Plan Your Trade And Trade Your Plan

The markets ended on their highs but that is not what I want to talk about. Today I want to talk about trade management.

I have recently been going back and forth with a work associate, Alex about a recent trade. He had originally bought Bank of America (BAC) May 9 calls with the stock trading in the low $9 to high $8 range. The stock had been bouncing around and he began to accumulate a loss that was just eating at him. Finally, Friday I had enough so Alex and I had a little talk. First, he clearly deviated from his exit plan; he had a 50% loss and now could not keep his emotions in check. Second, I asked why he now needed to get out of this trade so urgently. He told me that he has a loss and that even though he has deviated from his plan - he had a “gut feel.” (I did not mention he doubled down on his position when it initially went against him, a Big NO-NO.) Those “gut feels” after doing everything wrong, point to a contrarian signal. I offer a little insight, at junctures like this - take the weekend to review the trade and devise an exit plan.

Alex then did decide to hold it over the weekend and low and behold the market bounced back nicely today. He then got out of the trade and for the rest of the day he complained and lamented about missing another 20% upside in the stock. We all have had these experiences in this environment with the news flying around and a very choppy market. But remember to plan a trade and trade a plan! Think of Alex on your next trade, especially on BAC, maybe cut your position size and stay true to your entry and exit points for both Profits and Loss.

After Hours

Stocks moved broadly higher, with relative strength in banks and commodities helping to lift the major averages Monday. Bank of America (BAC) gained 19.3 percent to $10.38 and was the best gainer in the Dow Jones Industrial Average (^DJI) ahead of stress test results due out Thursday. Reuters reported earlier today that the bank denied media reports that it plans on raising $10 billion in capital. Bank stocks also seemed to get some support from Warren Buffett’s comments earlier in the day. The investing guru said he believes Wells Fargo (WFC) and US Bancorp (USB) have the necessary capital to weather the economic storm. Stronger-than-expected economic data helped as well.

Reports on pending sales and construction spending both surprised on the upside. Finally, some of the commodity-related groups, like coal, oil and the dry bulk shippers, saw strength as commodity prices moved mostly higher Monday. Crude moved to five-month highs above $54 a barrel and gold gained more than $14 to move back beyond $900 an ounce. Trading in the options market picked up from the slow pace seen the week before. Approximately 9.2 million calls and 6.5 million puts traded on the exchanges. The CBOE Volatility Index (^VIX) edged down .79 to 34.51.

Bullish

A number of coal names saw increasing volume as the sector heated up Monday. The Market Vectors Coal Fund (KOL) gained $2.33 to $21.33. While the exchange-traded fund moved higher, a number of individual names saw active trading as well. Arch Coal (ACI) was one of them. Shares rallied $1.85 to $17.55 and options volume rose to 2X the average daily levels. Most of the activity was on the call side of the options chain, with 26,000 traded, compared to 8,351 puts. Since March 17.5 and 20 call options were the most actives, the activity seemed to reflect expectations for additional upside in the short-term. May contracts come off the board on May 16 and have nine trading days of life remaining. Bullish trading was also seen in Peabody Energy (BTU), Massey Energy (MEE), and Foundation Coal (FCL).

Bearish

Puts on Clearwire (CLWR) were actively traded Monday. Shares of the Kirkland, WA-based wireless products company rose 27 cents to $5.90 and options volume rose to 4X the typical levels. Most of the activity was in the January 2.5 put options and included a block of 4,350 contracts for 60 cents. The bid-ask spread was 40 to 65 cents at the time, suggesting a buyer was initiating the trade. Put volume in CLWR picked up last Tuesday as well. The bearish trading comes ahead of a May 13 earnings release. Bearish trading also surfaced in RF Micro Devices (RFMD), Saks (SKS), and Constellation Energy (CEG).

Index Trading

Options activity picked up in the PHLX Gold and Silver Mining Index (^XAU) Monday. The index gained 7.45 to 127.89 as a move higher in the yellow metal sparked interest in gold mining companies. Options volume picked up to 4X the usual, with some players showing interest in the September 75 put/200 call strangle–perhaps buying puts and calls in anticipation of higher volatility in the gold mining index. 518,000 puts and 395,000 calls traded across all index products. The S&P 500 Index (^GSPC), the CBOE Volatility Index, and the Mini NASDAQ 100 Index (^MNX) had among the most actively traded contracts.

ETF Trading

The Direxion 3X Bear Fund (FAZ), which is a leveraged ETF designed to move 3X the inverse of the financial sector, saw a big loss Monday. The fund fell $2.31 to $6.30. Heavy trading accompanied the move lower, with 140,000 calls and 22,000 puts traded. Investors were actively selling May 7.5, 9, and 10 calls, probably closing out positions as the exchange-traded fund sank lower Monday. Outside of that, the SPDR Trust (SPY), the PowerShares QQQ (QQQQ), and the Select Sector Financials (XLF) had among the most actively-traded ETF options. Approximately 2.1 million puts and 2.1 million calls traded across all exchange traded funds.

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