Trade Rationale: $QQQ

I mentioned last Wednesday night about how I felt the market was reaching a short term point of inflection.  Yes, I use a few technical indicators…but as with most of my trading decisions, it’s more of a ‘feel’ than a “my indicators say we’re oversold”.

I feel like technical tools can provide insight into what is happening, but I just don’t have enough confidence in them to solely base trade decisions around them.  I first and foremost manage risk on my trades, so if I’m wrong (and I’m probably going to be wrong a lot) I know how wrong I’m willing to be.

Making and sticking to rules is, IMO, the only way to survive when trading discretionary systems.  This helps to ensure that when I am wrong, I don’t ask questions…I take losses, try to learn from the trade and move on.

When buying the dip (my primary means of speculation) I know that I’m not going to get lucky enough to buy at the exact bottom, so I’ll take a partial position and see what happens.  I want to see price supported, which is why I like to use the (20,2) Bollinger Bands.  I like for them to provide cushion/support.  If price looks like it’s going to close outside of the band, I will almost universally be selling the entirety of my position.

Okay, so I do use TA for some trading decisions, but that rule is in place based on my experience and comfort level.

I don’t like holding a stock that is breaking down on expanding volatility.  I know this kind of runs counter to what Bollinger Bands are supposed to represent…but this has been my observation.  Even still,  this is open to interpretation as in oversold markets (like I perceive we are in now), I will consider buying index ETF’s that are breaking below an expanding lower BB.   For example:

$IWM 07/29/11

Anyway, as I had been mentioning last week, if the market continued to sell off, I would gain the conviction to allow me to place a rather heavy amount of risk on the table (for a ‘single’ [it’s made up of different parts of a single equity] trade).

Right now I am at 3% portfolio risk on my $QQQ options speculation, and was even thinking of taking it up to 5-7% if there was further price consolidation between 57 and 58.  Based on the way the futures are looking, I’m going to have to remain content sitting at 3%.

Reason: I’m not at all comfortable buying into a huge gap up, so I’ll sit back and watch how the market reacts to the early strength.  If we fill the gap and the market is showing signs of support in the gap-fill region, I may dive in for some more.

I decided to buy August options at 3 different strike prices: 58, 59 and 60.  I have placed a 1% risk envelope on all three positions.  In a huge rally, I think $QQQ will easily get to 59, putting those options ITM.

My purchase of the 60 calls was pure degenerate gambling in the event of a violent/monster rally.  It’s a small position as my maximum risk (1%) is the entire premium.  I’m not looking to exercise any of these option positions, so even if we don’t make it to 60, a sharp increase in price in a short amount of time could really increase the value of those.

Any additional purchases will be of August 58’s and 59’s.

My maximum time horizon for this trade is 6 days.  Therefore no matter what, I’m out of these positions by the close on Monday, 8/8.  More than anything, I’m going to be patient and let the price do it’s thing and react accordingly.

A quick update of the $QQQ chart I’m using

$QQQ 07/29/11

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This entry was posted in General, Information, Options, Options, Psychology, Trades and tagged , , , , , . Bookmark the permalink.

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