Case Study - FAST II
Case Study - FAST II
I learn more from my mistakes than from my successes, especially in the Market where the Luck Factor is so awfully high. I've written about my Buy-Write FAST trade that I used to capture a special dividend which ended nicely.
Additionally, I wrote an OTM call for FAST at the same time that I thought was pretty secure because of all my worldly experience in technical trading analysis and the stock market.
Here's how it went down:
Basis: 400 FAST with a low entry price (I've had the stock for some time)
STO 4x FAST 13-01-19 42.50 C @ $1.25, APR 21%, $488.80 premium
I picked a call with enough time to BTC if the stock went sideways or down and I had enough price cushion, I thought, to give me space to work (expire or BTC). Even with an Earnings release a day before expiration! (rule breaker). Everything told me that the stock was struggling to break 41, that it could be expected to crest at 41, that the trucks would back up at 41, that 41 was a wall. The stock had been trading in a narrow band (low volatility) for a while, and it was breaking out DOWN. Lots of technical bullish signals, the government debacle, plagues and puppies. I did NOT pick up the RSI and ADX trend indicators because I wasn't looking at them. Both were signalling that the stock was in for a upswing. RSI was around 50, meh - not bad not good, but the ADX was sloping up - a rally potential. This upward price movement was confirmed around Dec 11th when the DI+ crossed over the DI- headed up. RSI remained flat. The trend had strength (ADX/DI+, DI-), but wasn't entering an over bought zone (RSI). The ADX continued to show strength as the price continued to move up.
I was upside down on my option call by a couple grand by now as the stock hit 48. It would take me too much money to buy it back and I realized I didn't necessarily want to be called away at 42.50 when the stock was trading at 48. FAST has an earnings call coming in a few days and expectations are that the company will meet, not beat the street's number. I really didn't want to be called away when the stock drops out on "selling the fact" after earnings. I'd rather BTC for a profit and sell another call if the stock drops. I need to buy some time to work the trade. AND, the RSI is near 70 (over bought) and ADX has crested and is sloping down (trend is loosing strength). The DI+ is still above the DI-, but they are trending closer (trend loosing strength). [ADX, DI+, DI- are by the same technician who devised RSI by the way and apparently work well together as trend indicators - google knows all].
I placed a two legged trade today:
BTC 4x FAST 13-01-19 42.50 C AND
STO 4x FAST 13-02-16 42.50 C @ EVEN
I specified I wanted this to be a wash sale EVEN - the cost to me is zero please. I'm paying a single commission on the single "trade" (checked with broker before I initiated) and it went through like lightening. Premium that went in and out was $4.65 per ($1,860). My basis for the option has been reset to $1,860 as far as the IRS is concerned, I think. It is a taxable account.
Basically, my position is now
Basis: 400 FAST
STO 4x FAST 13-02-16 42.50 C, $488.80-$12.01=$476.79, APR around 30%, but I bought myself another month for this trade to be profitable - ie, expire worthless or BTC and attempt another call on the position. If the stock goes to 50 and I get called away... I'll have to struggle to find another use for my cash in January. Gosh, what will I do?
Conclusion... I've got to learn more about short term technical indicators and pay attention to them if I'm going to make reliable income from my option writing. To the library Jeeves, and don't spare the caffeine!
First Expiration week of 2013, hope everyone is keeping warm and has successful trades.
"It's just your money. It's not your life. The figures on a broker's report mean little compared to that. The people who loved you a week ago still love you today." L.R.