SPY Support/Resistance Options Investment


Start: 04/19/2012    8,823
End:  06/02/2012  15,389
Total Gain/(Loss):   6,314
Total Fees Paid:       -278


                     
Expiration          Quantity     Open    Paid   Amount    Close      Sold  Revenue Profit
Jun 16 '12  $133 Put 6  06/04/2012  6.06   3636                                2,910  741
Jun 16 '12  $135 Put 4  06/01/2012  6.86   2744                                2,700  57 
Jun 16 '12  $136 Put 4  05/31/2012  6.25   2500   06/04/2012   9.13     3639   1126
Jun 16 '12  $135 Put 2  05/23/2012  5.50   1104   06/01/2012   6.30   1255   150
Jun 16 '12  $135 Put 4  05/24/2012  4.70   1893   06/01/2012   6.30   2510   617
Jun 16 '12  $137 Put 6  05/30/2012  5.75   3464   05/31/2012   6.89   4119   655 
Jun 16 '12  $135 Put 1  05/23/2012  5.50     552   05/29/2012   3.01     290   262
Jun 16 '12  $135 Put 3  05/23/2012  5.50   1657   05/29/2012   3.01     901   757
Jun 16 '12  $138 Put 6  05/22/2012  6.57   3956   05/23/2012   7.90   4725   769
Jun 16 '12  $138 Put 6  05/22/2012  7.15   4304   05/23/2012   8.25   4935   631
Jun 16 '12  $136 Put 4  05/18/2012  7.35   2953   05/21/2012   5.50   2189   764
Jun 16 '12  $136 Put 1  05/18/2012  7.34     734   05/21/2012   5.50     547   188
Jun 16 '12  $140 Put 5  05/16/2012  7.00   3508   05/21/2012   9.00   4486   977
Jun 16 '12  $140 Put 5  05/16/2012  7.00   3508   05/17/2012   8.71   4341   832
Jun 16 '12  $146 Put 1  04/19/2012  8.66   8677   05/14/2012  12.02 12002 3325


I got stopped out of my two open positions. We have reached the PIVOT. I have purchased 5 PUT contracts deep in the money because I am betting Thursday will be a DOWN day for S&P.


Trailing stops are a great tool to maximize profits and limit losses. After today, nothing changed, I just ended with two contracts more than when I started. The sentiment is still NEGATIVE.
I benefited from a long term downtrend caused by: Low GDP, Hight Unemployment, Political Uncertainty in Southern Europe and Middle East. 
I expect the Market's long term to continue on the long spiral down therefore will continue purchasing PUTs.
A solid downtrend, no chance for pivots. 
Patience is the name of the game. This is a trend system and it will pay more when trends are clear. I was stopped out with profit on six contracts on Thursday and other six on Friday. Two new PUT positions of 4 contracts each were triggered open on the fall of the S&P 500 Market that ended with a 32 point loss. The conditional/contingent orders will trigger different Put levels taking in consideration the price moves.


SPY trends have to be filtered with those of SPX:


Pivot:                       124.00
Hard Support:        126.10


Price Now:              132.03


Hard Resistance:   130.10
Pivot:                       132.00


When investing in SPY derivatives pay attention to the replication process (after closing SPY is adjusted proportionally with the level of the SPX components). This means SPY may go ahead or fall behind SPX on its own, but will be adjusted when the replication is done. This is something to take in consideration when calculating trigger levels.


Economic Calendar: PST Last Week Results RED


Mon.  5:30AM  Personal Income (payroll), Personal Spending, Pending Home Sales 10:00 Factory Orders
Tue.   6:00AM  Home Price Indices, Auto Sales 7AM CB Consumer Confidence 10: iNSTITUTE OF SUPPLY MANAGEMENT
Wed.10:30AM  Crude Oil Inventories
Thu.   8:30AM  Initial Jobless Claims,9:45AM Chicago PMI, Bloom.Cons.Conf. 10AM Factory orders
Fri.     8:30AM  Non-Farm Payrolls, Unemployment Rate, Average Hourly Earnings 


Coming Up This Week:
Institute for Supply Management
Consumer Credit
Fed's Beige Book


Bonds:      DOWN
Crude Oil:  DOWN
Gold:        DOWN Until 60 $ UP on Friday!!!
USD:         UP


