ZIM Zooming Down - Update 2

ZIM 6/10/22 Daily Chart

Yesterday's post included "it seems very likely we'll get a higher than expected inflation number. If we do, then that puts more pressure on the Federal Reserve to increase short term interest rates higher and faster. That should be very bearish for the market.". That's exactly what happened. I didn't watch our Put value continuously, but I did notice our profit got as high as $350. It may have been even higher.

Soon as the CPI Report came out at 8:30am ET this morning and the equity futures started tanking, I knew we didn't need our June 60 Call hedge anymore, but the option market didn't open until 9:30. So I entered a limit order to sell the option for at least $10. At 8:56am ET I sent this Tweet:

"CPI report was worse inflation than expected, as we predicted. ZIM should drop more. Entered order to sell the hedge for at least .10"

When the market opened at 9:30 our June 60 Call sold for .48, so we only lost .60 - .48 = .12 x 100 shares = -$12. Cheap insurance to protect our $590 position.

Near the Close, I had to make a decision. The voice in my head was insisting I sell and capture the profits while I can. I don't want to hold over the weekend and wake up Monday to a loss because ZIM announced they're being acquired (just made that up), or some other bullish news. What to do?

Today we formed a Doji candle below yesterday's low but near it. If, on Monday, we gap up a little at the Open and make a significant green candle, then we'd form a 3 candle pattern called a Morning Star. And since Stochastics are now oversold, this pattern would be very bullish. And volume has diminished. 

Also, we're sitting right on the 50% Fibonacci level. It would be normal for this level to provide support. However, if you look left, you'll see we already bounced off the 50% Fib on 4/25/22. Price could certainly bounce again, but often once you've paid your respects to a support level you don't need to pay tribute again.

All of the points above give credence to the greedy, paranoid voice in my head saying "sell, sell, sell!". However, this is still a bearish setup in a bear market. Chances are we will continue down on Monday. But maybe it would be a good idea to take something off the table. I thought about a good way to do that and came up with this: Roll down the option. Here's how I did that:

I sold our July 55 Put for 5.90. This captured 5.90 - 3.20 = 2.70 x 100 shares = $270 in profit.

Then I bought a July 40 Put for .98 x 100 shares = $98.00. If we lose that whole option, then we'll still have $270 - 98 = $172 in profits. So we "rolled down" the option strikes in our position from 55 to 40, and thereby captured some good profit but stayed short to benefit from any further drop in the ZIM stock price.

Our current balance is $270 - 12 = $258 in hard money profit. Plus we have a July 40 Put worth $98.

ZIM Zooming Down - Update 1

ZIM Daily

Today we gapped down at the Open and didn't even try to fill the gap. That's very bearish. Then we made another big down candle almost as big as yesterday and with almost as much volume. 

Given that this is the day before a big economic report, tomorrow morning 8:30am ET (the month to month CPI inflation report), makes today's big move even more significant, because you often see quiet and/or mean reversion type days before a big report comes out.

In yesterday's post, I forgot to mention the candle closed near the bottom. This was another bearish indicator. Today, we did it again.

Stochastics are still in the mid-range, so we have plenty of runway to drop further.

So, we continue to have a very bearish set up. However, the CPI report tomorrow morning is a craps shoot. The market could rocket upwards in response. And this could definitely happen even though we're in a bear market. On the other hand, looking at things fundamentally, which I try not to do, it seems very likely we'll get a higher than expected inflation number. If we do, then that puts more pressure on the Federal Reserve to increase short term interest rates higher and faster. That should be very bearish for the market.

Our July 55 Put was purchased yesterday for $3.20. Today's last trade was $5.90. That means our puts have increased in value by 5.90 - 3.20 = 2.70 * 100 shares = $270 profit. I had a very strong desire to sell and capture that profit. Would that be the best course of action? It would certainly be the safest and satisfy the loud voice in my head warning I could lose it all. But how would I feel if ZIM gaps way down tomorrow? Not so good.

I decided I wanted to participate in a likely downdraft tomorrow, which I'd miss if I sold out the position. However, there's a very real chance the market could shoot up tomorrow and take ZIM with it. So it would be a good idea to take a hedge against our short position.

I Tweeted out at 3:16pm ET that I bought a June 60 Call option for $0.60. If ZIM goes up significantly tomorrow then this Call option will increase in value, offsetting our losses in the Put option. Not necessarily 100%, but it'll help. Since the news comes out at 8:30 and the option market opens at 9:30, we'll just have to wait to liquidate the position.

