This blog entry was prompted by a Trade Note written by Snowman. To read the Trade Note please go to: http://community.tradeking.com/members/snowman/trade_notes/4091-bought-to-open-15-contracts-of-hbc-op-at-7-20
Snowman,
It looks like you have been trading these HBC Mar 80 puts quite a bit over the past couple of weeks. To recap your strategy for the rest of our members:
You are bearish on the stock HBC. To capitalize on this idea, you bought puts that expire in March because you think that the stock price will be lower sometime between now and then. You anticipate this may be caused by an earnings preannouncement or by the report itself, which is expected earlier that month. (To learn more about this strategy, account holders can check out the online version of the Options Playbook, Play #2 - Long Put. It's under Education.)
The Technical Insight (our technical analysis tool from Recognia - see image below) has a mixed view on HBC, but most of the indicators are giving bearish signals. This tool may be accessed under Quotes + Research > Technical Analysis. On the other hand, our research report provider Market Grader has a different view (see image below). HBC's score is 67.7 giving it a buy signal. Research reports are located under Quotes + Research > Research Reports.
Nice job on setting a goal for this trade. Although they may not be reached, having targets is an integral part of trading. In using the Profit + Loss Calculator (under Tools) and your price target for the stock at 64.50, you stand to make bank on this trade (see image below). Of course the forecast is not guaranteed - it still makes for some interesting stuff. The tool projects that your profit in the March 80 puts will be roughly $8 per contract. To calculate your projected return on investment (ROI) take the P + L Calculator amount of $800 and divide by the cost of $720 - a whopping 111% return. That would be $12,800 on an investment of $11,520.
As with all of our tools, they are provided to help our clients make better decisions. However, you will ultimately decide whether or not to put your money at risk in the market.
Speaking of $11,520 - this might be a fairly large trade for many of our Community members. I know from personal experience that using size or capital in a disproportionately large amount to one's resources, may cause one to jump ship early. Keeping the size of one's trades relatively small will keep a trader more level headed when making market decisions. It also keeps one in the game over the long haul, guarding against having "too many eggs in one basket..." Of course, we must all choose these parameters based on our own personal risk tolerance and trading goals.
As a final thought, you may want to make an investment in an alarm clock. If you are anything like me, you might want to make that a very loud alarm clock. Maybe even consider posting a suggestion in the TradeKing Wishlist to add this feature to our site! As for monitoring your trades, you could place an Advanced Order that stipulates to sell your puts when HBC reaches your target of 64.50. This is called a contingent order. Briefly stated, it's a setting that will activate an option order based on the stock price. Even though they are convenient, there are some drawbacks associated with Advanced Orders. I discuss some of them here: http://community.tradeking.com/members/moose/blogs/3565-a-few-thoughts-from-today. To read further, please go to: http://content.tradeking.com/wiki/display/tkservice/Advanced+Orders.
Thanks for allowing others to learn from your posts! With HBC trading down further on Monday, your puts are sitting pretty with a bid of 8.20.
This comment and any market data included here was prepared on 1/28/08.
--Nicole Wachs
TradeKing Staff
P.S. If you enjoyed reading this post, check out the brand new All-Star Trades blog. Maybe your trade will be featured next!
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