Notice the lower high on 4/3/17 (yesterday) and a gap down today. Yesterday also was a bearish engulfing candle and a close below the 8ema. These are bearish signs.
I expect the 2 most likely moves from here are either the formation of a wedge, which is not my preference, or a continued drop to the trend line I drew, which coincides with the 50SMA and the 50% Fib. The latter would form a down channel, and this possibility is what I'll trade on.
Where would I be wrong? If price exceeds the previous swing high of yesterday at 37.41. So I put my stop at 37.50. Also, in case of a crazy gap up move, a stop won't help me. So I got May 38 Call options for $.36 and shorted XHB shares at $36.82 in equal proportions to the number of shares represented by the options (100 shares per option). I set my target just above the 50% Fib at $36.04.
So, worst case win is 36.82-36.04 =$.78-.36(option)=$.42/share. But the option will probably not be worthless, so I'll make more.
If the trade stops out, then the loss is 36.82-37.50=.68 but the option will gain .68x30%=.20 because the option has a 30% Delta. So the loss is .68-.20=.48 per share. But the Delta will increase due to Gamma so I'll lose a little less.
This is pretty close to a 1:1 risk:reward. Not desirable but I think the probabilities of a stop out is much less than a down channel forming, so I'll put the trade on for a 1:1 risk:reward because I think I have an edge, at least until the 50% Fib is hit.
Worst case loss is if there's a huge pop and price goes over $38. In that case my loss is capped by the 38 Call option to 36.82-38.00-.36(option cost)=$1.54 per share. Not good, but it is defined and I will use this when calculating the size of my position to no more than 2% of my account.
OK, let's see what happens.
No comments:
Post a Comment