Full Blown Bull Market Not Yet Here?

One thing that dow theorists used to propose is that it isn't a bull market until all major indices are making new highs. However, due to the US coming off the gold standard in the 70s and the way currency exchanges and the increased global investing that is being done that may not be enough. One thing Martin Armstrong once said that always stuck with me is it's not a full blown bull market until its leading relative to all currencies. That works for different asset classes and in this case the Russel is only just about to approach new highs relative to the dollar index.

The last time that we were in a "full blown bull market" by this metric was in mid 2013 to 2014.
We can also look and see emerging markets aren't ready and that the all world index is not ready to take out its highs. This suggests a concentration into US stocks until proven otherwise.

The Russel is and all world index is pushing against resistance so it is possible we will stall here, but if/when we make it through to highs it is an all clear buying signal until it retraces the candle that takes out the high and fails its breakout (failed move and 2b sell signal) or until it creates another topping pattern after completing its rally.

For the record, Martin Armstrong has also suggested that the public average Joe investor won't as a group begin to pour into the market until if/when we get above 23000 and if that happens lookout we are headed towards a parabolic move or what he calls a "phase transition".

Risk Arbitrage And Options

Risk Arbitrage is identifying a deal of merger and aquisition that has been announced but has not gone through officially yet and in an all cash offer, buying the company to be acquired, and in an all stock deal buying the to be acquired company and selling the company doing the acquiring.

Risk Arbitrage with options is instead using calls and/or puts to accomplish the same thing, but with unique leveraged instruments.

In the early days, Warren Buffett used to participate in these until he met Charlie Munger and Munger convinced him of sticking with other methods.

Long Call Options and Risk Arbitrage

A call option gives the call owner the right to buy 100 shares of a stock (per contract) at a particular agreed upon price (the "strike price" is the term to define the agreed upon price). It forces the seller of the call option to sell the stock itself at that price should the call owner decide to "execute" your option rather than just sell it to someone else.

For example, if a stock is priced at $90 and there is a deal announced for $100 per share, you may decide to buy call options with a strike price of $95 and make the difference between the price at the close of the deal and this strike price (in this case $5 per share), and the cost of the option. If you can buy the option for $1.70 per share (or $170 per contract) and the deal goes through, you can sell the option for $5 and make $3.30 per share (or $330 per contract) if the deal of the stock closes at $100. However, if the deal fails, you'll likely lose 100% of what you risk. In fact, even if the deal is delayed and the stock goes up from $90 to $96.69 or less you will lose money, and if it doesn't go at least to $95.01 you will still lose all of it. With options you have to be right on timing, price, AND for out of the money options you need to be right on the magnitude of the move. This example allows a return of almost 3 times the risk, which means you can lose 3 times and nearly break even on the 4th. So to make money the deal has to go through more than 25.4% of the time. We actually should only plan to make this trade if the odds are much higher (like 35%) because of volatility, risk, and to pay for missed opportunity.

One variable I haven't mentioned yet is time. Eventually options expire and when they expire you either sell them, exercise them, or they expire worthless. Unless they are trading above the strike price for call options, (and sometimes if  you sell them before the end of the day on the final trading minute of the final trading day before options expiry) they will almost always expire worthless because no one else will want to buy the, knowing they will soon be worthless. The tricky thing about arbitrage deals is they can take longer than you initially expect.

One of the tricks of options is position sizing. Normally when you buy a stock you might put 10% in a stock and if it drops 10% you might sell. This is a 1% loss to your portfolio. But if you risk 10% on an option you have a 10% loss to your portfolio. Lose multiple times and you will have a hard time making it back. A 20% loss requires a 25% gain, a 50% loss requires a 100% gain. While options do allow leverage, making back those gains eventually It doesn't take too many losses for the position size to hurt you even with an edge. However, if you risk 1% per option, you only incur a 1% loss if you are wrong and you can lose 10 of those and be down 10% and only need an 11% portfolio gain to get back to even. The thing to realize about options is the problem is time PLUS price.

Options can work well for risk arbitrage plays because there usually is a clearly defined time frame and a clearly defined buy out price, so you can calculate your exact upside if the deal goes through, and your downside can be 100% as opposed to worrying about a stock that could easily gap down substantially before you could sell the stock itself.

So with this basic understanding we can look at other strategies for merger arbitrage plays.