Of course, if ZIM takes a flying leap further down, the Call option could become worthless before I can sell it. But our gains will far outweigh the $60 loss. Can't wait to see what happens tomorrow.

March Wheat did an about-face - Update 2

We had a gorgeous day for our short position, even though we had relatively low volume due to it being New Year's Eve day. We closed with a lower high and a lower low than yesterday. We also closed under the previous Support/Resistance level that provided support for the past 2 candles, but not today.

And Stochastics are still in the mid-range while the BB/KC Squeeze is about to break out. Things are looking very constructive as of today's Close.

Corn also closed with bearish indications, which lends some indirect support to a short position in Wheat.

There are only 2 grain related USDA reports due out next week. They are both at 3pm ET on Monday 1/3/2022:

• Fats & Oils: Oilseed Crushings, Production, Consumption and Stocks
• Grain Crushings and Co-Products Production

I'm told by respected Ag trader Richard Anderson that usually neither are market moving reports. So, I'll be holding our position through the news release. You can see the schedule here:

https://www.usda.gov/media/agency-reports?start_date=1%2F3%2F2022&end_date=01%2F07%2F2022

If you noticed in yesterday's post I was also short Soybeans, I covered that position at the close today at 1340. Net is 1364 1/2 - 1340 = 24 1/5 points * $10/pt = $245 in the Soybean trade. The full contract would have been 24.5 * $50/pt = $1,225.

I closed it because:

• I'm over-weighted short grains to hold over the weekend.
• March Soybeans could not close below the 8ema yesterday or today.
• Taking the profit is a hedge against Wheat gapping up at the next market open.

Nothing to do now but wait until next year :)

Time-frames of Choice

This applies to technical trading in "normal" market periods. A common question I hear, and ask it myself when learning a new pattern or other setup, is "what time-frames does this work best in?". This is a fair question and if you don't get a helpful answer, here are my thoughts about picking a time-frame in general.

Too long and you increase your risk of cycles unrelated to your pattern and headline news.

Too short and you increase your risk of market manipulation and large orders. Relatively large orders would look like headline news and be easier to occur due to lower volume in short time-frames. A larger time-frame can swallow up and absorb the relatively larger orders.

So, its reasonable to think there's a medium term sweet spot. For me, its somewhere between scalping and swing trading. Specifically, I try to stay within a range of 3 minute to daily charts. My favorite time-frames are 15 minutes and 1 hour. An exception is the grains market, i.e. corn, wheat, and soybeans. I prefer the Daily chart for the grains market.

Sometimes a setup is on a time-frame where the proper Stop placement represents too large a financial risk. If you can't get that down through mini-contracts, position sizing, or options, then go to a lower time-frame to find another good, but closer, Stop placement that gives you a smaller financial risk.

Whatever time-frame you choose, be cognizant of scheduled news, such as earnings reports for stocks and agricultural (crops and livestock) or inventory (energy) reports for related commodities. Unless you have inside information, you have to prepare for a surprise, which means taking a hedge or exiting your trade.

July Corn Rising - Exit

I've been disappointed by the markets in so many ways over the years but today I was disappointed in a whole new way. Maybe because today's post is number 13 in this thread, or Murphy's Law was being enforced, or the market makers have a secret surveillance camera in my office. Whatever the reason, the probability of this specific outcome was very low, based on the July Wheat and Corn markets past behavior.

As you know, the hedge was a July Put option on Wheat rather than Corn because Wheat has had weaker price action for months. During the duration of this trade Wheat and Corn have had very similar daily moves, and Corn has had more Bullish price action than Wheat.

So, it would be reasonable to assume this behavior would be true today. Therefore, one would expect Corn to retrace faster and higher than Wheat, if indeed there was a retracement. In yesterday's post I said "very often when there's a big move on a given day, the next day sees a retracement". Well, that's exactly what we got.

Except for one thing. The top chart above is the Daily chart for Corn and the bottom chart is for Wheat. Notice how today's Wheat candle retraced further than Corn's.

Well, the strategy was expecting Corn to rise faster than Wheat. If that was true then Corn would have been at higher price when the Wheat Put hedge value dropped back to 13 points, where we bought it. I had entered orders last night to sell the Corn and Hedge contracts when the Hedge hit 13 points.

