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us stock market, trade stock
Begin Part 2 of 3
SUBSCRIBER QUESTIONS
Q: I do not understand how QQQ options work. Exactly how are they priced? Can you please explain. Thank you.
A: The QQQ is traded on the American Exchange and it is an index option on the Nasdaq 100, the top 100 technology stocks weighted by market cap. Unlike other options, the QQQ strikes are in $1 increments. They are priced by market makers as are any options.
Q: What do you consider to be sufficient open interests for an option?
A: We like to see 100 open interests or more. That gives more liquidity in the option and that gives us more options. First, it allows us to perhaps work the spread better to get a better trade. Second, and importantly, it means there are more trades in the option, and that gives us better odds at being executed when we use stop losses on an option position. For example, a stop limit order, i.e., a stop order at a specific price you want to sell at or better only, is not triggered until there is a trade at that specific price. Thus, the option price can move past you without being triggered. On a stop loss order, if the option moves below your stop price without being traded but then trades at a lower price, you are taken out at that lower price. Thus you want more open interests as that means more trades and a better chance you get hit on your stop limit order.
TEAM TRADES
MRCY: Not all tech stocks were down as this Technical Traders Report stock showed us. Ready to move up after closing at support. The stock was testing the breakout from its recent cup with handle pattern, and had closed Friday at 39.81. We were looking at picking up some stock. MRCY is moving up the right side of a 9-month cup base.
Opened at 39.75, just under the 10 day MVA, but quickly jumped up to a high of 41, pulled back slightly, then moved back up to the high again at 8:55 (CT). The stock turned back down again from that test, dropping back to a low of 39.34 just before 9:00, as the Nasdaq pulled back as well. As the index rallied back from its current low, MRCY did the same, though as when the Nasdaq turned back down just after 9:00, the stock didn't, and on a break over the previous high of 41, we entered with a stock buy position. The stock was bidding at 41.32 with an ask of 42, and since it wasn't a bad spread and we wanted to get in, we placed a limit order at 42 with order to place a stop loss at 39 (8% below 42) if the fill was made. A slew of trades came through at 42 and the fill was made.
We had to leave the computer for awhile, but the stop loss we felt would take care of things. MRCY raced up to a high of 42.63 while we were gone, then began pulling back, making it down to 41.25. The stock had a natural stop loss in, however, as that 41 level had been tested twice earlier in the session. The price headed back up, the stock hitting a new high of 44.63 by 12:35. We checked in just before that, and decided to move the stop loss up to 41. That way we would end up almost even if we were taken out. Didn't look like that would happen, though, the way the stock was moving. Volume had not been stellar, but it had been moving up steadily. Shares began to drop of during the lunch hour, but the stock was holding at 44.63, another support level that had developed over the last hour and a half or so. We were pleased with the 4-point price move and moved the stop loss up to 43 (though it looked like 44.63 was going to hold the stock).
The stock was up to 44.75 at 1:55 pm, getting close to 45, the closing price hit on the breakout the previous Monday, volume not quite at average levels. We moved the stop loss up to 43, just below where we thought price had support. MRCY broke above 45 by the end of the day, closing at 45.63 as volume finally broke average levels at over 282,000 shares. We held the stock, wanting to stay in on a continued move up Tuesday if the FOMC meeting yields a rate cut. We will be watching 47.88 (December top) and the 49 level for possible resistance on the way up. The stop loss positions were a bit tight, but with this market and a tech stock, we did not want to risk much capital to the downside. If the stock performed as expected, we would be in the trade. If not, we would be out.
For a review of frequently asked questions, please use the link below:
http://www.investmenthouse.com/1questions.htm
THE PLAYS:
All prices reflect prices at the close on Monday.
Best Plays:
1) MTB: Moving up after testing its breakout.
2) MRCY: Looks ready to take more onto this strong move.
3) GDW: Ready for a sector rally.
4) ACS: Sitting on an up trendline.
5) XL: Getting stronger volume; look for a continued move up.
6) MAPS: Moving up again after testing the breakout.
7) GPT: Looks good, but needs stronger volume.
BREAKOUTS:
Continued Play (from the TTR update, 12-14):
RKY (Adolph Coors Co--$78.13; -0.87; optionable (RKY)): Food & Beverage
http://biz.yahoo.com/p/r/rky.html
STATUS: Pulling back from the flying plateau pattern along with volume (387,000; avg. 363,000). Look for a pullback to the buy point of 77.06 on a test of the breakout. Strong money flow and high relative strength.
BUY POINT: On a move back up after a pullback to the 77 range.
POSITION: Stock and/or January $75 calls to buy (RKY AO). The April and January $80) options had insufficient open interests (too illiquid for this stock).
Continued Play:
PFGC (Performance Food Group--$52.50; +2.75; no options): Food Wholesale
http://biz.yahoo.com/p/p/pfgc.html
STATUS: Kept the breakout move alive on s huge volume surge (839,900; avg. 103,000). A bit extended now, though on the big volume the aggressive can look at further upside since the stock has shown previously that it can run, taking short breathers of a day or two on the way up. Look for a test of the buy point of 48.01 on a pullback.
BUY POINT: Aggressive: On further upward movement on continued strong volume. Safer: On a move back up after a pullback to 48 (or better).
POSITION: Stock.
