IWM Call Follow Up

The IWM Call position (July 17th-this Friday) with a $125 strike looked like a lost cause for a while, down well over -50%, but the charts lining up for a bounce is what kept me in the position. I have no problem stopping out of an asset, I just believe that if you have a good, objective reason to be in the position, well the fact is we get paid to take risks. This is where knowing yourself and having objective evidence comes in and becomes a gray area. There's a difference between holding a losing position because you have strong objective evidence that probabilities are that it will either be a winning position or it will be at a significantly lower loss and simply not wanting to be wrong and hoping it comes back. Hope is not a strategy, it's not objective evidence, but it is one of the biggest impediments to proper risk management.

I'm also not from the school that says you stop out at a 7% loss no matter what. If I don't have strong objective evidence, then yes, it's time to stop out, but if I do, well lets just say I try not to have position sizes that will get me in to deep trouble should things go against me. I believe in position sizing, I believe in building a position rather than just jumping in all at once, even though there are times for that as well-take yesterday's USO position, Trade Idea: USO SPECULATIVE (Long) Bounce and the follow up, USO Charts Follow Up. While opened as a speculative position, I'm not against adding to it if the conditions are right, if not I'm happy to leave it where it is. This is something each trader needs to work through for themselves. bI once wrote an article on my free site, it's pretty dated, but I think relevant, Zen and the art of investing.

The title is kind of tongue in cheek as at the time I wrote it, there were books everywhere from Zen and the art of motorcycle repair to Zen and the art of cooking, but the basics of the article are truthful, in my opinion trading is one of the most spiritual exercises you can be involved in. Spiritual development no matter what religion or lack of it is a choice in life, getting to know yourself and understanding your strengths and weaknesses in trading is a matter of life and death in the market. Given enough time, there's no system that I've seen that can replace understanding yourself and it's a never-ending quest in the market as the market will uncover every weakness or flaw that you have.

In any case, you can draw your own conclussions about the article if you so chose. My point is simply that the market is like a living, breathing beast and it's dynamic, it has its good moods and its bad moods, it's predictability and unpredictability and to deal with all of that, you need to understand all the same about yourself. I don't think (in my personal opinion), that the market and stops can all be summed up to the 7% rule, the market is too dynamic, but then there's the truthfulness of your objective data and separating that from cognitive biases.

In any case, the IWM July 17 $125 calls are coming very close to expiration so the theta is becoming more of an issue.

Here's the P/L...

At a cost of $1.68 and a fill of $1.48, the former (over 50+%) loss in this position has been widely down to -12% which is a lot better than a 50+% loss or more.

Because this is an options position, there are a lot of variables that go in to its pricing/value, this week not the least of which is time decay so while I still think this cycle is not over, I don't feel as confident that it moves enough to overcome the time decay that's working against it and honestly I'd rather just be done with it and get ready to deploy those assets in a new position. Had we bounced last week as was expected, the position would have worked well.

 This is the IWM 10 min chart and while it's largely in line, looking at the previous positive divergence to the far left and how much it moved vs. the last positive divergence, I don't have the same confidence at this point that the options position would have given me a much better exit.

 This is the intraday IWM showing yesterday's late day 3C improvement in the IWM (not the same for all of the averages) and remember the VIX smacking to ramp the market as well. This isn't a screaming negative divergence , but if 3C were to turn down from here which it certainly can, things could get ugly quick for an options position with a few days left on it.

 This is the 1 min Russell 2000 futures from overnight, recall the flat trend through most of the night since last night's Daily Wrap as if someone was supporting the market through the overnight session, which wouldn't be surprising given Yellen's testimony in front of Congress the next 2-days. Still, the intraday chart wasn't inspiring a lot of confidence.

 I think the biggest hurdle to overcome with the average trader is the notion that the market is random, just drifting around reacting to each event as it unfolds. We have seen for years that cycles are set up in advance like this one with a base and accumulation and a bounce off that base. It's pretty rare that Wall St. abandons a cycle they have set up.

While I'm not saying there's a widespread conspiracy, the charts show us the same thing over and over. If I can tell what the market is likely to do from an HYG 3C chart or an FX chart, how much more so do you think the pros that trade only in a specific asset can tell when something is changing. Along the lines of the conspiracy theories, remember about 2 months ago when all the Bloomberg terminals went down and the market was in havoc? Trader after trader who certainly had back-up access to other quotes weren't so concerned with the Bloomberg terminals being down because of quotes, they were most concerned and worried about the "CHAT" feature that allows them to talk with other Bloomberg terminal users, one trader went so far as to say it felt like the middle ages in which they had to pick up a telephone to call their "chat" buddies. 

Why do you think that feature is so important to the pros that it caused havoc in the market the day the terminals all went black.

As I was saying, showing traders that the market is not random and that its moves are not based on this morning's economic data is one of the more difficult tasks, but one of the most useful. Cycles are set up in advance, they usually follow a specific 4 stage pattern and Wall St. rarely abandons them.

It's the CNBC 30 second soundbite of why the market did what it did today that dumbs down the market and makes it seems like a reactive protozoan just drifting through time/space reacting to whatever it bumps in to. This is because the market is far too complicated and crooked for anyone to properly explain it in  the typical media 30-second soundbite, so things are dumbed down so people feel like they have some measure of control over the market rather than the market dominating them.

 The R2K futures 7 min chart is starting to move to a relative negative divergence, this is a weaker form than a leading divergence, but usually transitions in to the stronger leading form.

 The TF 10 min chart is showing the same thing. This is not an impending break to the downside, but from here, things can happen very quickly should they decide to.

And perhaps most bothersome is the 15 min R2K futures with a leading negative  divergence from the overnight session, NASDAQ futures look the same.


Again, not the smoking gun I'd be working quickly to put out new short entries, but not the best signal either as it puts us in more of a transitional area in which things can change quickly.