As an options trader the toughest part of finishing a trade is good timing. As a buyer the clock is always ticking away and when that expiration hits the result becomes final – win or lose. But you can eventually be right on the direction, but if that option expires before the move you are looking for, then it’s likely a losing situation, and the frustration sets in. I must confess – sometimes my timing on the entry is a lousy, even a bit sloppy. However, in my experience it’s about seeing the bigger picture of trend, momentum, price action and volume that tells me if I should stay on a trade or cut bait.
I trust my read on the charts and technicals. They guide my decision-making process, allowing me to make quick choices on buying/selling. The speed and efficiency of my reads are critical as it comes to the best timing. While we know trading is not a game of perfect and there are always going to be missteps, I will stick by the tools that have brought me along and continue to give me the best opportunity to trade winners.
As mentioned prior, sometimes my entry points are not great, case in point Onyx Pharmaceutical (see chart below). We entered a long ONXX Apr 80 call at 2.40 on Feb 25 in the service after the company posted strong earnings. You can see the big move on that day which followed a sharp drop from 85 to 70. Did the trend change? Was the power move on the 22nd enough to convince me to go long? Several aspects turned my attention to the bullish case, including the strong volume and buying on that day, price action and closing near the day’s high. So, the following Monday we entered our trade.
Now, why the April 80 strike? I wanted to give myself some time and flexibility in case I was wrong in the short term. At the moment we had about seven weeks to expiration, and if there was some followthrough (barely on the 25th) we could see much higher prices. I bought time (the strike had NO intrinsic value), so my philosophy is if you buy the time, you might as well use the time. This was a not a play to load up on (none really are), and since we had time we could use it. As it turns out, in the short term I was wrong (not the first time, nor will it be the last), but I was watching the chart, technicals and volume. In fact, some actually joined in after me and picked up the calls cheaper than I did!
The stock retraced about half the big move on Feb 22 but that was it. These past few days the stock has been running hard, reaching the Jan highs of 85+, a 15% move in roughly six sessions. We held on EVEN THOUGH the calls had gone down about 40% in the interim. With all that time left in the option (6 weeks), was it time to eat the loss? If we sold it, where would we be now? Chasing our own tail, because the stock is up huge and so are the calls. Discipline and patience in my book are a winning formula. Lucky? Maybe, but remember I use the charts/technicals to guide my positioning – so if you think interpreting charts is lucky, well….we sold out of HALF of the calls on Mar 8 at 6.70, a 139% winner and still hold the remainder, which are up now 223% (a free trade working). Not perfect timing, but a good ending nonetheless. I don’t care how I look at the start, it’s the close that matters most.
The bottom line, no matter if your entry is good or not pay attention to the technicals and chart. In most cases they will save you from making a wrong decision.
Bob Lang, Senior Market Strategist and trades various option strategies for option trading newsletter Explosive Options