Fast moves: TRA

 

 

TRA doubled since December 08 and rose 63% for the last month, which automatically put it in my watch list. I follow closely stocks that make 50% up or down moves in a short time frame, for which I consider a month or 20 trading days. I use a liquidity filter (average daily volume above 100k) and price filter (above $2.00) in order to escape from worthless OTC stocks.

50% move in a month is unusual and there is always a strong catalyst behind it. If you understand the catalyst, then you have better chance to understand the sustainability of the move. Many traders will consider 50% move in 20 trading days insane and will blindly short. Not so fast. A good number of those stocks have strong wind behind their back and continue to rise. I have seen stocks that rise another 50 or more percent after the initial big move.

Such types of stocks move violently and it is not wise to risk more than 0.25% of your capital on them. Always use stops. If you don’t know where you will exit in case you are wrong about the move, you are very likely to fail. Know at what point you are wrong. Remember, if you use stops, you are already doing better that 90% of the traders out there.

Certainly many on the stocks that appear on my 50% moves list are bouncing from their bottom after prolonged downturn. Such bounces are usually fruit of short covering and they are not sustainable. As a result, such stocks find strong resistance as their approach their 200-day MA and provide excellent short opportunities. Watch carefully for first signs of weakening of the trend and distribution.

In the case of TRA, the stock’s fast price appreciation was driven by a takeover bid in December. Last week it reported much better than expected earnings due to strong sales, which might add more fuel to its rocket. Last Tuesday it looked that the market was expecting this report and sold off the morning earnings’ gap. As a whole the first half of last week was charackterized by weakness in the fertilizer’s industry, which was likely the main factor that sent TRA from 25 to 22, later Wednesday afternoon. The stock managed to recover most of the move in Thursday. Friday, there was sideways action on much less than the average traded volume.

As a whole, the stock has been showing some signs of distribution lately and I would not get long before it manages for clear out 25.50 on strong general market. If you try to go against the trend and short TRA, good entry would be below 24.40 with a stop at 25.30. Target is 22.00. In this case, you will risk 90 cents to make 2.40, which is almost 3:1 reward to risk ratio. It is not the best risk/reward ratio, since the stop is relatively wide: about 3.7% of the stock price.Still  3:1 is better that 1:1. It doesn’t really makes sense to risk a dollar per share in order to make a dollar per share. Such type of thinking won’t get you very far. Your goal is to be immensely profitable, when you are right and to lose a tiny part of your capital when your are wrong. Remember, many of the best traders out there are right only half of the time and often even less than that.

 Risk 0.25% of your capital. If it is 100k, you will risk $250 on that trade. 250 divided by 0.90 will give you approximately 280 shares. 280 shares * 24.40 means that this trade will engage $6832 of your trading capital.

I will try to update several times a week with new trading ideas from stocks that have appeared in my “fast moves” watch list.

Have a great trading week

Options and Earnings



Options could be very useful tools for your trading arsenal during the highly volatile times of earnings’ season. They offer various combinations for more precise risk and performance management.

Selling a strangle (two OTM options)

Let take for example CME, which reports tomorrow, before market open. It is currently trading for $ 166.14. You look at its option chain and notice that: FEB 150 PUT is trading for $5.80 and FEB 180 CALL is trading for $6.80. You figure out that their earnings’ report won’t cause a significant stock’s move in neither direction. Then, you decide to benefit from the elevated implied volatility before the announcement by collecting premium from selling the above mentioned out-of-the-money contracts. The net result: a premium of 12.60 (1260 for the strangle) in your pocket.
– you keep the entire premium if CME closes in the 150-180 range at option expiration, which in this case is FEB 20;
– the position is profitable in the 137.40 – 192.60 range, since the received 12.60 premium upfront will offset a possible appreaciation in the put option if CME dives (break-even at 137.40 – brokers’ commisions) and it will offset possible appreaciation of the call option if CME jumps up (break-even at 192.60 – broker’s commisions);
– the downside of this strategy is unlimited and losses starts below 137.40 and above 192.60;

