Swing Trade Signal for 3/2/2015

 

Swing trade signal for March 2nd, 2015.
Swing trade signal for March 2nd, 2015.

RLJ Lodging Trust (RLJ) has generated a buy signal for the opening bell on Monday, March 2nd, 2015. This is again using my swing-trade system that I like to call “Band to Band” (details on the system here).

As always, use your head when trading. A technical trade signal does not mean you should blindly trade, nor does it mean you’re guaranteed to make money.

Options Trading Off To An Ignominious Start

LKQ-ouch

Ignominious“…such a fun word, yes? Except if it’s used to self-describe.

My recent foray into stock-options trading has been ignominious to say the least. First there was my earnings bet on Questar (STR). The stock was in a downtrend and the earnings report missed expectations, and yet I didn’t get the drop I’d hoped for with my put option (discussed here). The price is slowly going down, but the put option price remains unchanged so far.

Then I bought a put option on Comcast (CMCSA) based on chart technicals. The stock was bouncing back and forth in a channel and it looked like it was time to head ‘south’ again. I don’t recall if I’d actually checked or not, but their earnings report came out and was mildly positive. So the stock of course headed upward and I sold my option for a loss. A 41% loss to be precise, but that was only $70 since it was one option contract.

Since when do I trade using channels and support/resistance??! That’s not my style, so shame on me.

And then yesterday as I was screening for stocks, LKQ Corporation came up on my radar as a breakout play. In my defense, I was using backtested strategies to come up with this trade, not some off-the-cuff rationale like the other trades.

Rather than buy the stock outright, I thought I’d give options a try (this time by buying a call). The buy/ask spread was 1.30/1.60 if I recall correctly, so I put in a limit order of $1.40 last night. Yes, just one contract again.

This morning I got a trade confirmation for the option order. “Huh, that’s weird…$0.50? I thought the price was higher than that.” Then I saw the carnage when I went online.

LKQ had released an earnings report this morning that ‘failed to meet expectations’, shall we say. The stock closed at $27.85 yesterday, and opened today at $24.10.

Ouch.

The good news is that I only spent $50 on my option instead of $140. The bad news is that I bought it at all! I went from an in-the-money momentum play to an out-of-the-money hope-it-doesn’t-expire-worthless play.

On the bright side, at least I didn’t buy this yesterday! And at least I didn’t buy the actual shares. The stock did move up 2.8% today, so maybe it’ll move higher. More likely I threw away “dinner for two” money.

The odd thing is that I wasn’t planning on the earnings report. I *did* check this information beforehand (I’ve checked my browser history to make sure). I seem to have gotten confused about the earnings report date, and thought yesterday’s bump was due to the report having just been released.

Lesson learned: just because options are less expensive than the underlying stock doesn’t mean you should treat them casually. I spent about an hour researching a different long-play stock last night, and about five minutes on LKQ. Good thing my experiments have been tiny.

 

Position Size vs. Commission Size

I guess I won't be buying that Rolls Royce just yet.
I guess I won’t be buying that Rolls Royce just yet.

“Best Swing Trade System EVAR!!” I yelled. (In my head, where I do much of my yelling.)

Unfortunately, it turned out to be the best system “evar” for someone other than me.

I had been working on codifying a system that incorporated the ideas discussed in this previous post (here). I came up with a pretty awesome system that backtested very well. And I’d started tracking current trades on paper, as well as entering into one trade using the new system.

But there was a fatal flaw. It turns out this system was making its money on nickels and dimes rather than on the big momentum bursts I had aimed for. Oh sure, it captured those too. But the bulk of the earnings over time came from little 1% and 2% moves.

“Hey what’s wrong with that, if it’s making money?” you ask. Well nothing…if you can make money that way! The problem though was that I had picked position sizes that were, shall we say, “aspirational” in nature? In other words, my system was using $6000 position sizes by default, but a more realistic position size for me is $2000 or so. This, unfortunately, made all the difference.

And it made the difference because of commissions! As an example, a .5% profit with a $6000 trade became a losing trade at $2000. And no, you can’t make it up in volume. This system broke because my actual commission/position ratio was much higher than my system was designed for.

I gotta say, this was a crushing blow. Not because a system I’d been playing with turned out to have flaws. But because it was The System…you know, My Edge. The System I Would Use To Slowly Get Rich. I felt really stupid after this, and in fact was kicking myself all weekend about it.

I’ve since come to terms with the problem, and I’m making sure that my other systems work well with my current portfolio, not my future portfolio.

So word to the wise: make sure any system you’re using will work with your particular circumstances. Don’t start using a day-trading system that gets excited over a .5% move with a $10,000 position and a deep-discount broker, if you’re investing $1000 at a time with a $9.95 commission each way. You’ll go broke fast.

The smaller the investment, the more time needed to make gains that offset the commission. And conversely, the shorter the trade, the larger the capital needed to consistently make money. Simple as that.