Bull Put Diagonal Spread for Earnings announcement

Profile: Steel Dynamics, Inc., together with its subsidiaries, engages in the manufacture and sale of carbon steel products in the United States. It operates in three segments: Steel Operations, Fabrication Operations, and Steel Scrap and Scrap Substitute Operations. Steel Dynamics was founded in 1993 and is headquartered.

Trading Stance: This is going to be a great lesson for all of you who have never held a stock through earnings and profited. You’ll see the surprises if any, the immediate volatility changes in the options and the actions needed to be taken if a reversal occurs.
That said lets look at the stocks position as it sits at the one year and five year high.
Even though we’ve initially entered a bullish trade we do expect a bit of profit taking to step in (eventually), that is why we’ve used puts instead of calls since a mysterious reversal could always be triggered. So for now we’ll see what the news will bring us on Tuesday and of course this next week is April expiration, that too could be exciting but shouldn’t affect our May position adversely.

Control your Money

The first and most important rule of trading real money is to use only "risk money." Risk money is money that you can afford to lose. It would not make you happy if you did lose it, but your life would go on without any change. In other words, risk money is money that is not needed for any necessity. As we transition from paper trading to real money trading, we must not use the rent money, mortgage money, grocery money, car payment money, insurance premium money, or tuition money. If that is all we have, it is not yet time to trade real money. Using money to trade that is needed for some necessity is dangerous and can cloud judgment. It places undue pressure on us.

As we begin trading, we must understand it is a business; successful traders rarely are gamblers. They do everything they can to put the odds in their favor. In addition to using only risk money, they carefully manage the money they are trading. One way to manage money for the beginning trader with a small account is to make equal dollar trades. If the trader is starting with $5,000 for example, each trade might be $500 or $250. What we don't want to do is make one trade $2,500 and the next $250. How could we possibly know which one is going to be successful? Generally, Murphy's Law goes into operation and we have a big loss on the $2,500 trade and a small gain on the $250 trade. Trading in that fashion soon takes the trader out of the game. Our first objective is to stay in the game. Making equal dollar trades helps us do that. Even if we lost all the money risked on one trade it would not be the end of the world. Of course, if we have a good exit plan, it would be unlikely that we could lose everything invested on the trade. On the other hand, if we placed a large portion of our money at risk on a single trade, it could end our career.

That sad story is all about money management and greed. If we manage our money properly, we remove a large part of the risk and prevent our greed from enticing us to do what the fellow in my example did. As we begin to trade real money, we are still building our confidence. Our paper trading may have been very successful, but it just isn't the same. Now, something important is on the line. Take it easy. Build confidence with equal dollar trades. If you lose part of your money on a small trade, so what? You will have losing trades so keep the losses small.

I believe an even better way to manage trading money is to use equal percentage trades rather than equal dollar trades. That is difficult to do with a small account, but can definitely be utilized as your account grows. I personally favor making trades where only 3% to 5% of risk money is placed at risk in any given trade. When losses are incurred and the account value drops, the next trade automatically is made for a lesser amount and when gains are made, greater amounts automatically are invested.

This seemingly simple device of managing money can build confidence, protect assets, and enable the trader to stay in the game.

Reasons to Trade

One of the critical elements of trading he addresses is the psychological. Many of us have heard and mouthed the rubric that the markets move on fear and greed, but few of us have taken the time to understand how those emotions really work in moving stock prices.

It seems obvious that we trade to make money, but that may not be the real motivating factor for many. There can certainly be a "rush" from making trades. Some traders, it seems, trade just to trade. They are caught up in gambling mode and, for them, it seems critically important to trade without real regard to real liklihood of success. In spite of the market conditions they continued to make trade after trade even though only few were successful. I asked him why they were doing that and said to have money working all the time.

Clearly, there are times to enter bullish trades, times to enter bearish trades, and times to go play golf or go fishing or do something other than trade. If we do not recognize and believe that there are times not to trade, our successes will at least be seriously undermined by our losses if not completely outpaced by them.

Silicon Motion Technology Corp. (SIMO)

It looks as though SIMO may present a call buying opportunity if it retreats to the 10 day or even 40 day moving average and then bounces up. I'll need to be careful to assure enough open interest when looking for the right calls to buy.

Bear Call Spread-March 07

CEPH
$67.25Bear Call
Sell Apr 75.00 call $0.80
Buy Apr 80.00 call$0.30
return $0.50
11.11%


Technicals: The stock peaked in March of last year at a 52-week high of $82.92 and then promptly turned around falling to a 52-week low of $51.58 just a few months later. More recently, prices have been channeling sideways between overhead resistance, now near $75, and support below around the $70 mark. Last week, prices slipped below support for the first time in months giving us a breakout to the downside. The stock may return to test old support as new resistance, but for now things are looking weak. The stock trades in the health care/biotechnology & drugs industry which continues to pull back over the last two weeks and the stock’s fundamentals are very weak. Currently, both the MACD’s and the Stochastics are revealing sell signals.