Since, for the first time, July Wheat moved stronger than Corn, the Corn contract sold at a lower price. Last night the Hedge was worth almost $200 more than the Corn. Is "disappointing" a strong enough word?

Bottom line is we're out. There isn't much time left in the July contracts, and where December commodities go from here is very uncertain, so we're out of Corn and Wheat for now.

Summary:

YW July Exit 638 1/4 - Entry 693 1/2 = -55 1/4 * $10/pt = $-552.50

ZW July 660 Put Exit 12 5/8 - Entry 13 = - 3/8 * $50/pt = $-18.75

YC July Corn Exit 650 1/8 - Entry 689 1/4 = -39.125 * $10/pt = $-391.25

Total $-962.5 Loss.

July Corn Rising - Update 12

Wow, interesting day! The FOMC Meeting press conference yesterday included some discussion on tightening their monetary policy in maybe 2023 (it's currently 6/17/2021; ya gotta be kidding me), and look what happened today. Risk off in most assets. The Federal Reserve is in a roach motel, in a box, that's painted in the corner, inside the Hotel California. In other words, they're stuck with either extreme easy monetary policy, or crashing the markets.

Regarding our Corn trade, first thing to say is our Stop was hit on Wheat. So we're out of July Wheat. For more details, see:

https://jmstweets.blogspot.com/2021/06/wheat-might-make-some-bread-exit.html

After Wheat got whacked for $-552.50, I had to decide whether to also exit Corn and/or the hedge. Corn ended the day at $-576 and the ZW July 660 Put hedge ended the day at $+698. While the hedge more than covered the incremental loss from yesterday, it hardly covers the combined loss of Wheat and Corn, which is about $1,100. So, what to do?

Well, we need to decide whether Corn is going up or down from here, and since the hedge is actually on Wheat, we need to decide on where Wheat is going from here also.

If you go to the link above and see the Wheat chart, you'll see it broke out of the downward Flag channel its been in for about 12 days. It broke to the downside, which was unexpected. It made a slight new swing low. The previous low was 639 1/2 and today's low was 637 1/4. Does this suggest further downside or a double bottom?

I see a possibility for both. Notice the 200sma exactly coincides with the 78.6% Fib of the green range at about 630. Notice also that Stochastics are just about to go oversold. It seems likely that when the market opens up, price can go further down, or gap down, to this 630 level, then reverse and head back up. If this is a Double Bottom pattern, then we're headed much higher.

Another way to look at this is that we've formed a "lower case 'h' " pattern on the Daily chart, after forming a Double Top. This is going back to about April 27th. If this is the "Dreaded 'h'" pattern, or it also qualifies as an "Inverse J-Hook" pattern, then we're going much further down.

So, which is it? There's no way to know before the market closes on us today.

I'll tell you my thinking, but first you need to understand what option Delta means. The Delta value of an option tells you how much the option price will move as a function of a move in the underlying security. Delta is the percentage of the underlying that the option price will move . For example, when we bought the July Wheat 660 Put, the Delta was .514, which I documented in the post that day. That means for each point that the Wheat Futures contract moved downward, the option price would increase by .514 points.

You also need to know that the Delta value is not constant. As the underlying causes the option to move more in the money, the higher the Delta becomes, up to a maximum of 1.0. And the opposite is true. As the underlying price action causes the option to move more out of the money, the lower the Delta becomes, down to a minimum of zero. The amount the Delta value moves relative to the amount the underlying moves is called Gamma, but we can skip that for now.

I bring up Delta because if Wheat goes down further then Delta will increase. In fact, its already increased substantially because the underlying Wheat Futures has dropped considerably since we got the option. Today the option's Delta was .71 at the market Close, up from .514 when we got the option. So now the hedge is increasing by about 70% of the move in the futures rather than about 50%. This is an important consideration in the decision of how to handle the situation we find ourselves in.

Keep in mind that Wheat and Corn have been moving very similarly since this trade began. I expect this to continue for the duration of the trade. So, if Corn reverses and heads back up, I'd expect Wheat to go up as well.

OK, let's look at the Corn chart above. I see a reason to bounce and a reason to continue downward.