Covered Calls And Risk Arbitrage

Rather than just buying call options on an all cash deal for risk arbitrage, you may attempt covered calls. Covered calls is where you buy the underlying stock and sell a call at a strike price against it.
For example, awhile ago RAD was selling at $5.60 with a deal that would either be $6.50 or $7.00. The FTC denied the initial deal at $9 for the entire company but after revising the deal downward and offering to divest from a certain number of stores to satisfy the FTC it could go through again at either price depending on how many stores required to divest from. The deal was expected to go through at the end of July.
The call options with expiration date of the 3rd week in July with a strike price of $6 were trading at $0.45 (per share or $45 per contract of 100 shares). That means that if you buy the option AND the deal goes through for $6.50, you'll only make 5cents and you're risking 45 cents per share if it doesn't. That means the deal has to go through 90% of the time to break even as a call buyer. Even if it goes through for $7. That's still $1 made on $.45 risked which is a little higher than I'd prefer. Also, I'd usually want to buy a couple months past when the deal is said to go through because it may get delayed again, this actually doesn't even finish out the month of July which means there's a good chance we can lose even if the deal goes through. If it's a bad situation for the call buyer, you should think about being the call seller.

Selling calls without owning the stock is dangerous. Although this would be the best possible situation a call seller who doesn't own the stock could be in with a likely capped upside, there is still a rare possibility of another bidder coming in (RAD would have probably already looked at all possible bidders and someone else would have probably come in by now), or something weird like the deal failing but the shares going up beyond $7. Plus, I think the deal still probably goes through more than 50% of the time so we want to own some of the exposure.

This is a perfect situation in my view for a covered call.

In other words, we buy the stock and for every 100 shares that we buy, we sell a July option with a $6 strike price. In the most likely situation given a buyout goes through before expiration, we keep $0.45 per share that we collected from the premium, we keep $1 that we make from the stock from $5 to $6, and we give up our stock at $6 per share and forfeit any additional gains, should they occur. In other words, when we are right, we make $1.45 per share. If the deal fails, we still collect $0.45, but we have to hang onto the stock until the option expires, unless we want to close on the option first and then sell the stock afterwards (but there's usually extra transaction fees for this).

The options are like a $0.45 insurance policy in exchange for giving up the gains beyond $6. It insures $0.45 of damages should the stock decline, but we'll still have to take the loss of the difference.
If we expect this deal to go through 2/3rds of the time, we'll make $1.45 each time or $2.90 for the two times, and on the 3rd we'll make $.45 more for the options or $3.35 for all 3 times including the one that failed. So when it fails the stock will have to drop less than $3.35 to make money (not including fees, transactions, and weird situations like a revision of the takeover price or early execution that can mess with the expectations) Since the price is $5.66, that means it would have to fall to $2.31 or lower when we're wrong to lose money (or we'd have to overestimated the chances that it goes through).

I don't know exactly what will happen if the deal fails, but it seems reasonable enough that this trade is profitable. Some people will look at the price a stock was trading at before it announced the deal and use that as the expected loss. I think the actual probability might be higher. Also, I think I'll probably collect the premium in July and that will possibly allow me to collect an extra $.50 to $1 when the deal goes through, or possibly sell August options, or if it's trading close to $6 I may even exit early rather than risk the possible deal failure.

Long Stock And Risk Arbitrage

There are plenty of situations which you would not wish to buy the option but would wish to own the stock without selling covered calls. One example is when the calls have such a wide spread between the bid and ask that you can't buy or sell them at any reasonable price. This happens more often than you might think. But if this happens, you still may wish to consider risk arbitrage if the deal seems good enough. You also may wish to do this if the stock is trading at $1 and the deal will go through at $2.50 or less and the only options available are $2.50 and they are only available for buying at $0.05 and sellers are unlikely to collect. In other words, if the strike price of the option doesn't make sense for either side. Not all stocks trade options so that's another reason you may not wish to play options.

The way options are priced usually make deals that have higher net profit better than shorter time frame. However, if you can get a deal that is expected to clsoe next week for only a 3% gain, and the loss is less than say a 9% loss if it fails, and you can make lots of these trades over a year, that can add up. This is a good reason to make long stock risk arbitrage. 