SPX/SPY: DOWN


Introduction to My System (If you are interested in my system without reading the long introduction, just go to the bottom of the blog, the green highlight):

• Watch for and prepare to follow a move in the direction in which volume increases.
• Limit losses and ride profits, irrespective of all other rules.
• Light commitments are advisable when market position is not certain.
• Seldom take a position in the direction of an immediately preceding three-day move. Wait for a one-day reversal.
• Judicious use of stop orders is a valuable aid to profitable trading. Stops may be used to protect profits and to limit losses.
• In a market in which upswings are likely to equal or exceed downswings, heavier position should be taken for the upswings for percentage reasons - a decline from 50 to 25 will net only 50% profit, whereas an advance from 25 to 50 will net 100%
• In taking a position, price orders are allowable. In closing a position, use market orders.
• A move followed by a sideways range often precedes another move of almost equal extent in the same direction as the original move. Generally, when the second move from the sideways range has run its course, a counter move approaching the sideways range may be expected.
• Reversal or resistance to a move is likely to be encountered
• During a move, take or increase positions in the direction of the move at the market the morning following any one-day reversal, however slight the reversal may be, especially if volume declines on the reversal.
• The only objective analysis is based on PRICE. We know the price. Everything else is subjective.
• React to the market movements whenever they occur. Respond to what has happened rather than anticipating what will happen (go on board; if it goes your way stay on board, if not get out)
• Wait for the right market conditions to place your trades.
• Adapt to change: ‘It is not the strongest of the species that survives, nor the most intelligent but the ones most responsive to change.’ (Charles Darwin)
• Strive to keep your strategies based on statistically validated trading rules.
• ‘It is when the unimaginable occurs that the systematic trader remains calm, presciently knowing when to buy, sell or adjust their exposure. ‘ (Mark Abraham).
• Don’t be discretionary, be mechanical.
• You don’t know a trend until is over.

‘Way of the Turtle’ by Curtis M. Faith.
The title is misleading, the book is not about slowly making money… like a turtle.
Quite the opposite, it is about aggressive, high risk/high reward models and systems, the way they work, differences and rates of success. It is a small book but filled with statistics and exciting investment stuff.
(The Turtle story: two friends and successful market trend players, Richard Dennis and Bill Eckhardt have made a bet while visiting a turtle farm in Singapore. The bet was over whether trading can be taught. Richard would teach his system of trading to other people and then he will give them his own money accounts to test their success. Bill believed you must have some unique inborn qualities to be a successful trader. I first read about this story of the Turtles in Michael W. Covel‘s book: ‘Trend Following‘)
There is a lot to be said about ‘Way of the Turtle‘.

• We need and EDGE when we choose our investment, another EDGE when we manage the size of the bet, to be consistent with the plays in spite of sustained losses, and to increase the EDGE in exiting each position.

I was impressed with its content up until the last ‘bonus’ chapter, where my jaw dropped. The writer, who was the ‘fastest’ turtle in this education experiment, confidently and without reserves lays down the complete trading system (I copied here some of it, from the book, so you can get the idea of the system):

• What to buy or sell: if you only trade a few markets, you greatly reduce your chances of getting aboard a trend. The Turtles had to trade in the following markets: 30-year US Treasury bond, 10-year US Treasury note, 90-day US Treasury bill, coffee, cocoa, sugar, cotton, Swiss Franc, British Pound, Euro, JPY, Canadian Dollar, S&P index, gold, silver, copper, crude oil, heating oil, gas.
• Position sizing: how much to buy/sell is the most important aspect of trading, to increase the opportunities for profit while controlling risk. They used an algorithm based on each issues volatility: N = 20 day exponential moving average of the true range.

Daily True Range = maximum (H-L, H-PDC, PDC-L)
where H=current high, L=current low, PDC=previous day’s close.
Every day the range changes:
N = (19 x PDN + TR)/20
where PDN=previous day’s N and TR=current day’s true range.
This volatility of the issue is also helping in sizing the bet. How much to bet, how many ‘units’ of your account total?
Unit size = 1% of account / market dollar volatility or
Unit size = 1% of account / N x dollars per point
The units are adjusted for volatility risk and are a measure of the risk both of a position and of the entire portfolio of positions.
The limits for the turtles were set for single market, correlated markets, loosely correlated markets and also for single direction, long or short.