See the 2 thin white horizontal lines? We closed right at the same level today. Those lines represent support/resistance levels from late April and mid-May. Look on your 4 hour chart to see them better. We may bounce off these and head back up. Just under those lines, there's a possible Trend Line, the 50% Fibonacci level, the bottom Bollinger Band, and the bottom of the Keltner Channel. These could also provide support. Also, very often when there's a big move on a given day, the next day sees a retracement.

On the other hand, we've made a lower swing high on 6/10/21 vs 5/7/21. That's Bearish. We've been below the 8ema for 4 days. During those 4 days, we've formed a Bearish Engulfing pattern twice. And the Bollinger Bands have been inside the Keltner Channel. Just a little inside, but if those Bollinger Bands flare apart then we may have a release of a BB/KC Squeeze, which would mean Wheat will go down much further. And, Stochastics are still in the mid-range, giving the downside lots of runway.

Bottom line, which way do we think Wheat and Corn will break tomorrow, up or down? Bottom line, we don't know.

Here's my thinking. If we get a bounce, and price heads higher, we'll hold our position until the hedge profit goes to zero, then sell it. We'll break even on the hedge. By the time that happens, the Corn futures contract will have recovered much of its value. The loss at that point will be much more tolerable, and maybe we'll have an indication whether Corn will continue higher or not.

If price heads lower, then the value of the hedge will increase faster than the loss in the Corn Futures contract. Why? Because remember the option is on the ZW $50/pt contract while the YC Corn Futures is $10/pt. The option Delta will be at least 75% and .75 x $50/pt = $37.50/pt for each $10/pt move in Corn. In fact, if Corn and Wheat fall far enough, the hedge should recover all the loss in both the Wheat and the Corn Futures.

Given our current position, if price goes up, we reduce our loss. If price plummets, we could eliminate our loss completely. So, my final decision was to hold both the Corn Futures and the hedge. 

If you are asking why not sell the Corn now, its because it may go up from here. If I thought Corn would just go flat from here until expiration then I'd sell both the Futures and the Option. But I think sideways price action until expiration, while possible, is unlikely.

Wheat Might Make Some Bread - Exit

Wheat got burned today. The 639 Stop was not changed since we entered this trade and it was hit today. It was placed just under the previous swing low, which was 639 1/2. We sold at 638 1/4.

We still have our hedge on, which is a ZW July 660 Put, and it did its job as expected. It protected further losses in both Wheat and our parallel long Corn trade. I considered taking off our Stop since we have a hedge, but decided to let the Stop work because it was unlikely to be hit and we're on the July contract, which expires July 14th. Contracts have already rolled to the Sep. contract.

To continue following this trade, please follow the Corn trade beginning with "July Corn Rising - Update 12". 

Summary, NOT INCLUDING THE HEDGE:

YW Exit 638 1/4 - Entry 693 1/2 = -55 1/4 * $10/pt = $-552.50 "Loss". We won't know the bottom line of this trade until we know how we exited the hedge and the corn contracts.

July Corn Rising - Update 11

Above is a zoomed in view of the daily July Corn chart. We closed with a Doji, just below the 8ema but above the Flag pattern Trend Line. We are in a somewhat neutral situation and therefore still in need of protection.

We had sold off the hedge this morning when Corn was looking strong and appearing to break out of the Flag pattern, again. If we get follow through to the upside and a higher high than the previous swing high at 717 1/2, then this is a very Bullish pattern. But at the moment, there isn't a clear direction.

So, we bought back the July Wheat 660 Put hedge for 13 points.

For more details on this, please see today's post on the parallel Wheat trade:

https://jmstweets.blogspot.com/2021/06/wheat-might-make-some-bread-update-11.html

A good lesson here is the importance of waiting until a candle closes to have a valid interpretation of its signal. This is true on any time-frame. However, there are situations where you already have a strong indication from the previous candle, and you'll need to make a trading decision based on how the next candle begins.

Wheat Might Make Some Bread - Update 11

We started the day session with a strong Bullish move up to the 8ema. As I mentioned in yesterday's post, the July Wheat Futures 660 Put Option hedge we bought yesterday for 15 1/8 would lose value quickly if price starts rising because of the size of the hedge and its proximity to expiration. So, given the strong upward move combined with a fast rate of change in the hedge, I sent the following Tweet at 10:03am ET:

"Seeing some strength in July Wheat and Corn so sold the hedge."

Sold it for 12 points, so the loss was (12 - 15 1/8) * $50/pt = -$156.25.