Selling a credit spread

Let say you are bearish on CME, but you don’t want to short the stock in front of an earnings’ event that might move it 20 points overnight in either direction. You don’t want to buy a put option of the stock, because premiums before such major announcement are highly elevated. An alternative approach for your bearishness is to use a bear call spread. In our CME example, you might buy FEB 175 CALL for 8.50 and sell FEB 160 CALL for 15.50. The net result is $7.00 in your pocket.
– your maximum gain could be $7.00 (or 700 for the spread) if CME closes below 160 at options’ expiration (FEB 20), because in such case both options will expire worthless and you will keep the credit;
– your maximum loss is $8.00 (or 800 for the spread) if CME closes above 175 at expiration, since at 175 your long call (FEB 175) will be worthless and your short call (FEB 160) will costs $15.00 per share;
– Break-even is at $167;

Call Ratio Backspread

Let say that you expect CME’s earnings report tomorrow to cause a significant move in the stock. You don’t want to buy a strangle or call and to pay premium before earnings and you have bullish expectations. In this case you might sell FEB 160 CALL for $15.50 and use the proceeds to buy 2 out-of-the-money calls. For example you might purchase two FEB 175 CALLS for 8.60 each or a total of 17.20. The net result will be a money outflow of $1.70 (17.2 – 15.5).
– maximum gain is unlimited and starts above 191.70; At 190, the short call cost 30, but the two long calls cost 15.00 each and from 190 + 1.70 up, the long position will appreciate much faster than the short, resulting in a net gain.
– maximum loss is 16.70. If CME closes at 175 at options’ expiration, your short call position will cost $15.00 and your long calls will be worthless;
– if CME dives on earnings and closes below 160 at options’ expiration, all calls will be worthless and your loss will be limited to the paid premium difference of 1.70 per share (or 170 for the whole spread);

There are many other way to utilize options for hedging and speculation and I might talk about them in another post.

Best performing stoks YTD

 

 

ANDS  +205.73%

PALM  +140%

STEM  +119%

AERN  +85.7%

NG  +81%

MEA  +88.7%

RBCN  +77.5%

GENR  +74.5%

NTCT  +71%

VNR  +68.6%

MFLX  +60%

EROC +57%

WOLF  +55%

STKL  +52.9%

CPY  +52.8%

*stocks of companies that have received acquisition bids are omitted.

I often take a look at the list of the best performing stocks year to date. Early in the year, the list is full of stocks that have bounced from the drain. Such type of stocks rarely stay long on the list and generally provide good shorting opportunities as they approach previous zones of strong resistance. As the year rolls, new leaders emerge and eventually some of them will be the best performing stocks for the year. It is useful to set up a minimum liquidity requirement (at least 100k average traded volume per day) and also minimum price requirement to isolate penny stocks. (I use $2.00 as a minimum price since too high price requirement will cut the majority of the best performing stocks for the year at their initial stage of price appreciation).

Given the current market environment, I prefer to trade, not to invest in the stocks that appear on this list as I use trailing stop to follow momentum. How to recognize which stocks from the list could be good short and which – good long ideas? Take a look below the surface. What is driving the price of the stock?  It is all about expectation and/or speculation for strong earnings in the future. Those expectations are usually based on an exciting new product, recent history of strong earnings and sales growth, industry relative strength, legislative change. These are usually good long candidates. Severely beaten down stocks that try to bounce from the ground after serious decline, usually provide good short opportunities as they approach their 200 day moving average and meet strong resistance there.

From a technical perspective, you would be in better position if limit your long ideas to stocks that make higher low and higher high above their 200 day MA as you will enter on higher high and trail with a stop to protect profits and limit downside. Short ideas should come from stocks that are finding strong resistance just below their 200 day MA and are reversing back from there after making lower high. Everything should be looked in the perspective of the general market. When the market is going up, I concentrate on long candidates and vice versa.

The best performing stocks YTD is a very simple system for generation of trading ideas and it could be a basis for huge returns if proper money management rules are applied. There is a profound difference between good long and short trading idea and successful long or short actual trade. For the latter you need strict money management rules, which include, but are not limited to: proper position sizing, cutting losses short and letting winners run.  

Alternative momentum screens for the above mentioned idea generation method could be:

Stocks up 50% or more in a month

Stocks up 200% or more from their 52 week low

Stocks at 50 day highs

Again, don’t forget to add liquidity and minimum price requirement filters.

 

Trend following

“The crowd may be stupid, but they are stronger than you. Crowds have the power to create trends. Never buck a trend. If a trend is up, you should only buy or stand aside. Never sell short because “prices are too high” — never argue with the crowd. You do not have to run with the crowd — but you should never run against it.

Dr. Alexander Elder