Bear Call Spread-23 Feb 07

Sell Mar 100.00 call$0.85
Buy Mar 105.00 call$0.30
Return $0.55
12.36%

Technicals: The stock hit a 52-week low of $49.25 back in March and then began a long-term rally that resulted in January 52-week high of $109.45. This new high was the result of the prices breaking out of a Symmetrical Continuation Triangle. This chart pattern is considered to be a bullish signal as it indicates that the current uptrend may continue and that is just what took place. As the target price was hit the stock has reversed direction slipping back below a former area of resistance. In other words, when prices did finally come back to test old resistance as new support the stock failed to find support and has now fallen below its 30-dma as well as the trendline. The stock trades in the services/casinos & gaming industry which is trading near its yearly high prices. However, its fundamentals are weakening. The MACD’s are showing a sell signal while the Stochastics are revealing a buy. We’ll expect overhead resistance around the $96 level to hold and keep prices below the lower strike price over the next few weeks.

Spread-19 Feb 07

FFIV

Bear Call

Sell Mar 80.00 call$0.85

Buy Mar 85.00 call$0.35

Return $0.50

11.11%

Technicals: The stock bottomed out in August at a 52-week low of $40.55. After that low, prices reversed direction and began a long upward trend that resulted in a January 52-week high of $80.85. The stock didn’t participate in Wednesday’s strong rally after Ben Bernanke announced that inflation was in check. It makes us wonder if a possible Head and Shoulders Top pattern may be forming on the price chart. We won’t know for sure until the pattern is complete. The stock trades in the technology/computer networks industry which has been trending sideways for the last few months. The MACD’s are flat on the sell side and the Stochastics are also pointing towards selling pressure.

Trading is Tough

Trading is hard. We aren’t talking about paper trading; we’re talking about taking your own hard earned money and risking it to test what you believe to be true. Trading is stressful. Real trading is difficult, and it can physically drain you. You could be soaring emotionally as you watch your trade profiting; then the next day, you may hit the depths of despair as another or even the same trade turns against you.

It’s during these times when a trade moves against us that we feel like giving up or we lose our focus and start aimlessly trying to make back our loss anyway we can. When I was a young inexperienced trader, if I found that I lost money trading a particular stock then I would be even more aggressive trying to get that lost money back. Of course, this resulted in more losses and more frustrations. What made it even more frustrating was that I knew of some other traders who were profiting off this same stock. I finally had to learn that I needed to stop trading that stock and go find one that I will succeed at, otherwise I won’ t have any money left to trade with. This can also be applied to trading systems. Why were others making a profit when I wasn’t? How come two different traders trading the same stock or system get so radically different results?

We all have our own personalities that make us uniquely different from others. Certainly you will have strengths, but you will also have weaknesses. Understanding yourself as a person is the single most important factor in deciding whether you succeed or fail as a trader. If you do not understand yourself, you cannot succeed, if you’re a stubborn person, you will find that this personality trait doesn’t work well when a trade is moving against you. Refusing to admit that you are wrong can be a very costly lesson. Make no mistake about it; your personality has a major influence on how you trade. It is more important than the broker you use, the stocks you trade or the latest and greatest trading software available. In Market Wizards, Jack Schwager suggests that the single most important element of a successful trader is in having a trading plan that fits your personality.

often get questions as to how I trade, and sometimes I have instructed my friends on what I do. However, when they try it, it doesn’t always work out as well as it does for me. If you find that what you are doing in your day to day trading isn’t working for you, then you need to adjust. Just because it works for your trading partner, doesn’t mean it will work for you. You may need to try several different trading instruments or trading plans until you find one that better fits your personality and then once you have found it, stick with it and don’t deviate from it. One of the most difficult aspects of trading is sticking with your trading plan. You will find yourself re-entering the market after a string of losses with the thought, "This time I will stick to my plan. I will not get sidetracked."

In theory, it seems relatively simple to make a trading decision based on a particular approach and then to stick to that plan. However, in practice, it can be difficult. Many obstacles and psychological hurdles are ready to trip us up at the very first opportunity. After back testing a trading system and proving to own satisfaction that the approach will work, we start out with a great deal of enthusiasm. We step forward with the very best of intentions; yet so often we find ourselves changing our plans in midcourse and losing out on what could have been a very profitable trade.

So what makes you think you can succeed? The market is littered with the corpses of those who thought they could beat the market with the latest technical indicator that has worked for the last 5 years. Then failed the next year, or when you tried it. Everyone's looking for the perfect system, the foolproof method, the quick solution, the get-rich-quick scheme. I have news for you — they don't exist. So you think you can succeed in the toughest market of all? What makes you any different from anyone else?

The answer is very simple — it's you. It is important for us to stay the course, but at the same time it is also important for us to remain flexible enough to change direction if the need arises.