When selecting risk arbitrage, you have to realize that the highest percentage profit probably have the lowest chance of going through or will be delayed

The Baseline Odds of Risk Arbitrage Deals

According to insidearbitrage,  last year saw 225 deals closed. It also saw 20 deals that failed. It also saw 88 pending deals, some of which were probably delayed and may not close yet, and some of which may have been carry overs from 2015 that still haven't closed. We also don't know how many deals closed at a lower total than initially expected that could have resulted in a loss in options price, a much lower gain in the stock, and possibly even a loss overall in the deal (depending on where you bought). So let's just assume all pending deals are bad deals. We'll say 225/333 closed which is just over 2/3rds. I think this is a good number to use when planning a deal but with higher percentage deals you should expect lower probability of it going through.

I think using the pre-announcement price is a good price to plan on the stock going to if the deal fails.

How Much To Risk?

How much you should risk on these deals and on merger and arbitrage depends on your edge and instrument in general, but when Warren Buffett used arbitrage, he only used it as part of his portfolio. He would take a controlling interest in some and he would just find undervalued situations in others. 

One of the benefits of risk arbitrage is the low correlation to the market. The expectation of gain is not very high, but it also will tend to outperform in bear markets because of the low correlation to the market. Buffett would at times use margin to buy risk arbitrage names due to the high probability nature, and his measurable downside and measurable edge, but he would carefully weight the downside, and this was a time when risk arbitrage was not popular, and thus the opportunities were much better. He also was convinced that these were not the best way to play the market over time.

I like it due to the ability to outperform on the way down which can allow capital to buy if things go wrong. Buffett now almost always has some (usually large like 20%) percentage of capital in cash, buys insurance companies which have access to their float and now has access to the federal funds rate to borrow at lower interest than most, plus he has such a good reputation that he is unlikely to see a lot of capital leave his company just because the market sells off and he can also raise money by selling bonds. He also collects earnings directly from companies he owns privately that are relatively immune to the economy. Because of this, he doesn't have a shortage of means to buy when everyone else is selling and raise more capital should stocks sell off. 

However, for the average Joe experienced investor, this may be a good option if you do so intelligently. There's a book by Mary Buffett explaining how Warren did these deals if you want to learn more.

Trading System - Order Within Chaos

Stockbee has a good post out recently on how to organize your trading plan.
For some people, operating under chaos is how they're used to operating. These individuals may be able to manage the simultaneous chaos of the market and find setups. But even this type of individual would benefit from organization. There are too many tools available that can improve your efficiency and too many options out there for individuals to be able to optimize them all. This is where a trading plan can be structured to be more efficient.

Even having software that helps you with one particular process such as watchlist development or entrypoint isn't necessarily enough to tell you position size, asset management, decisions on how many to enter and which ones and how to prioritize entries, how aggressive to be given the conditions and so on.

A full trading plan has to quickly sort through the mess of multiple variables and manage the chaos. Many make the mistake of confusing chaos with randomness. The market is chaotic which means many properties such as distribution of outcomes and day to day predictability of moves may seem random, while operating with an order under the surface.

But chaos is sensitive to small changes and relationships between multiple variables may not be equal to the sum of its parts. So how do we operate in a multi-variable world?

Mohnish Pabrai has been using checklists to accomplish this task. It is the same process that airlines have implemented to reduce error and many medical arenas are now adapting to avoid mistakes.
Checklists should at least be designed with the most fatal mistakes in mind and make sure there aren't too many decisions on the checklist.

Develop the habit of reading through a checklist.

Make the checklist when you are out of the market or at least on a weekend when the market is closed so you can maintain some objectivity.
Backtest and forward test and/or model certain conditions and decisions to see if your assumptions about your decision make sense prior to implementing it into a working checklist. A checklist should have no more than 11 items and probably closer to 5-7.

Example checklist:
1)Check to make sure portfolio tracking data is updated
2)Check to see if any thresholds have been met that require action such as reducing size or limiting buying.
3)Check to see if your portfolio rules allow for the addition of stock and/or option purchases
4)If so, use breadth tracking and/or other methods like oscilators and indicators to determine if market is in a condition where taking the action is acceptable.
5)Check watchlist and risk/reward of potential entries and ensure they follow your purchase rules before purchasing.
6)Look for entry trigger.
7)If portfolio rules and market conditions and entry triggers permit, buy.
8)Track portfolio end of day just before close (5-15m before close) and sell anything below stop or beyond target that meets exit criteria.
9)Update watchlist after close consistently (perhaps once a week, twice a week or once per day).
10)Input watchlist data of possible stops and entries.
11)Update alerts for prices below stop or above target and also for any prices that may trigger a trade.

