Because we had anticipated the rally top very precisely with Hidden Pivot analysis, we were able to buy August 98 puts for 1.28, three cents off their intraday low.  Later in the day, we took a partial profit on the position as is our custom, selling half of the put options for 1.50. This effectively reduced the costs basis of the puts we still hold to 1.06.  Here’s the trading recommendation that went out to subscribers at 12:42 p.m. EDT via an intraday bulletin:  “Using a 1.50 offer, exit half of the puts purchased earlier this morning for 1.28. With DIA trading 105.10, the puts are currently reflected at 1.47-1.52.”  We needn’t have hastened, since, with the Diamonds falling like a brick, the puts were streaking toward an intraday high of 1.73 (a “12000% annualized gain!!!!!” in the promotion-speak of some of our guru competitors, by the way.)

Few Winners

We routinely take partial profits early in a put trade because, in the 37 years we have been trading options both on and off the exchange floor, we can recall only a couple of instances when a retail customer we knew actually made money holding puts. Even when stocks crashed in 1987, those who had bought puts for the ride were so busy patting themselves on the back that they got crushed when stocks trampolined higher with a vengeance on Tuesday, October 20.  Moreover, in all of those 37 years, there have probably been no more than one or two periods lasting longer than two days during which those who held puts felt anything even remotely like exhilaration. And that is why we are quick to take at least a partial profit on all option trades, but especially on put-option trades.  As a result of yesterday’s refreshing little frisson, we still hold half the original position, with a cost basis of 1.06 per put option against yesterday’s closing price of 1.70. Our timely entry will make it hard to lose, but we are obliged to warn you that options trading is a very tricky game, and that most of those who attempt it lose their shirts. Nor should past performance be construed as a guarantee of future success.  

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Information and commentary contained herein comes from sources believed to be reliable, but this cannot be guaranteed. Past performance should not be construed as an indicator of future results, so let the buyer beware. There is a substantial risk of loss in futures and option trading, and even experts can, and sometimes do, lose their proverbial shirts.  Rick's Picks does not provide investment advice to individuals, nor act as an investment advisor, nor individually advocate the purchase or sale of any security or investment. From time to time, its editor may hold positions in issues referred to in this service, and he may alter or augment them at any time. Investments recommended herein should be made only after consulting with your investment advisor, and only after reviewing the prospectus or financial statements of the company. Rick's Picks reserves the right to use e-mail endorsements and/or profit claims from its subscribers for marketing purposes. All names will be kept anonymous and only subscribers’ initials will be used unless express written permission has been granted to the contrary. All Contents © 2010, Rick Ackerman. All Rights Reserved. www.rickackerman.com 

-- Posted Tuesday, 22 June 2010 | Digg This Article