Think of Bollinger Bands (the dark red lines) as the shores of a river. The stock price tends to stay within the shores of the river, and like a boat, if it leaves the river, it must get back into the water. MGM broke the upper Bollinger Bands yesterday, and closed well above today. This presents a potential down day before Friday.
There are three ways to play this. 1. Short sell the stock, 2. Write uncovered calls. 3. Buy a put.
Shorting the stock is straight forward. Sell the stock today and buy them back at a lower price. For those who don't know, you are negative shares in your account and hope to buy them lower. This is the most common practice to make money on the downside.
The second method is to write an uncovered call. I find options a better method than shorting the stock, since it actually can be less risky, but gains are limited only to the premium. However, you can profit if you are wrong, unlike shorting the stock. And with only three days until January options expiry, this may not be a bad trade, since the 12.50 calls were valued at .16 for three days.
The last method is buying a put. This is an okay trade, as it limits your loss to the cost of buying the insurance policy, however, with only three days until the January put option is worth nothing, why take that risk?
Jan 12, 2010: MGM Trading Opportunity
I told my friend Charles that I would post a daily blog, if you will, about a trade or trades that I may find profitable for the next three business days. Before I go on, I disclaim that these are my own personal opinions based on fundamental or technical analysis. Always consult a financial or investment advisor before investing or trading in anything.
Plain and simple, on a technical level, the charts point to an expected decrease in the price of MGM Mirage, back into the Bollinger Bands. That level is approximately $11.25. I suggest my friends, and especially Charles, read below to see what I did and why. I am willing to answer all of your questions, since many people are unfamiliar with this topic.
MGM Mirage [MGM:NYSE] has had a recent run up in its stock price: up over 30 per cent year-to-date. It was great for me, because I was assigned on my short December 10 puts. Seeing that it broke $11 yesterday, I made a quick sale and made a nice little profit.
Today Goldman Sachs upgraded the stock on news that Nevada gaming revenues were profitable for the first time since 2007, a potential sign of an improving economy. The stock reacted positively and rose 9 per cent in trading today to finish at $11.95. A little sigh of relief for those who bought at $100 at the end of 2008. Although fundamentals will ultimately price the company, upgrades and downgrades create volatility. These are the days that traders, like myself, live for.
An upgrade will always push a stock price higher, at least temporarily, until the fundamentals kick in. A downgrade will essentially do the reverse, that is, knock the stock down a tad. But, upgrades and downgrades present great trading opportunities, especially when a stock like MGM Mirage has pushed itself above the Bollinger Bands.
Think of Bollinger Bands (the dark red lines) as the shores of a river. The stock price tends to stay within the shores of the river, and like a boat, if it leaves the river, it must get back into the water. MGM broke the upper Bollinger Bands yesterday, and closed well above today. This presents a potential down day before Friday.
There are three ways to play this. 1. Short sell the stock, 2. Write uncovered calls. 3. Buy a put.
Shorting the stock is straight forward. Sell the stock today and buy them back at a lower price. For those who don't know, you are negative shares in your account and hope to buy them lower. This is the most common practice to make money on the downside.
The second method is to write an uncovered call. I find options a better method than shorting the stock, since it actually can be less risky, but gains are limited only to the premium. However, you can profit if you are wrong, unlike shorting the stock. And with only three days until January options expiry, this may not be a bad trade, since the 12.50 calls were valued at .16 for three days.
The last method is buying a put. This is an okay trade, as it limits your loss to the cost of buying the insurance policy, however, with only three days until the January put option is worth nothing, why take that risk?
Think of Bollinger Bands (the dark red lines) as the shores of a river. The stock price tends to stay within the shores of the river, and like a boat, if it leaves the river, it must get back into the water. MGM broke the upper Bollinger Bands yesterday, and closed well above today. This presents a potential down day before Friday.
There are three ways to play this. 1. Short sell the stock, 2. Write uncovered calls. 3. Buy a put.
Shorting the stock is straight forward. Sell the stock today and buy them back at a lower price. For those who don't know, you are negative shares in your account and hope to buy them lower. This is the most common practice to make money on the downside.
The second method is to write an uncovered call. I find options a better method than shorting the stock, since it actually can be less risky, but gains are limited only to the premium. However, you can profit if you are wrong, unlike shorting the stock. And with only three days until January options expiry, this may not be a bad trade, since the 12.50 calls were valued at .16 for three days.
The last method is buying a put. This is an okay trade, as it limits your loss to the cost of buying the insurance policy, however, with only three days until the January put option is worth nothing, why take that risk?
Tuesday, January 12, 2010
Subscribe to:
Post Comments (Atom)
1 comment:
Jan 13: The end of day 1 of my prediction and the stock continues to rise. Opportunities to close out a short sell profit existed in the morning. An update tomorrow will be provided.
Post a Comment