Optional:Update portfolio tracking data after close or after next open?

Condense this to:
1)Update and check portfolio tracking.
2)Check breadth and portfolio tracker to determine if you are possibly (or definitely) buying or selling today.
3)Check watchlist for possible entry, confirm with trigger.
4)Review positions before close.
5)Update watchlist, watchlist data and alerts

You may wish to set an alert or alarm to inform you when it's time for this. You might have a phone alarm and where it says "location" or "title" you can put the details for what that time of day signals. Example:
Alarm 9:35: portfolio tracking - determine today's possible actions. Update portfolio data
Alarm 10:35: check breadth and determine if buying or selling today.
Alarm 11:35, 12:35, 1:35: breadth + portfolio + watchlist
Alarm 2:35  Final period to consider buying
Alarm 3:50 Check portfolio tracking and look for trade exits.
Alarm 3:59 Market close, update watchlist.
Alarm 4:15 Update watchlist stop and targets in spreadsheet
Alarm 4:45 Update Portfolio data
Alarm 5:00 Update email alerts for trade triggers

Another way to organize it is perhaps that within each checklist you might have more details available as a reference if you need them, or you might try a checklist of checklists. Your first checklist tells you which order to view the checklists and how to use them to come to a decision. Your second goes through the steps of what specifically to do rather than generally and provides more details to avoid any mistakes within that particular process itself and gets you used to not trying to make any decision that isn't allowed by the process. This is a more in depth way to go about it but it keeps you organized to a particular procedure.

Checklist of Checklist example:
1)Portfolio tracking checklist
2)Breadth tracking checklist
3)Watchlist development checklist
4)Monitoring Watchlists for entries checklist
5)Entry checklist + Position size checklist
6)Management/exit checklist
7)Trade review checklist

-------------------------------------
1)I like updating portfolio and determining the plan for the day at the open (adding any trades from yesterday and updating the prices to set the tone for the rest of the day. I have no interest in trading the first hour or two after the open anyways so any time in the first two hours to do this is fine)
2)I like managing trades/exiting right before market close on an exit signal.
3)I like setting up a watchlist after the close and setting the targets and the stops if I were to take the trade after the close... or on the weekend
4)I like setting alerts just after that. Alerts let me know when trades I really want hit points where I'd consider an entry or when certain candlestick trades are triggered that I use when opportunity is scarce or when I'm trying to place a bearish trade.
5)After the first hour or longer of trading I like checking breadth throughout the day and I check that just before I look at my watchlist.


Setting a phone alarm with a note to go off Monday through Friday is a good system even as just a reminder. You may want to treat one or two days of the week differently and have different alarms.
Set it to go off once sometime during the open.
Have it go off once 5 or 10 or 15 minutes before the close depending on what you need
Set it to off after the first hour or two to go off once every hour and once every 15 or 30 minutes on Fridays (options expiry).

As you spot nuances you'd like to include, try to adapt your checklist to reflect those changes but make sure you don't get carried away. For example, perhaps you want to check the RSI(5) on the sector SPDR ETFs and check the breadth by sector and by some of the largest industry groups to determine where to focus your buy priorities or watchlist priority names. As you're building a watchlist rather than just being about risk/reward you probably want to highlight a few of the most quality names or those within themes and place emphasis on those

How To Avoid Embarassing, Costly Trading Mistakes

Everyone makes trading mistakes and some of the most costly include:
1)Trading too large in size.
2)Holding onto a stock against the strategy of stopping out.
3)Missing an exit.
4)Missing an entry point
5)Being Under or Over invested
6)Many others

One of the more important things I am working on is systematizing my trading and automating a trading strategy wherever possible. If you can learn how to simplify your trading strategies to a set of rules, you can set up safeguards and routines that keep you from making mistakes.

