A New Tactic

Take the “Sniper” Approach

By Bryan Bottarelli
Wednesday, January 09, 2008 10:18 AM EST
Wed, 9 Jan 2008 15:18:00 GMT

Dear Bottarelli Research Member,

I’d like to address the wild price swings we’ve been seeing across the board in our options positions lately — and offer you some tactical guidance on how to manage these price swings in the most effective way.

As you probably know, many of our recent plays have experienced both sides of the gain/loss spectrum. For example, our recent trades on POT, SPWR, MA and FLR were all showing a 15% gain at one point, but these gains quickly evaporated as fear-based selling took hold of the markets. In fact, even our two put plays from this morning (DECK and UNP, which we still trying to execute our sell prices) fall into that same category as well.

Now, from a technical perspective, the early gain that we’ve seen on every position tells me that the initial timing of our entry prices has been correct. But as you’ve seen in 2008, correctly timing a technical entry point means nothing if the markets are behaving irrationally. Therefore, I have two suggestions that I’d like to implement immediately — and both of them should offer a tremendous boost to our returns.

The first is something that I call a “sniper” trading approach (other traders call it a “guerilla” trading approach as well). The strategy involves placing a sell order 15% to 20% above your entry price the moment that you get filled. Think of it as the exact opposite of a stop loss order — only this one locks in a profit for you off any momentary up or down ticks. In a market like this, where prices change in a moment’s notice, I don’t want anything standing in your way of making money. Therefore, in the near term, don’t wait for me to issue you a sell alert. If you have a gain of 15% to 20%, take it! Of course, I’ll also follow each recommendation for you as well, but as a standing order in this volatile market, lock in your gains anytime they reach 15% to 20%.

Now, this certainly isn’t a market tactic that we’ll implement forever. But until the unpredictable intra-day swings begin to subside, let’s adopt this 15% to 20% “sniper” strategy and lock in winners they moment they hit our targets. Had we done this on DECK and UNP this morning, we could be out with gains in hand. But as it stands, each position is still open, as the prices moved too quickly to exit on time. So if you’re still holding each put, I still think we’ll be ok. After all, the bears have shown the ability to sell any market rally, and today could be no exception. If this morning’s upside shows any sign of exhaustion, the bears could pounce hard, so maintain your sell orders on your DECK January 130 Puts (QUK MF) and your UNP January 120 Puts (UNP MD), good for the day.As you can see from the Dow chart below, this morning’s upside could easily get rejected, so look to sell your puts on any weakness throughout the day.

INDU

A second strategy that I could implement on a volatile stock involves taking a “straddle” position. By definition, a straddle is an options strategy with which entails buying both a call and put with the same strike price and expiration date. Straddles like this are a good strategy to pursue if you know that a stock’s price will move significantly, but you’ve unsure as to which direction it’ll go. Sound familiar in this market? Looking ahead, a straddle on a stock like Apple or Google could be a handy (and much safer) way to lock in a nice gain off any major upside or downside price movement, so stay tuned for this possible trading tactic as well. Until then…

Lock and load!

Sincerely,

Bryan Bottarelli

Bryan Bottarelli
Editor, Bottarelli Research

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