.38 or a 68% ROI (138/204)

One Reply to “Tales of a Technician: The July that Was”

  1. JustinDriskell JustinDriskell says:

    I enjoyed the style of this post. Hope to see this one again next month! 🙂

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