This decision seemed to be a good one as the futures price continued to rise. But it topped out at 11:51am ET at 672.75 which is both the 8ema on the Daily chart as well as the swing high on 2/24/21, which can serve as resistance. It was marked on our chart. See the then white horizontal line.

By the end of the trading day, price had retraced almost exactly to the open, thereby forming a Doji candle. We were at the middle of the Flag pattern channel, with mid-range Stochastics, and a Doji indecision candle. Where we go from here is a crap shoot.

So, in response I sent the following Tweet just before the close:

"Bought the Wheat hedge back."

This time we got the hedge for 13 points x $50/pt = $650.

By the way, July Corn closed with a Doji, just below the 8ema but above the Flag pattern Trend Line. Stronger position than July Wheat but still in need of protection.

July Corn Rising - Update 10

We made a lower low today but we bounced off the 50sma and closed near the top of today's price range. We're also not far from the 8ema. But we're still under the 8ema and inside the consolidation. We look stronger than Wheat and Soybeans, but we're not so strong that we don't need some protection.

Due to the weakness of our Corn chart as well as on the July Wheat and Soybean charts, we really must exit or take a hedge today. It looks like we could break out to the upside as early as tomorrow, but it would be denial not to address the weakness of our trade today, since we don't know what will happen from here.

Since our parallel long Wheat trade is worse off than the Corn trade, I decided to take the hedge on the Wheat rather than the Corn. The hedge is large enough to protect both the Wheat and the Corn positions.

For a detailed discussion of the trading plan from here, please see today's post on the Wheat trade:

https://jmstweets.blogspot.com/2021/06/wheat-might-make-some-bread-update-10.html

Wheat Might Make Some Bread - Update 10

This time its different. Meaning today's candle went all the way down to the bottom Trend Line and closed far from the 8ema. The past 5 days were more neutral, but today is clearly Bearish. So now, I have to do something about it. Either exit the trade or find a way to hedge it.

The thing is, we could be about ready to break out of this Bullish Flag pattern to the upside. The BB/KC Squeeze is still working and we have no sign of breaking out of that yet, but when we do, we can see a large move. If we break to the downside, we'll definitely hit our Stop which would be a sizable loss. The Entry is 693 1/2 and the Stop is 639. So the loss would be (693.5-639)*$10/pt=$545, plus a similar loss on our parallel corn trade.

There are a number of different ways to take a hedge on this trade, including buying a Put Option or Put Option Spread, sell a Call Option or Call Option Spread, short another grain futures such as Soybeans, or use an appropriate ETF. I decided on buying a July Wheat Futures 660 Put Option for 15 1/8 points with an expiration date of 6/25/2021. The option is on a full size ZW Futures contract ($50/pt) not the YC mini ($10/pt). The cost was 15.125*$50=$756.25 with a Delta of .514.

Since the option underlying futures contract is 5x our long futures contract and the Delta is about 50%, we should see an increase in the value of the option that's 2.5% the change in the Wheat futures. Plus the Delta will increase if the futures continue downward. So, this one option should cover both our Wheat and Corn contracts.

Now there's the question of whether to take off the Stop on our futures contract since we're theoretically covered by the option contract. I think if we come down as far as the Stop, then we're in serious trouble. Since the advantage of holding the futures through the Stop level would be that we don't need to decide where to re-enter the trade and most likely lose some possible profit by waiting for a good buy signal. We also would save on commissions, but they are negligible on this trade.

So given that, plus the fact this futures contract will expire on July 14th, and we need to roll forward to the September contract anyway, I decided to leave the Stop on.

It will be important to liquidate our hedge quickly if sentiment turns around. Because of the size of the hedge and its proximity to expiration, it would lose value quickly.

I try to stay away from fundamentals because there is so much bad information and manipulation out there, but I wanted to include the reason for the deviation of our bullish trajectory at the beginning of this trade is due to a change in the weather forecast for the new September crop in the USA.

Wheat Might Make Some Bread - Update 4

We gapped up at the open tonight, Sunday 20:00 ET. This is a very welcome Bullish indication. Corn did the same, and since the hedge was on the Corn futures, I managed the hedge by watching the Corn chart.

To see how that went, please see:

https://jmstweets.blogspot.com/2021/06/july-corn-rising-update-4.html

July Corn Rising - Update 4

At the grains market open Sunday night 20:00 ET you can see on the Daily chart above, on the bottom, we opened with a gap up. When you gap up its a very Bullish indication. Unless the market is overbought and you just witnessed a top, followed by a new down trend.