• Entries were made according to systems:
• System 1: short term system based on a 20-day breakout
• System 2: long term system based on a 55-day breakout
• Breakout: the price exceeds the high or low of a particular number of days.
• Adding Units: Turtles entered single-unit long positions at the breakout and added to those positions at ½ N intervals after their initial entry. This ½ N interval was based on the actual fill price of the previous order. This would continue right up to the maximum permitted number of units. If the market moved quickly enough it was possible to add the maximum 4 units in a single day.
• Consistency: The Turtles were told to be very consistent in taking entry signals because most of the profits in a particular year might come from only two or three large winning trades.
• When to get out with losing position: the most important thing about cutting your losses is to pre-define the point at which you will get out before you enter a position.
• ‘There are old traders and there are bold traders, but there are no old bold traders.’ Most traders who do not use stops go broke.
• Turtle Stops: they had a particular price that when hit would cause them to exit the position by using either limit orders or market orders. The stops were nonnegotiable exits.
• The stops were on the basis of position risk. No trade could incur more than 2N risk, or 2% of the total account. If additional units were added the stops for earlier units were raised by ½ N.
• When to get out of a winning position: must also be predefined, with a trailing stop.
• ‘You can never go broke taking a profit’ is not for this system. Taking profits too early is one of the most common mistakes in trading with trend-following systems.
• Where you take profits could make the difference between winning and losing.

• How to buy/sell: the trading system that was used by the Turtles was a complete trading system, and this is why it was so successful. It did not leave important decision to the discretion of the trader.
• ‘God is in the details.’
• Buy the strongest markets and sell the weakest markets in a group. Roll over expiring contracts.

Richard Dennis: ‘I always say that you could publish my trading rules in the newspaper and no one would follow them. The key is consistency and discipline.’
Many of the Turtles did not make money not because the rules did not work; it happened because they could not and did not follow the rules. The Turtle rules are very difficult to follow because they depend on capturing relatively infrequent large trends. As a result, many months can pass between winning periods.
Another problem is the tendency to want to change the rules. Many of the Turtles, in an effort to reduce the risk of trading the system, changed the rules in subtle ways that sometimes had the opposite of the desired effect.
Who won the bet between Richard Dennis and Bill Eckhardt?
Apparently it was a draw. Some of the turtles became extremely successful trend-traders, others lost money big time. They were all taught the same strict rules of trading.
As a note, their system can be applied in any market. 
Investors in securities (and all other issues) are paired in mainly two teams. I say mainly because there is a third category: long term investors who do not participate at the price fluctuations. They buy and hold. They may make money based on the general market progress, through the purchase of indexes, mutual funds, bonds, etc. base on yearly moves.
I leave them aside; they do OK, but they do not really affect the daily evolution of the price of issues. Who does? The two teams involved are the PROFESSIONALS and the AMATEURS.
The professionals are: underwriters, floor traders, pools, investment bankers, hedge funds and INTELLIGENT SPECULATORS.
The amateurs are: business men speculators, brokerage clients, the average Joe with a computer who gets to play in the Big League because of their hopes, desires and despair.
 
If it were not for the speculators there would be no active stock market. If it were not for the speculators, America would not stand where she does, as the leading industrial country in the world. We may deplore speculation, but if it were not for this outpouring money for stock, you and I should not enjoy a fraction of the comforts and luxuries which we accept as necessities. The speculators carry the ball, until the goal is reached. Speculators keep stocks afloat, until they sink into the strong boxes of investors.
 
There is a constant battle between the Professionals and the Amateurs (the Public).
 
Unless WE who make up the Public have a thorough knowledge of WHY the Professional exists and how he operates, we cannot hope to win in our engagement with him.
 
Let's do that.
 
