This morning I hopped out of bed, turned on the TV and didn't like what I saw in the futures market. Suffice it to say, I was feeling a little long. Yesterday on PremierMarkets.com we were holding 1 June in the money call option and 1/2 position long in AMR Corporation (NYSE:AMR). We had closed all of our bearish positions. While I worry about things like this, I don't panic as we've always got a contingency plan. Getting caught on the wrong side of the market can happen to even the best of traders, but how they dig themselves out of the hole is entirely dependent on their contingency plans. My contingency plan #1 was to get short shares of Read-Rite (NASDAQ:RDRT) at the open if the stock cooperated and didn't gap so far down that risk/reward became unfavorable. In my thinking, this morning's gap below $7.50 was too much to chase to the downside, so I'd better have had another contingency plan. We did and immediately shorted 100 shares in the QQQs to help hedge our downside in those positions we were long on the site.
Read-Rite Chart - 60-minute interval.
This morning I profiled shares of RDRT as a potential short. However, subscribers know how I hate to chase gaps. Having recently traded RDRT from the short side at $7.06 and only seeing marginal paper profits to the downside of $6.78 after shorting, we were stopped out for a small loss yesterday morning before the stock moved higher right to our downward trend and 38.2% retracement level. The gap below the $7.50 level made the trade look less attractive with a stop above the $7.78 level. Therefore I suggested that traders feeling a little long short the QQQs outright and thus provide a hedge for our 1 call contract.
NASDAQ-100 Index Tracking stock (QQQ) Chart - 60-minute interval
In this morning's hot list on PremierMarkets.com we had another plan in place for those feeling a little long. Right now I'm viewing the QQQs as range bound between $34 and $38. I'm holding my June$35 call and short 100 shares of the QQQ. This is basically a hedged position. I knew going in that I could lose my entire $560 investment in the calls. However, now that I'm hedged until expiration in June, I can now make a more educated decision and gather more information from the markets and time progresses. We are two hours into trading and the MARKET is digesting this morning's economic data and beginning to cast votes with dollars based on the latest economic data. As a trader, all I have to do is monitor my levels and let the MARKET tell me what to do. If the QQQs gain strength, I've got the calls working in my favor. If the QQQs continue to weaken, then my short works to my advantage. By having a stop in my call position just below yeterday's low I can sell that position there and let my short ride. If the QQQs trade above $38, I can stop out of my short and then let the calls work what magic is left in them.