Stochastics are not yet in the overbought range (>80), but we could see a refill of the gap anyway, followed by a bounce and resumption to the upside. So, rather than sell off the hedge immediately in a giddy sense of euphoria, I went down to the 3 minute chart and looked for a clue which way we were going. If we started down, I would have held all the positions, then sold off the hedge at the top of the flag trend line, and waited for the futures to start back up.

The 3 minute chart is the top chart above. Notice we had a nice drive upward, then a Doji candle formed. There's a rule of thumb that how the next candle starts moving away from a Doji then that is the direction the new candle will continue. The Doji represents indecision, and a decision has been made. Go with it.

So when I saw the candle after the Doji started moving up in earnest, I sold the ZC Jul 600 Put for 2 1/8. But before that I checked the Wheat chart also, because this hedge protected that position also. Our Wheat trade also gapped up at the open.

We opened strongly Bullish after the weekend, so I'm holding the position overnight. We might get a pull back to the Flag and fill the gap. If we do, I'd expect a reversal back to the upside. Overnight trading can be somewhat counter-trend so I may not like what I see in the morning. But the current plan is to hold the position until the day session opens at 9:30am ET and see what happens after that.

Loss from the protective hedge we took Friday is:

 ZC Jul 600 Put Bought for 3 1/4, sold for 2 1/8, which is -1 1/8 pts x $50/pt = $-56.25

July Corn Rising - Update 3

Once again, the July Corn and July Wheat Futures are so similar my comments are the same. Just ignore the comments on the candlestick pattern on the Wheat chart, which does not apply to the Corn chart.

Unfortunately, we did not form a Bullish candlestick pattern today, other than bouncing off the 8ema, closing above the 8ema, having a positive day, and closing near the top of today's trading range.

Please see https://jmstweets.blogspot.com/2021/06/wheat-might-make-some-bread-update-3.html

Wheat Might Make Some Bread - Update 3

In trading, patience often pays off. As much as I wanted to exit this trade yesterday, I clenched my teeth and held, for the reasons I discussed in the previous post. Today I was glad I did.

We bounced off the 8ema and 50sma and closed above both. At the close, we formed a Bullish Harami candlestick pattern. Although, we also just formed a Bearish pattern as of the Close yesterday. So while we're moving sideways on mid-range stochastics we probably shouldn't give much weight to these candle patterns. But still, its reassuring to get a Bullish pattern.

Also, we seem to be forming a Bullish Flag formation. See the 2 thin white downward angled line segments. If we are, it would be relatively short in length to break out of a Flag pattern on the next trading day. So if we're in a Flag pattern and we have a few more days to complete it, then we may make some more lower lows.

Today's price action is definitely telling us to stay in this trade. But today is a Friday which means we have to sit out 2 calendar days, and we may get a few more down days next week. So it makes sense to take some kind of hedge. To that end, I got a ZC corn futures Jul 600 Put option for 3 1/4. The cost is 3 1/4 * $50/pt = $162.50. Our Stop on our long corn trade is 602. But Stops don't work when the market is closed. In this situation you want an option. Since we were willing to use a Stop at 602, the option Strike can be just under that to handle a catastrophic drop in price.

Why corn? Well, we also have a long position in corn as well as this long position in wheat. In both trades we're using the mini-contract, which is $10/pt rather than $50/pt for the full contract. Since the price action on corn and wheat have been extremely similar from the beginning of this trade, and since the value per point is 5x larger for the option than the mini futures contract, I figured the one option for corn will also give us a hedge against a severe drop in wheat.

Thor Industries, Inc. Weekly Bullish Gartley Re-Entry

I concluded the 12/28/20 post in this thread with "We'll monitor the THO chart and look for an entry for a new long position." Found it today.

This morning before the market opened, I noticed THO had bounced off the 50sma and was peeking over the 8ema and 20sma. The bid/ask spread on the options are terrible, but its still a better alternative than a decent amount of the stock. I used the stock last time and it tied up a lot of equity. The world was crazy then (12/23/20) but its even more crazy now. So today I really preferred defined risk at a fraction of the stock value I'd have to put at risk.

The option market is closed pre-market so I had to wait but I knew I'd be busy at the open. However, since this stock moves fast across price ranges, I wanted to catch it before it got away from me. 

