Yesterday at 10:30 EST I thought the 520 strike for both a put and call would be an appropriate level for June expiration. The symbols were (XEBFD) and (XBERD). The reason I liked the June expiration is so that I would hold the "losing trade" for a period of time and then look for a recovery in the losing trade to end up with a net profit between the two. Here's how it would currently be working if they were both purchased near $40. The total outlay for this trade for one contract each of the put and call would have been $8,000. $4,000 for the call and $4,000 for the put (they were actually a little less, but lets work with round numbers). A straddle trader usually enters a straddle knowing that one of the options will result in a loss. The key for trading a straddle is to simply know what you're total cost is and what you're break-even total would be. From the above information, I know that If I hold each until expiration, then the XBD.X needs to trade below 480 (520 strike - $40 option) or trade above 560 (520 strike + $40 option) to result in a break- even or profitable trade.
Last sentence should read...
I know that if I hold each until expiration, then the XBD.X need to trade below 480 (520 strike - $40 option) and close that position out for a profit. Then have the XBD.X turn higher and close at or above the $520 level for the entire trade to pan out.
This is how I would currently set up the trade as it was outlined with the point figure chart at 11:30 EST today. You will note that I correctly said that $8,000 was at risk in the trade, however, I think faster than I'm able to type and left out the closing of the put for a profit and then getting a rebound in the XBD.X (a key part I admit). Remember that I'm using the vertical count from the point figure chart and its bullish price objective to even think that the XBD.X will rebound from the targeted pullback near $480. Yesterday, I did NOT KNOW which way the XBD would break, but felt it was at a pivot point (see yesterday's 10:30 EST Update) and why I thought a straddle would be a good way to play this index. One reader was concerned that the options were risky due to lack of trading. That may be valid, but I do believe that 80 to 85% of a stocks price movement is related to the sector that it is in and might also be a decent strategy on a stock like Merrill Lynch (NYSE:MER), Lehman Bros. (NYSE:LEH). Take a look at the index XBD.X, MER and LEH and see if they don't look very similar.
A word of warning
Sometimes I get the feeling that traders think they can simply put on a trade and then forget about it and it will simply go according to plan. This is not the case. Every trading plan needs to be kept abreast of and monitored. If a major broker dealer reports huge trading losses in their accounts in the next couple of days (I'm not saying this is going to happen, but proving a point) then I think our bullish price objective from the point/figure chart will become suspect. However, if a broker dealer does say something to that effect, then I think that put option a straddle trader is holding would do very well and probably make up for losses in the call.
PMC Sierra's (PMCS) first quarter profits fell 84%, but who cares because earnings of 2 cents a share are what analysts expected. PMCS traded as high as $$49.55 today, but has been lingering around the $45 area most of the day..
PMC Sierra 60-Minute Chart I had to break the 60-minute chart into two sections to show the whole picture.
For anybody long PMCS, what can be expected? Anchoring a retracement bracket to the 1/31/01 high and the 4/4/01 low shows that the 38.2% level lines up with a previous high around 42. That resistance level was blown out of the water when PMCS met earnings. Since the $41.75 to $42.50 area contains a gap, previous high, and the 38.2% retracement bracket, I would now look for that level to act as support. The 50 and 200-period moving averages are still too far away to offer any short-term support. The area between the 38.2 and 50 retracement levels contains 5 days worth of congestion, and should temporarily keep prices from getting above $50. Looking forward, if prices can get above $50, I would expect prices to stall at the area between $58 and $61.50. Retracement levels tend to gives us good targets, but rather than follow that target to the decimal point, I prefer to tie those levels in with other technicals to give me a range where prices might stall or fall to.