Trade:
Sell May 22.5 Puts - 8 contracts at .30 each
Buy May 20 Puts - 8 Conttracts at .15 each
Resulting in a bull put spread with a limit price of .15/contract.
Analysis:
Dollar General options are trading with an average implied volatilities of around 36%. That is 12% higher than the average 20-day and 30-day historical volatility. The reason for this spread is that DG is about to announce earnings in a couple of days. Once earnings are announced, I believe IV will drop significantly, devaluing the short puts.
From an EW perspective DG is beginning wave 3 up and if the earnings are positive, the wave could continue upwards for a while.
If my EW theory is wrong, I have found very strong Fibonacci support at $24.30 and at $23.9. I highly doubt that DG will be able to break both those support levels even if earnings are poor. That is why I have picked strikes well below those levels.
Profit/Loss Expectations:
If I hold this trade to expiration, I can expect to make approximately $96 or 5% on Margin requirements (after commission) in under 60 days. Annualized, that is approximately 40%. I will achieve this profit at any price above $22.50 and there is a 73% chance of this scenario.
If I hold the trade until expiration and the price closes below $20, I will have the maximum loss of $1880. There is a 10% chance of this scenario.
Trade Management Plan:
If the price breaks upwards or keeps movings sideways after the earnings announcement, I will sit back and let the options expire after 53 days.
If the price breaks downward and below $23.20 (just below another Fibonacci level), I will exit the position with ~$400 loss after waiting a couple of days to see if IV falls. If at anytime my overall loss reaches $800 (~stock price at 21.20), I will exit the position immediately.
-Wown
Stockjockz.blogspot.com
Monday, March 29, 2010
Friday, March 19, 2010
3/19 update QQQQ
Sorry I have not been keeping up with the updates on QQQQ. Not much has been going on since the market has been moving sideways for a while. After breaking my target of 46.64, the market has been very slowly creeping upwards to my next target of 48.38. The oscillator on the hourly charts are showing a sharp reversal and the reversal is also reflected on the daily chart.
My reasoning is now that the original EW pattern I had drawn may have been wrong and I have discovered a couple of alternate patterns which could be developing. I still remain bearish on QQQQ in the short run, but now I am not sure about the long term trend - the bull market run may or may not be over.
Will post detailed analysis in a couple of weeks as I am very busy at the moment.
-Wown
stockjockz.blogspot.com
My reasoning is now that the original EW pattern I had drawn may have been wrong and I have discovered a couple of alternate patterns which could be developing. I still remain bearish on QQQQ in the short run, but now I am not sure about the long term trend - the bull market run may or may not be over.
Will post detailed analysis in a couple of weeks as I am very busy at the moment.
-Wown
stockjockz.blogspot.com
Monday, March 8, 2010
3/8 update on QQQQ
Summary
After consolidating for a couple of days at my initial target of 45.57, the QQQQ has continued to climb higher. This has two significant impacts that I have described below as I explain the chart updates.
Before I get into that, I do want to simply summarize the below so that if you are Elliott Wave challenged, you do not have to read on. Basically, I very strongly believe that this move up is coming to an end and I still think the next support level of the down move is near 40.50.
Chart 1(hourly):
The hourly chart shows that wave 5 continued to climb up, contrary to what I had originally suspected. After reaching the top of the channel (black diagonal line), QQQQ moved along the channel, setting a price high of 46.64 (again). Now if you refer back to my earlier posts, you will notice that the second most likely target I had set for QQQQ was exactly 46.64 (as reflected in the daily chart below, chart 2). This fact, coupled with the major divergence I am seeing in the oscillator and the fact that volumes are declining further, strongly leads me to believe that wave 5 is more than likely over.
The only alternative is that wave could extend and continue upwards. I find this unlikely because of 2 reasons. Firstly, the 5th wave extended in the previous motive wave up (wave A green). Thus it is likely that the same will not happen again.
The second reason is explained below as it needs us to look at the daily chart.
Chart 2 (daily):
The second reason why I believe that wave 5 will not extend is because that would put wave C (green) above the previous top. This would imply that a running expanding triangle is developing as the correction and right now we are in wave B (blue).
