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Author Topic: Use Support and Resistance for Quick Profits!  (Read 710 times)
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tamo42
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« on: 2011 Aug 11, 10:12:44 am »



It's been a while since I've made a stock trading post. Since I have a minute to breathe, I thought I'd share what I've been doing lately. The Chinese coin market is wonderful, but I also like a bit more action on a day-to-day basis.

If you've read my previous posts, you should be familiar with the fact that I am an options trader. There are all kinds of things you can do with options. Over the past week, I've been shorting calls and puts into resistance.

In the financial markets, resistance is the concept that prices have a hard time pushing through certain levels. If a stock once traded at $25 for a long time, falls to $20, and then rises back to $25, then the $25 price level will serve as resistance. The explanation, like all market phenomena, is psychological. Essentially traders who sold at $25 before are likely to see $25 as a good price to sell at again. Similarly, traders who bought at $25 were losing money at $20, so they are often eager to unload for a break-even at $25. Add to that the fact that this has become a well known phenomenon, so additional traders use these price levels just because they know others will. So it's an escalting effect.

This doesn't mean that prices always stop at resistance levels. It just means that these trades will take place at these levels and will at least slow down the process. And time is the key element to options.

So here are three trades I made over the past week using the concepts of support and resistance. Support is the exact same thing in the opposite direction:

Aug 8: AAPL fell to 353.02 at its low. During the day I sold to open the 295 August puts. Basically I was betting that AAPL would not fall to 295 before August 20. The next day the market rebounded fairly strongly, and I closed my position, locking in about half my maximum potential profit for 1 day's trading. Profits were 1% of the margin required.

Aug 9: After closing the AAPL put trade, I noticed that AAPL was pushing against its short term moving average. This moving average serves as resistance when markets are trending strongly. Taking this as a cue, I opend a 395/400 weekly bear call spread. This means that I sold the 395 calls that expire on August 12, betting that AAPL will not reach this level by tomorrow. This position is still open, and I expect to keep my profits when they expire tomorrow. Profits should be 1.2% over 3 days.

Aug 11: I've also been in GLD, the gold ETF. GLD has moved very strongly to the upside in the wake of S&P's downgrade of the US Treasury bonds and European concerns. Today we have seen a retracement of a portion of those gains, but the short term moving average, serving as a support level in a trending market, is a little over 167. So I sold to open (shorted) the weekly 165 puts. Essentially I am betting that GLD will stay above 165 through tomorrow. Profits should be 1.45% of the margin required over 1 day.

Anyways, that's all for now. Be aware of the whole world and all its opportunities.

Happy trading!
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Neal McSpadden
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smbgaiden
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« Reply #1 on: 2011 Aug 11, 11:15:52 pm »

All look like excellent and deft maneuvering! You got to love the high VIX! I was a little early on selling naked puts on a couple things, because even though the prices went in my direction (up), the VIX kept a rising premium bolted on and muting my gains.

By the way, have you read John J Murphy's 'Technical Analysis of Financial Markets'? I recommend highly, in spite of the times it gets a bit dry & boring at times due to over explaining.

Also, did anyone notice the Chinese Yuan made a decisive move below 6.4:1? I have been short USD and long CNY for 2.5 months or so and the move was typically between 6.41 and 6.48 during the period.
« Last Edit: 2011 Aug 11, 11:29:00 pm by smbgaiden » Logged
tamo42
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« Reply #2 on: 2011 Aug 12, 08:37:29 am »

That title seems familiar, but I don't recall it exactly. I've read a lot of books Smiley.

And yes, I know exactly what you mean the volatility increasing premiums that should be falling. I thought I would close my second AAPL position days ago, but oh well. I'll just have to hold through expiration to keep my profits. Fortunately, that's today!

I didn't know anything was going on in the USDCNY market. I'll have to take a look.
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Neal McSpadden
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The Primal Prepper - my blog about preparing for the worst while living the best
tamo42
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« Reply #3 on: 2011 Aug 12, 02:06:33 pm »

All closed profitably. Essentially I made 2% on the margin capital required for the week.
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Neal McSpadden
Get Coin Investments List Updates Here
The Primal Prepper - my blog about preparing for the worst while living the best
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