Still Trading POT

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It has been a while since I posted. The past 2 weeks I went to 2 weddings. The last one had me traveling on a groom-side party bus from Houston, TX to Richmond, VA. During this trip I had my trusty Sprint Broadband card and laptop. I managed 2 round trades this past week for a gain of $1200 trading POT. Both were long positions. I felt I had called the short a little too soon. Luckily I got out before it fell.

I said that POT would fall back to the $165-170 level and that I’d go long under $165. My timing was a little off. I didn’t enter any short positions as I didn’t feel I had strong confirmation. I did make a couple of daytrades however. I’m making an adjustment now as I think we’ll be hovering around the $165-175 range for a few weeks. As such I’m going to be entering long positions on any dips close to the 50 day moving average of $170 and sell at $175. It is important to analyze, wait for confirmation, and make adjustments when necessary.

Tomorrow’s trade: Get long at $170′ish, exit at $175′ish for an intraday trade.

POT - Time to short?

I’ve had 6 very profitable trades in POT so far.  I’m going for lucky #7.

I think now it maybe time to reverse position.  Now is probably the worst time to chase POT.  There are signs of weakness in volume.  I’m keeping my eye on the June $165 puts.  They were up today 6.67%.  If I can get a dip under $11 I’ll probably get a position on Monday.   I believe we’ll test $180 again, but POT will ultimately come back to the $168-170 level at least near term.  This would give a good short-term short trade.  I’d probably get back in long if the stock can dip below $165 again.

Potash has tested the $165 level for about 9 weeks.  It finally broke out above this week.  The volume is starting to wane and I see signs of weakness.  I think next week POT will close under $170 and may even dip to $165.  I will most likely short the next time it goes above $180 and cover at $170-172.  If it comes down to $165-167, I’m a buyer of calls again depending on the technicals.

Potential Upcoming Trades

• Buy June 2008 $165 Puts @$10.80-10.90 range, Sell at $11.50
• Buy Jan 2009 $300 Calls @$4.50-4.60 range, Sell at $5.00

I do believe these trades will be possible in the next 2 weeks.  The Put this coming week, and the calls the following week.

Potash - Trading the Good Stuff

When You Have a Good Thing Going…

Keep doing it.

Since my first recommendation, I’ve traded in and out of POT 5 times. Each trade has been up 15-20% and with a holding period no longer than 2 weeks.

On Feb 18, I recommended trading Potash Corp (POT). On Feb 26, I wrote about how I made 27% on my POT option trades. I’m here to say the trade is not dead yet. I’m great at short-term trades and POT combined with this market volatility has given me many opportunities for some profitable short-term trades.

My most recent trades:

4/4/08 Bought Jan 09 $300 Calls @ $4.30
4/7/08 Sold Jan 09 $300 Calls @ $5.00 = 16% gain over 2 trading days minus commissions

4/7/08 Bought Jan 09 $300 Calls @ $4.50 - Is currently negative, but I believe it will pop back. I got in too early.

If you look at the chart you can see that POT has broken a ceiling of $165 that it has tested for the past 6 weeks.

This is bullish. However in the short-term I expect some retracement, probably not below $165, but certainly to the $170 range. The steep MACD line concerns me. As such I booked my profits, but then bought a position back at $4.50. I feel comfortable holding and waiting on this position. Some will certainly comment on certain options trading strategies for this, but the fact is I’m not a 10 in options-trading sophistication. What I do trade is what I know well and can do consistently.

In my 8 Tips to Emotionless Trading, #5 I say “Know your style”. I know my style and I’m able to trade profitably when I adhere to it. When I don’t I lose money.

I selected POT on fundamentals, but I purchased and sold on technicals. If I was a long-term investor I would have simply purchased the stock and walked away. Over the long haul though, you get dips and peaks. That’s where I like to trade. That’s my style.

A Great Long-Term Trend

Grain and food demand is increasing at above-trend rates due to the growth in the emerging markets. These regions have expanding middle classes with rising per capita food consumption. With food consumption increasing, food prices increasing, and finite land these countries look more and more to fertilizers to boost crop production.

POT has shown support around $154 recently. I won’t hold through earnings no 4/24. I simply don’t like the uncertainty since this stock has had quite a run. If you are braver than I you could hold through earnings and perhaps get an even bigger bang. Their is support around $150 from it’s 50-day moving average.

Why Options Traders Must Watch Implied Volatility

A reader - Thom questioned why I recommended you short the Lehman stock as opposed to buying puts. My rational is that the options are extremely expensive. Imagine buying the options at the peak of volatility and then it drops, say by 30%. Even if Lehman stock drops, you have a high probability that you will still lose money on your puts as the puts become less costly to purchase due to the lower volatility.

Below (chart 1) is a chart of the current price. Above is the stock price; below the option price. As you can see the stock has fallen, but so has the put option over Monday/Tuesday. Why? Over that period, the implied volatility fell from roughly 115 to 75. This is the drop in vaolatility that I was afraid of. Had you shorted the stock through the period, you would have made money. Had you bought puts, you probably lost money through this period. Today the stock went up and correspondingly the put optino went down, but the thing to keep in mind is that on Monday/Tuesday puts lost money due to a fall in implied volatility (chart 2)

chart 1 - stock falls on Mon/Tues, but puts also fall

When buying options, pay attention to the implied volatility! It is a big factor in option pricing.

Chart 2 - Implied Volatility falls from a peak of 200 to 75 today. Puts fall through Mon/Tues.

The Lehman Offering: Time to Short?

Is it time to short Lehman Brothers? The Prince of Wall Street thinks so. In his blog post - The Lehman Offering: The Fear May Grow, the Prince points out that Lehman’s latest approach to the market placing $3 billion in prefereds may lead the market to further question their balance sheet.

My initial take was the same. However Lehman may be a dangerous stock to short right now. The options implied volatility is extremely high so if you’re going to bet against it you would be better off shorting the stock directly and not through options.

The implied volatility is triple its norm. Options are very expensive at this level.

Today Lehman was up $6.70 (17.8%) leading the financials higher. This offering actually seems to have quelled fears that it was headed towards a Bear Stearns fate. The XLF (financials ETF) was up 7% as were most of the big financials. Lehman truly led the financials higher today. Looking at the chart also leads me to believe this would be a dangerous bet against Lehman. I think there will be profit taking tomorrow morning, but other than that I’m not sure I’m willing to bet against it. Since I usually trade options and the options are expensive right now, I will choose another target. In fact I would even consider selling some puts against Lehman at this level.