Last Sunday's webinar by Jim Brown on LEAPS put strategies had me doing a trade mock-up in the BBH. I promised everyone that we would follow that trade from time to time. Well... it's been a week and we perhaps have another 70 weeks to go, but lets take a look at how that strategy from Monday morning would be looking today. We're doing this just so you can get a feel for things. We outlined the trade based on the point and figure chart and every subscriber can go back and look at the 01:30 EST Update on May 21st in the archive sections of their web sites to see how things looked then, compared to how things look now.
Biotech HOLDRS Chart - $1 and $2 box
A LEAPS put trader shouldn't be concerned about day-to-day activity in their BBH LEAPS trade unless a stop is triggered. We had used the point/figure chart to establish a stopping point at $118 for the trade. Well, this week's action had the BBH moving up to $138, then pulling back 4 boxes to $130 and then reversing back up three boxes to $136. Much like an Institutional fund manager, the LEAPS put trader is more concerned about "meaningful" moves as represented by a point/figure chart than he/she is with the daily fluctuations that really don't have that much affect on their longer-term trade. Here's a "live" look at the profiled options that we had printed from last Sunday evening. You can compare the chart below to that found in Monday's 01:30 EST Update to see how this trade is acting.
Hypothetical Trade Based on 05/20/01 data for BBH
If a trader had sold the BBH Jan03 put, his/her account would have been credited $5,650 (less commission) and the purchase of a protective put for July 130 would have created a cost of $900. The purchase of the July $130 put is viewed as "insurance" should a rapid drop in the BBH occur. PremierMarkets.com set things up this way as we felt we should know something good/bad by July expiration. One subscriber asked... "What do I do after July expiration? Do I buy another put?" That is for each subscriber to determine for themselves. I would suggest that upon option expiration, a trader would simply review their trade (both puts) and also determine how the supply/demand chart is looking. If the BBH were trading up at $170, the trader would be identifying "sell signals" on the point figure chart where they would look to close the Jan03 $180 put, just as if they were trading a stock. We will continue to update everyone on this strategy as it might be a good learning experience for how this strategy works over time.