TESTS OF THE BREAKOUT:
New Play:
MTB (M&T Bank Corp--$61.30; +1.26; no options): Bank
http://biz.yahoo.com/p/m/mtb.html
STATUS: The stock is moving up after a pullback to the 10 day MVA (59.53) on a test of the breakout (late November) from a recent consolidation. The stock rose on higher, average volume of 293,800. Look for a continued move up, watching for resistance at the breakout high of 62.70.
BUY POINT: Aggressive: On further upward movement on volume of 397,000 or better.
POSITION: Stock.
New Play (from the weekend):
MRCY (Mercury Computer Systems--$45.63; +5.82; optionable (QYR)): Telecom equipmt
http://biz.yahoo.com/p/m/mrcy.html
STATUS: Shot up on stronger volume after pulling back in a test of the breakout from the recent cup with handle. The stock beat the previous closing high at 95, and looks ready to tack more onto this move. This was a strong move in context of market action today. Relative strength that has broken out ahead of price, a bullish sign.
BUY POINT: Aggressive: On further upward movement on continued rising volume.
POSITION: Aggressive: Stock and/or February $40 calls to buy (QYR BF or BH). Options at $45 strike had too few open interests for the stock.
Continued Plays:
GDW (Golden West Financial--$63.31; +2.25; optionable (GDW)): Savings & Loans
http://biz.yahoo.com/p/g/gdw.html
STATUS: Reacted favorably with other financial stocks Monday, breaking up from the 2-day lateral consolidation at the 10 day MVA (61.15). The move was on lower volume, but we will see if that is a one-day anomaly, as the Friday doji was on volume higher than that of today (which was 984,800; avg. 727,000). Price just beat the recent 65.25 high. Now the stock will take on 65.25, hit 12/06. High money flow and relative strength that continues to break higher, ahead of price. Buying is improving.
BUY POINT: On a move up from here on stronger volume in a financial sector rally. Watch 65 for resistance.
POSITION: Stock and/or February $55 calls to buy (GDW BK). February $60 calls had insufficient open interests for the stock.
ACS (Affiliated Computer Svc--$61.00; +0.94; optionable (ACS)): Computer software
http://biz.yahoo.com/p/a/acs.html
STATUS: Continues to hold a pattern that is beginning to look like an ascending wedge, but needs a bit more time to firm it up. The stock opened at Friday's closing price of 61, pulling down to its up trendline (Oct/Dec lows) on volume that tanked below average to 153,400. Look for a move up in a rally; if the stock doesn't break above the recent high (62.13) from there, that wedge can form on another pullback . Continued excellent money flow and high relative strength (that has broken out ahead of price, a bullish sign).
BUY POINT: Aggressive: On a move up from here or the 60 level (in a rally) on rising volume.
POSITION: Aggressive: Stock and/or April $60 calls to buy (ACS DL).
XL (XL Capital Ltd--$82.00; +1.31; optionable (XL)): Insurance
http://biz.yahoo.com/p/x/xl.html
STATUS: Moved up from support (18 day MVA at 80.67) on volume that just broke above average levels (551,100). Look for a move up on stronger volume as the market rallies, letting the stock break over 82.50 to clear out a lateral consolidation just below that level. XL hit a breakout high (from its recent ascending wedge pattern) of 86.50. High relative strength and money flow, and good buying.
BUY POINT: Over 82.50 on rising volume.
POSITION: Stock. January and April $80 options had insufficient open interests (too illiquid for this stock).
MAPS (Mapinfo Corp--$42.38; +3.07; no options): Computer software
http://biz.yahoo.com/p/m/maps.html
STATUS: Moved up from the doji as expected, supported by stronger volume (237,500; avg. 165,000), and easily breaking resistance at the 41 level. MAPS hit a high of 46.69 on its recent breakout from the November consolidation, and is moving up after testing that strong move. Look for a continued move up as volume surges in a market rally.
Excellent buying, and money flow and relative strength broke higher.
BUY POINT: Aggressive: On further upward movement on continued rising volume.
POSITION: Stock.
MMM (Minnesota Mining & Mfg--$114.63; +2.44; optionable (MMM)): Conglomerates
http://biz.yahoo.com/p/m/mmm.html
STATUS: Moved up again Monday after testing the recent breakout, but volume was lower at 2 million (avg. 2.1 million). Safest play is to let the stock move over 116, to clear out several prices hit recently just under that level. MMM reached a breakout high of 119, and it showing excellent money flow, relative strength and buying.
BUY POINT: On a move over 116 on above average volume.
POSITION: Aggressive: Stock and/or April $115 calls to buy (MMM DC).
GPT (Greenpoint Financial--$36.13; +2.13; optionable (GPT)): Banking
http://biz.yahoo.com/p/g/gpt.html
STATUS: The star doji played out as expected, with the stock moving up to a new high for the year, pushing price closer to the previous high of 36.25 in the lengthy base. Volume was lower at 460,200 (avg. 361,000). We expect the stock to break out over that previous high rather than pull back from here, since the stock just accomplished that on the move back down to the 10 day MVA (33.88). Relative strength continues breaking out ahead of price, bullish for a move up.
BUY POINT: Over 36.25 on continued strong but rising volume.
POSITION: Stock and/or January $30 calls to buy (GPT AF). April $30 options as yet have too few open interests for
End Part 2 of 3
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