The Professional: The Investment Banker (or any Banking Organization that underwrites or purchases stocks or bonds from one who needs capital) is the manufacturer and distributor. He must sell the goods he has fabricated to make a profit. The stock-and-bond manufacturer has to employ other distributors, high pressure sales managers (pool operators), and may appoint any number of agents to sell for him throughout the world. He receives help from stock brokers and salesmen. The pool-operators accumulate stocks when, in their judgment, they are cheap, with the expectation of selling them to us, the public, later at higher prices.
The Professional may be called in as a specialist in one of a number of situations. A manufacturer wants to raise capital to build a new plant, but before issuing more stock he calls upon the financial manufacturer. This specialist may advise him that before he actually issues the new stock it would be wise to arrange for a more active market in his present stock, so he can sell his new stock at higher prices. Therefore, the plans are worked out similarly to the plans which would be carried out if the manufacturer were planning to market a new line of his own merchandise.
The Professional may also be called by a group of large stockholders or a corporation who wish to sell their stock, but realize that they cannot all offer their holdings for sale simultaneously without breaking the price of the stock. The professional will undertake to sell their stock for them to the public, and his agreement with the stockholders will be to obtain a given average price.
A number of Professionals may bank together - form a pool - for the purpose of acquiring a quantity of a stock which they think may be marketed to the public at a higher price.
One company may wish to gain control of another company through open market acquisitions of the stock. It may need, for example, only 50,000 shares to gain a working-control.
A Professional may be called in to act as the purchasing agent. In this instance his tactics will be reversed. It will be his job to buy cheaply, rather than to sell dearly. His tactics will be to depress the stock in price in order to persuade the public to sell.
The thought to bear in mind is that the business of the financial community is to sell stocks to the public. There is a purpose behind every operation by a Professional: it may be simply an individual campaign for personal profit; or, it may be a well conceived plan for the raising of capital for industry.  
As soon as we appreciate that the professional element looks upon us as customers, rather than as partners, we shall begin to perceive the task we face in attempting to make money by trading in stocks or, incidentally, even by investing in stocks.
 

1. TIME YOUR SPECULATIVE COMMITMENTS IN ORDER TO GO WITH THE PROFESSIONALS AND SELL WHEN THEY DO.
2. STOCKS SELDOM RISE ON THEIR OWN ACCORD, THEY WILL SAG UNDER THEIR OWN WEIGH UNLESS THEY ARE PUSHED UP. IN ORDER TO MAKE MONEY FROM SPECULATION WE MUST TRADE IN THE ACTIVE STOCKS - THOSE STOCKS IN WHICH THE PROFESSIONALS OPERATE.
3. WE CANNOT KNOW WHAT THE INSIDERS INTEND TO DO, BUT WE CAN SEE THEIR ORDERS ON THE TAPE WHEN THEY EXECUTE THEM.

The Principles of Tape Reading:

• The interpretation depends upon the consideration of the action of the Volume. It is not price action, but the VOLUME, the amount of money, the supply and demand with best tells the story.

1. First: Increasing VOLUME during an ADVANCE with the intervening pauses or setbacks occurring on light volume. This indicates that the DEMAND is greater than the SUPPLY and it favors a resumption of the ADVANCE.
2. Increased VOLUME at the Top of a rally, or of an Advance lasting for sometime without an appreciable gain in prices - an active churning of stock transactions without progress. This is indicative of a TURNING POINT.    
3. A tired or STRUGGLING ADVANCE, when stocks creep upward on LIGHT VOLUME and 'die' at the top. This indicates a lack of demand (few buying orders); and where selling orders likewise are light this action frequently marks a ROUNDING OVER TURN, which may be followed by INCREASED VOLUME on the DOWNSIDE (when the sellers see that they cannot hope for much higher prices at that time). These struggling trends are subject to sudden reversals, particularly when they have endured for several days.

 (These types of action are present, but reversed in sequence, in declining markets.)
 
Clearest Example: the market rallies briskly, with the VOLUME of transactions INCREASING. After a time, it will be noticed, stocks generally SLOW UP in their ADVANCE. RIGHT THERE IT IS IMPORTANT TO WATCH THE VOLUME. If it DECREASES perceptibly with the diminishing ADVANCE of prices, it is a FAVORABLE sign, indicating that, although purchasing orders have slowed down, there is not a heavy supply of stock offered for sale; otherwise, an immediate reaction would set in. If, following this stabilizing period, prices begin to decline, watch for INCREASING VOLUME on the DOWNWARD path. If prices sag under slight pressure-that is, if the VOLUME of transactions is DULL, in hundreds of shares rather than large blocks - it is again a FAVORABLE signal for the RESUMPTION of the ADVANCE later. Never sell a DULL market.
Watch for dullness to appear on reactions, so then you may expect a RESUMPTION OF THE ADVANCE.
 
