EOT Position Update – May 14, 2008

| May 14, 2008

May 14, 2008

Market Snapshot

The Dow Jones Industrial Average closed at 12,898.  This gave us a nice gain over the last 5 trading days.  Today, smaller than anticipated increases in CPI numbers pushed the markets higher and caused the US Dollar to lose some ground.

Recently news of a massive earthquake in China has rattled financial markets.  The Shanghai index lost about 2% when news of the quake reached the markets.

Late last week news of further loses at AIG (only $8 billion) and deep cuts clearly pointed to the fact that financial stocks still have some risk in them.

Don’t forget . . . May options expire this week.  If you haven’t done so exit any remaining options trades with value.

Now for the trade updates.

Position Updates

  NGS July 2008 $30 Calls (NGSGF)
This is a new trade for the week, just published yesterday as a matter of fact.  Really only one resistance level 29.70, after that we’re at new highs.  Support is 25 and 23.

  DSX June 2008 $35 Calls (DSXFG)
Since putting on this trade the stock has moved up for more than 5 points.  Today we went right though our first resistance level of 34.50.  It looks like earnings were strong . . . just like we expected!  The next resistance level is 42 – an all time high. Support is 27.50 and 24.

  EXM June 2008 $50 Calls (EXMFJ)
EXM doesn’t announce earnings until the 19th but it looks like they are benefiting from the great news out of DSX.  The resistance level at 50 was already broken. Congratulations to everyone who took a profit on that trade.  54.50 is the next resistance level.  Support levels are 39 and 30. 

Bearish Put  UAUA June 2008 $15 Puts (UALRC)
This week UAUA moved lower, breaking our second support level of 13.  It’s no secret that I hate the airlines . . . you may want to hold these a bit longer as we crossed the lower support levels quickly.  The options still have a good bit of time left.  I’m expecting more bad news yet.  

  VNO June 2008 $95 Calls (VNOFS)
VNO again moved above the 200 day moving average.  This time the stock rallied to over 97.  Resistance is 100 and 105.  Support is 85 and 80.

   NSC June 2008 $55 Calls (NSCFK)
The stock broke our original resistance levels a few weeks ago.  Some of you more aggressive traders may have held this option further.  If so, my hat’s off to you. Yesterday the option traded up to $10 per share generating more than a 250% gain!

Parting Shots…

Position Sizing

Controlling risk is one of the most important parts of trading.  Every good trader develops a system that works best for them.  One part of that strategy is determining how much to invest in each trade.  Obviously putting all of your money in one trade is very risky.

Professionals use position sizing to determine how much to risk on each trade.

This is not as simple as it seems.  You need to take into account your own trading style, your capital situation, and risk tolerance.  Everyone is different so find an amount that works best for you and your own situation.

As a rule of thumb position sizing is often restricted to 5% of your trading capital (many suggest even less than that).  Remember, you never want to invest in options with money that you can’t afford to lose.

Position sizing has two big benefits.

One, it keeps you from putting too much of your capital on any one trade.  If you lose all of your money you can’t trade!

Two, position sizing removes part of the emotion of trading.  It prevents you from trying to ‘double up’ to make up for a bad trade.  It also prevents you from getting too greedy.

The idea is to take your trading capital and divide it into smaller segments for each trade.  Then invest that same amount into each trade.  This way you’ll improve your ability to ‘stay in the game’ should you encounter a rough patch (as every investor does at one time or another).

Category: EOT Update

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