The title is somewhat misleading, as this will be light on actual options update content.

The put/call ratio did fall a measurable amount (in-line with the general mood of the market), but not quite far enough to signal a contrarian short trade.  It currently stands at 1.00 (cause THAT ain’t a suspicious/manipulated number! /sarcasm), its lowest level since April 2nd, for whatever that may be worth.

I haven’t looked close at any unusual options activity – the few that popped up via twitter include QLGC, CIEN, FSLR, and various hotel & casino names.

Instead, I spent most of my night analyzing my latest failed trade – STP May09 15. puts.  Granted, in the Lenny Dykstra sense, this hasn’t yet failed, as I’m holding onto them still.  And in Lenny’s world, I’d just double down or roll them out thus making them “future” winners.  In my world, however, they’re dead to me.

What is the most frustrating about this right now is that the only reason the trade failed was my own stupidity.  I had a plan, I traded the plan, right up until the profit-taking part…at which point I took the piss, stuck my thumb up my butt, and let my gains disappear.

Read on for further details of exactly how I stuck it up there, unlubricated and all…

The Set-Up:
As stated above, the trade was with STP May09 15. puts.  Below is a 6-month chart of STP, zoomed-in on the last month, so that all the indicators are still keying off the 6-month daily data.  These include an RSI(3), mid-term stoch’s, and a 5-day LRR.  The LRR is my ‘timing’ indicator, although the other indicators as well as price action all have to confirm it.

The Entry:
The long put entry signal was generated at EOD on 15th when the LRR flipped to -1 (that vertical white line).  Confirming this was the highly overbought stoch’s and a falling, although not ideal, RSI (usually like to see it a bit more above 50, than it was here).  Since I use limit orders, the final confirmation is always price action – in this case I was looking for a print below $14, which would put the price at a new 2-3 day low (topmost yellow line).

Now usually I only give the entry 1 day to work, but since STP didn’t budge (price-wise or indicator-wise) much for the next 2 days, I kept the order alive.  Finally, the trade filled last Monday and was instantly profitable (green circle).  Feeling good…oh yeah!

The Plan:
There was no clear support for me to aim at, so I initially had no ‘target’ in mind.  The hard stop was (and still is) set at $15.50 (above which we’d be making a new high).

The no target thing is rather common for me, since I try to time exits off the indicators as well.  Should they then line up with some support/resistance level, well, all the better then.

The LRR exit criteria for puts is the exact opposite of the entry signal; flip to +1 and confirmed by price.  Usually, this only gets used in either losing trades or BIG winners that have had a long(er) run (think 2 weeks+).

The exit that makes me ‘feel’ the best is selling based off the stoch’s oversold reading.  The greater satisfaction is derived from what feels like selling on ‘my own terms’.  But there is no ‘hard’ criteria here…I either sell or put on a trailing stop when this indicator falls to oversold levels – part of this ambiguity is on purpose, with the idea being that the trailing stops would ‘let my winners run’.  This ambiguity, unfortunately, also leaves the door open for…

The Fail:
As we see on the chart, STP established the $12 level as s.t. support on the 2nd day of this trade, reversing off of it all the way up to my entry price.  It failed there and started a slower fall back to $12.  During this whole time, the stoch’s were steadily falling.  At the same time that this indicator reached essentially oversold territory (~27 on the stoch’s – oversold is <25), the stock was back down near $12 and the puts were showing 30% profits (blue circle).

Selling at EOD on Tuesday, locking in those gains, would’ve been ideal…although we all know that ideal rarely happens.  So that’s not really where the mistake was made.

The simple and, in retrospect, big mistake was not putting on a trailing stop to protect at least some of those gains.  This is completely inexcusable – stoch’s were essentially oversold and the stock was sitting at s.t. support.  Not to mention that May expiration was now only 2 weeks away (stupid-ass 15th expiration!).

The Takeaway:
All told…there plenty of good reasons to sell and/or protect.  I manage to ignore them all.

So let’s hear it for my 1st class brainfart and my 30% gains turning into 30% losses.  In fact, the magnitude of the loss doesn’t even really matter, since I size my positions so that my max. loss is if they expire worthless.

It’s the pain of the lost profits that stings me so…and the reality is that I made a pretty basic & stupid error and I’ve paid the price.  But the aim is that if I go back and spell out the errors to myself, I will be less likely to make them in the future.

So thanks for tagging along.  Keep it real!