Turning-Points on HEAVY VOLUME:
 
HEAVY VOLUME at the END of a move is EXTREMELY IMPORTANT, inasmuch as it generally indicates a TURNING-POINT in the market.
In this situation, on the upward side, we have volume during the advance with continued, increasing activity of transactions at the top WITHOUT STOCKS' MAKING FURTHER HEADWAY.
In other words, our buyer wants more stock and continues to enter order after order; meanwhile, our seller, who previously would sell only on advancing prices, now offers for sale great quantities of stock. For a time is a tug of minds between buyers and sellers, but this extreme activity near and at the top is indicative of a SUBSTANTIAL REACTION TO FOLLOW.
(This is true likewise at the BOTTOM).
 
VOLUME indicating an ADVANCE:
 
During a rally what has been going on?
Two things: first the buying of stocks by those who are COVERING their previous SHORT SALE; and, NEW BUYING by those who expect the ADVANCE to continue. Both factions are spending money to purchase something; but one faction is closing out a transaction, while the other is entering one. The man who covers his short position is in a greater hurry than the long buyer. You should consider if there are more short coverings than buying, because if the rally is due to short-covering it is likely to be brief, and may be followed by further declines. How can you tell?
Watch the VOLUME and the Rapidity Of Price Changes. If you are considering purchases, you will probably not be in a rush; and, furthermore, you will not wish to buy if you feel that an order 'at the market' may be executed at two or three dollars per share more than you see it on the tape. On the other hand, if you are short, and feel the decline has spend itself you will place your buying orders at the market, satisfied to get out with your profits.
 
The SIGNAL:
 
Let's say you have sensed a turn at the bottom and purchased the stock.
Your interest now will be to decide whether to hold for a SIZABLE ADVANCE, or to throw out your stocks if you misjudged the turn in the trend.
Your problem resolves itself into determining whether GOOD BUYING comes into the market along with SHORT-COVERING. (GOOD BUYING = purchases made by those who are in a position to know the underlying conditions of the market, and also the buying done by those who are sponsors of certain issues.)
You notice LARGE BLOCKS of stocks taken at steadily rising prices.
At intervals the market becomes quieter, with less volume and fewer transactions; yet you notice there is very little weakness apparent, that reactions are on transactions of only 100 to 2000 shares: there a few huge blocks frequently changing hands at LOWER prices.
What should you do?
Let's assume we have witnessed a swift rally which lasted for two hours. The dullness which has followed, with prices only a dollar or two under their 'highs', has lasted another two hours or so. Those who expect lower prices are selling while others are cautiously buying. Soon you notice a BLOCK of 3,000 or 10,000 shares or a transaction much larger than normal, change hands at the same price as that of the previous sale.
Your mind becomes alert at once; you have been watching for just this SIGNAL. (Of course the signal could have been a series of strings at gently advancing prices or any unusual block). Again, following the unusual transaction, there are other individual sales in your stock. AT THE SAME TIME YOU NOTICE VOLUME-TRADES IN OTHER STOCKS.
Your attention is on the tape: to see if the large transactions following the dullness are going to confirm your expectations that the ADVANCE will be resumed.
Before long you will know definitely.
The market may pick up momentum, with our guide VOLUME pointing the way and higher prices may be recorded. Shorts will cover, buyers will step in and another rally is in the making. Because this is the second step of the day, the buying will be more courageous and the advance should continue for a longer period.
 
THE STOCKS FREQUENTLY RALLY IN THREE-DAY PERIODS, and consequently their market-action at the ends of these periods should be more carefully analyzed if you are attempting to catch the ACTIVE MOVEMENTS of the stock prices.
 
In the event that the UNEXPECTED HAPPENS, and VOLUME INCREASES AT LOWER PRICES, it would be well TO SELL your trading-holdings AT ONCE and STAND ASIDE.
A further increase in the VOLUME in the DOWNWARD direction will WIPE OUT THE RALLY, and we are back where we started from.
 
IN THE MAJORITY OF SITUATIONS, however, DULLNESS FOLLOWING THE RALLY INDICATES THE RESUMPTION OF THE ADVANCE.
 
BUT DO NOT ARGUE WITH THE TAPE!
 
