PrimalGreed: 2007-02-25

Primalgreed.com - BESTBUY, that's not what I wanted! Part 3

Monday, February 26, 2007

PLEASE REMEMBER THIS IS FOR EDUCATIONAL PURPOSES ONLY!

Continued from Part 2

Greetings All,

Finally back to finish up BBY. If you remember from the last post, we had applied Profitsource’s risk to reward tool, with a stop price that was set at the Elliot Wave 4 peak of $51.80, the entry price was around $50.08, and the profit point was at $44.85. We also concluded from the risk to reward tool that shorting the stock would give us a 1 to 3.16 risk to reward, but the question was whether an option could give us a better return.

Looking at the risk graph from Optionetics, you can see that the March 50 Put for BBY could yield a $350.00 per contract profit for around $80.00 per contract risk. This leaves me with a risk to reward of 1 to 4.375 ($350.00 divided by $80.00), definitely more attractive then the 1 to 3.16. Of course, with option trading, these risks to rewards can be somewhat deceiving, especially if your timeframe is too short, or the option is too far OTM (out of the money)…among other things.

The model price for the option was $1.698 with a bid/ask of 1.65/1.75, the opening interest was around 9360 contracts, and the IV was 27.0%. I placed my order to buy at $1.65, initial stop at $0.85 and a half-profit taking at $3.70 (I always buy a minimum of 2 contracts). The order was filled on 01-30-07 at $1.65 per contract, and now we are off to the races.

From the screen shot, you can see that over the next few days the movement started to change from a sideways movement, to an upward movement. I began to notice that the 200 SMA had been tested before, and it looked like it was going to be tested again. The Elliott Oscillator had also started an upward trend, and the Daily Trend finder was indicating upward movement. My original stop point was $0.85 per contract, but after looking at the overall picture, decided to take my current losses at an exit price of $0.95 per contract.

The last screen shot is the continuation up to 02-22-07. There still seems to be some sideways movement, but recently the Daily Trend finder and the Oscillator are starting to go in the direction I intended to begin with. All that being said…..WHO CARES! The trade is over, and its time to learn from the mistakes of the trade.

In hindsight, there are at least several mistakes I made with this trade.

1. The price action already seemed sideways, and the Elliott Oscillator just didn’t feel as right as it should be.

2. I remember placing this trade under a less-than-perfect emotional state.

3. The option timeframe was too short (46 Days)

4. It is very possible my losses would have been smaller had I went ITM or deep ITM (in the money).

5. I’m sure there are many others; this list will have to be added too

I will add the Final Stats to this Later

Fibonacci Shocked