So here's what I did. I entered a conditional buy order for a Feb 105 Call. The condition was that the stock price was between 97.50 and 98. The thinking is if it hits 97.50 then its going higher. Of course, that's not necessarily true, and the 97.50 figure was by eye, so its a bit risky. I specified the upper limit of 98 in case it gapped up on the open, or option trading was delayed while the stock rocketed upward.

If you look at today's chart you can see the Open and the Low of the day were equal (95.41). This is another bullish indication. At 9:52am ET the order triggered and we got a Call for $3.95. When the order filled I added a Target at just below the 61.8% Fib extension of the green range at 113.64 and a Stop just below today's open at 95.36.

Interactive Brokers has an order type called a "Snap-Mid". This results in a limit order where the limit is the midpoint of the Bid/Ask spread. I used this for the Target and the Stop. I also added a backup Stop that would result in a market order a little lower at 94.36 in case the Stop-Limit doesn't fill. Of course, I used the same OCO (aka OCA) code that will close all the other orders when any of them fill.

Later in the day, I noticed we had a nice paper profit. This stock is so dynamic relative to price levels that achieving a risk free trade would be very, very desirable. So, what I did was enter a limit order to sell a Feb 115 Call at $4.00. Remember, we paid $3.95 for the 105 Call, so if we sell the 115 Call for $4.00 we'll have no risk! The downside is our profit will be limited to a fraction of the 115-105=$10 spread. A $10 equity in an equity option is worth $10 x 100 shares = $1,000. If this hedge order triggers we'll be in a 105/115 Bullish Call Vertical Spread at zero cost. Not a bad thing.

Here's the bullish indications I saw that got us in:

• Retest, Bounce off 50sma
• Left/Right Combo
• Slow round curve
• Close over 8ema
• Above all MA's
• ADX Cross

Summary (Feb 105 Call):

Entry 3.95

Stop when Stock = 95.36

Target when stock = 113.64

Pending hedge order to sell Feb 115 Call at $4.00

A Hidden Danger of Hedging - Exit

OK, my Stop was hit 19:20 ET at 1.21275 and now I'm out of both sides of this trade and this self-imposed purgatory.

This strategy saved me 1.2132 (18:00 ET open) - 1.21275 (Exit from Trailing Stop) = 4.5 * $12.50/pt * 2 contracts = $112.50 as compared with exiting both sides at the open. Was hoping it would be a lot more.

This expensive lesson cost me $2470, if you net out all the 26 related gains and losses during the trade. 

I consulted author, speaker, trading legend, and all around nice guy Larry Pesavento about my experience here. His advise was "Never hedge a losing position". Amen brother!

A Hidden Danger of Hedging - Update 3

When the candle after the Doji closed, the 2nd closed candle of the evening, I started trailing a Stop just above the high of the candle before the current candle. 

This is a manual process, so again I am a prisoner of my trade, staring at the screen. But at least I'm out of the hedge, and have a clear exit from the original trade. And I have 14 minutes to take a break before the close of each candle.

Notice how the Doji Rule has been working so far. It won't last forever, but Stochastics have a long way to fall, so maybe we'll recover a good portion of the remaining loss before exiting.

A Hidden Danger of Hedging - Update 2

I learned the Rule of the Doji from Steve Bigalow, a candlestick guru. The Rule of the Doji is that price action will continue in the direction of how the candle after the Doji moves. You can see our second 15 minute candle broke to the downside.

So, I implemented my strategy:

"Thinking if we open heading down, take off the long hedge and just trade the original short position from there, using a Stop of course. And never hedge again."

So I exited the long hedge and added a Stop Loss to the original short trade just above the high of the Doji at 1.2136.

A Hidden Danger of Hedging - Update 1

OK, it's Sunday night at the open. I came up with this strategy:

Looking at the Dec EUR 15 minute, I see a double top and a rectangle break out to the downside, with a measured move down to about 1.2095.

Thinking if we open heading down, take off the long hedge and just trade the original short position from there, using a Stop of course. And never hedge again.

If we open up and continue up, I'm thinking see how it handles the support/resistance at the bottom of the rectangle at about 1.2135. Take off one side of the spread accordingly and trade normally from there. And never hedge again.

Now I'm watching this doji form and waiting to see how the chart breaks, up or down, then implement my strategy.