Find out whether the BUYER is STONGER than the SELLER, or the opposite, and ACT ACCORDINGLY. VOLUME will give you the ANSWER.
 
My SYSTEM TREND & Range:


Parreto investing:
I have read the 'trend' investors make money only on 20% of their plays. But it is worth it for them because when they catch a trend they ride it to the end.
However, the 'between the lines' of this is as important if not even more important. 80% of the plays are range bound.
I prefer to play range-bound, long at support and short at resistance, because I prefer to make money 80% of the time.  
Is it possible to guess when a breakout will occur, in order to benefit from trend also?
 
The following is Sergio L. Buica system of trading. It is a system that will be constantly updated and improved.


There is money to make on TRENDS and there is money to make on RANGES. Should I spread my plays around in a number of sectors, of stocks or futures or should I limit myself to one known and widely played security?
 
I have chosen the latter, more specific SPY OPTIONS: CALLS and PUTS. 


Definitions:
SPX is the S&P 500 free-float market capitalization index. Is the average of 500 stocks. 


(The stocks included in the S&P 500 are those of large publicly held companies that trade on either of the two largest American stock market exchanges: the New York Stock Exchange and the NASDAQ.
S&P 500 is one of the most commonly followed equity indices, is considered a bellweather for the American economy.
Hundreds of billions of US dollars have been invested in the companies indicated by SPX.
In addition to investing in the indexed SPX of S&P 500, investors may also purchase shares of an exchange-traded fund (ETF) which represents ownership in a portfolio of the equity securities that comprise the Standard & Poor's 500 Index. One of these ETF's is called the Standard and Poor's Depositary Receipts; NYSE, originating from a chain of ETFs called the SPDR's pronounced "spiders", and is issued by SSgA State Street Global Advisors. Typical volume for the SPY SPDR averages between 300-400 million shares per day; the highest of any US stock traded on any exchange)


SPX is the equities index. Let's say it is at the level of 1300. 
SPY is the ETF and in this case is at 130. (move the comma one step to the left)
I bet on derivatives of SPY: options, calls and puts.
  
So, SPY is the ETF I place bets, following on the sentiment of the market. 
If the sentiment is good, I go long and buy Option Calls. If the sentiment is bad, I go short and buy Option Puts. I buy always deep in the money to benefit close to 100% on the move.


Why do I buy Options instead of stocks?
If you buy 1000 shares of SPX it would cost you 130,000 $.
I buy 10 contracts = 1000 shares deep in the money of SPY and it costs me 6,000 $. Downward risk = 6,000 $. Upward reward = unlimited.
Hey, the formula for pricing Options won Fisher Black and Myron Scholes the Nobel Prize in Economy in 1997.


If this seems too complicated, reading a few books on Options would be extremely helpful. You need knowledge to make money. Otherwise try the Mega Lottery.


Here is my system:

• Buy CALLS on SUPPORT PIVOT (exit if it goes below against your bet and buy PUTS)
• Sell the CALLS on RESISTANCE PIVOT, on the way down, AFTER IT WAS TESTED!
• Buy PUTS when you sell the CALLS, after a TESTED RESISTANCE!
• Sell PUTS on SUPPORT, on the way up, AFTER IT WAS TESTED!
• Buy CALLS when you sell the PUTS and restart the cycle.

• Sell CALLS on Breaking SUPPORT
• Buy PUTS on Breaking SUPPORT
• Buy CALLS on Breaking RESISTANCE
• Sell PUTS on Breaking RESISTANCE

Buy Options: ONLY IN THE LAST 1 month BEFORE EXPIRATION, TO AVOID TIME DECAY (PREMIUM), OR LONGER TERM BUT VERY DEEP IN THE MONEY.1 - You shall not play against the market trend.
2 - You shall not loose more than 1,000 $ on one play.
3 - You shall reverse direction as soon as you hit a PIVOT
4 - You shall update your daily support and resistance levels and act accordingly
5 - You shall stay with cash if you are uncertain of direction
6 - You shall add to the winning position: start with 4 or 6 contracts, add the same every 1 % of stock movement
7 - You shall reduce a loosing (or a winning position after maximum bet is placed)
8 - You shall try as much as you can to make every day a winning day
9 - You shall exit when in doubt and wait. You do not have to invest every day.
10 - You shall increase your bet on higher volume


Good luck!


With friendship,


Sergio