Now I realize that such a thing is a possible. But it is very unlikely in this particular instance because wave A/1 (blue) was 5 waves down. This means that the most likely wave pattern that will develop is a Zig Zag or a triangle of some sort that is part of wave 1 down of a wave level higher than the blue waves. Now we can safely assume that this is not a zig zag because wave B/2 retraced all the way to market high, so the only alternative is the triangle option, and running expanding triangles are VERY rare, especially those with a 5-3-x-x-x pattern.
One could argue that this is a flat correction, but again, unlikely because wave A (blue) was 5 waves down, and flats usually have a 3-3-5 pattern.
I hope I have not lost you, and if I have, once again to summarize, I believe the target for QQQQ is near 40.50.
As a further update, I will try including time studies on future charts to have an idea of when these moves should be completed.
-Wown
stockjockz.blogspot.com
After consolidating for a couple of days at my initial target of 45.57, the QQQQ has continued to climb higher. This has two significant impacts that I have described below as I explain the chart updates.
Before I get into that, I do want to simply summarize the below so that if you are Elliott Wave challenged, you do not have to read on. Basically, I very strongly believe that this move up is coming to an end and I still think the next support level of the down move is near 40.50.
Chart 1(hourly):
The hourly chart shows that wave 5 continued to climb up, contrary to what I had originally suspected. After reaching the top of the channel (black diagonal line), QQQQ moved along the channel, setting a price high of 46.64 (again). Now if you refer back to my earlier posts, you will notice that the second most likely target I had set for QQQQ was exactly 46.64 (as reflected in the daily chart below, chart 2). This fact, coupled with the major divergence I am seeing in the oscillator and the fact that volumes are declining further, strongly leads me to believe that wave 5 is more than likely over.
The only alternative is that wave could extend and continue upwards. I find this unlikely because of 2 reasons. Firstly, the 5th wave extended in the previous motive wave up (wave A green). Thus it is likely that the same will not happen again.
The second reason is explained below as it needs us to look at the daily chart.
Chart 2 (daily):
The second reason why I believe that wave 5 will not extend is because that would put wave C (green) above the previous top. This would imply that a running expanding triangle is developing as the correction and right now we are in wave B (blue).
Now I realize that such a thing is a possible. But it is very unlikely in this particular instance because wave A/1 (blue) was 5 waves down. This means that the most likely wave pattern that will develop is a Zig Zag or a triangle of some sort that is part of wave 1 down of a wave level higher than the blue waves. Now we can safely assume that this is not a zig zag because wave B/2 retraced all the way to market high, so the only alternative is the triangle option, and running expanding triangles are VERY rare, especially those with a 5-3-x-x-x pattern.
One could argue that this is a flat correction, but again, unlikely because wave A (blue) was 5 waves down, and flats usually have a 3-3-5 pattern.
I hope I have not lost you, and if I have, once again to summarize, I believe the target for QQQQ is near 40.50.
As a further update, I will try including time studies on future charts to have an idea of when these moves should be completed.
-Wown
stockjockz.blogspot.com
Thursday, March 4, 2010
QQQQ update
Chart 1: Hourly chart. I think 3 was an extension followed by a wave 4 that tried repeatedly to break the 3's top but failed, thus making a triangle. 2 reasons for believing 3 was an extension:
1) 5 was an extension in the previous wave up (wave 5 of A Green) and thus we can say because of alternation 3 should extend here.
2) wave 3's top would lie above my fibonacci confluence zone, implying that 3 became overextended. So a lengthy wave 4 correction followed which will be followed by a short wave 5.
Notice also the grey boxes. On the left side the market moved sideways while the oscillator fell. Then the oscillator reversed as wave 5 came about but very quickly after that QQQQ fell nearly a dollar. A very similar set up has been created on the right hand side as during wave 4 the oscillator has fallen significantly, today (during wave 5) the oscillator reverses. If the oscillator reverses AGAIN, you can be pretty confident that there will be a pretty big move down (And that is when I get in!)
Chart 2:
Two important things:
1) If I am wrong about the original 45.57 target and we do not get a reversal soon, the next target is 46.64 - not only because it is the previous top, but also is an important fibonacci confluence zone on the weekly charts (not shown).
2) Notice the steady decline in volume during the ABC (Green) wave. This signifies an exhaustion in this up move.
-Wown
stockjockz.blogspot.com