Money Management And Portfolio Management:

 

The ideal money management strategy is a complicated topic. I tried to approximate the "maximal growth" strategy for multiple correlated investments using a series of formulas and assumptions. This allowed me to come up with a maximum for a system I have.
It's something like:
No more than 20 "active" option positions
Standard 1% position size
max of 5 2% exceptions
max of 2 3% exceptions
max of 1 4% exception.
max 5 exceptions total.

max 10% per stock position
max 50% stock allocation.
10% income allocation. Only sell as needed to avoid margin, and repurchase as you can.
1-5% asset allocation (reviewed monthly)
A few more nuances than listed here.
Maximizing growth is probably way more aggressive than I want, so I may cut these in half. Still, it's very unlikely I'll be anywhere close to every single maximum all at once.

Trade Management:
I also have a few rules about trade management:
minimum 3:1 reward to risk prior to entry.
Clear entry trigger priority list.
Clearly defined stops and targets prior to trading
Exit near close if stock remains below your stop.
Don't sell short of target
After target have clear criteria for exiting that gives the stock a chance to run (such as selling on a close below the target or a close below the prior day low. or 3 day low or prior week low)

Using A Spreadsheet to track decisions:

You can set up formulas using excel to display a message if a stock is above or below a particular price. This can also allow you to also let you know if a stock has the minimum risk/reward to purchase. The idea is to input a watchlist into this list and have a way to automatically update prices (or to press a button or copy and paste a price quote) and not have to think too hard tracking your decisions.

The routine:
You should fall into a routine or habit rather than being emotional or thinking or worrying about your decision process.
1)Build watchlist. (I have a separate spreadsheet to mostly automate this)
2)Input watchlist plus add stops and targets
3)Check portfolio rules to determine how much of a particular position you can accumulate according to rules.
4)Look for confirmed buys if you can do so within established guidelines/rules of both portfolio and following buy checklist.
5)Purchase.
6)Input purchases in spreadsheet with stops and targets.
7)Review positions near the end of the day

You shouldn't really need to check your own positions more than once a day and the process of buying should only require you check your watchlist 5 times for a couple minutes per time. Perhaps once an hour after the first 2 hours of trading is over plus the last 5 minutes of trading.

One exception to checking your position might be on the Friday if you have any options that expire. You should probably use a 30m chart and check once per hour. Look for a close below in either of the prior 30m candles or a failure to take out the prior high in 2 candles... Otherwise sell or roll the option over to a later expiration date an hour before expiry.

If you need a checklist to remind you of this process and/or a timer system to alert you to make the checks that's fine.

Watchlist Creation:
As I've said, I've mostly automated the process. I have a much more complicated set of formulas that allow me to quickly categorize the stock and rank them and I'll go through maybe 400 stocks just glancing at the charts for a particular visual look I'm looking for and I'll come up with a watchlist of maybe 20-60 names from that list. It only takes me maybe 15 minutes. I could probably come up with more strict formulas to only look at 100 names and still get 1-2 dozen names for the watchlist but I like looking for the best setups. I can do this after market close and use the list the following day.

Watchlist importing:
This also is probably best done after the close. List the stock, identify approximate stop and target (I use measure rule to measure the pattern) and repeat for all. This may be a little more time consuming but will probably enhance my decision making and makes sure I don't miss anything obvious.

Options Tracking:
Probably the most challenging thing to automate is options tracking. it's not easy to automatically get option quotes for every price and have formulas based upon your stock target to convert it to a risk and reward. You may be able to approximate the option cost if you know the implied volatility and days left or come up with a formula that calculates it... but the implied volatility varies too often between stock and even among a stock it varies over time. However, if you list a strike price and target price, you can have a calculation of what the intrinsic value of the option at expiration is. There may be an extrinsic value added on if you buy more time than you need which can complicate the strategy if you are planning on rolling the option well before expiry.

You can also reverse engineer so you have the required price to give you the 3:1 reward to risk based upon the intrinsic value at expiration at the target price. You might just pick a strike price or 3 for a stock and check the quote early on and see the risk reward and where it needs to be and then set a limit order based upon what it should be at the price. That would take an options calculator or you approximating it (you can develop this skill over time). I'm not sure what the best way is to quickly optimize strike price selection and options selection. This function needs work. For now I'm just using the stock's risk/reward as a proxy and I'll go down the line of those on my watchlist and make sure the option trade also has a 3:1 reward to risk.

Tracking the option once you trade it should be tracking the intrinsic value only which isn't too difficult as long as you input the strike price. The "stop" for an option should probably be zero but you may try to salvage half in certain circumstances when you use options as stock replacement, but that's another topic.

So for now this is a system that you can use to have a spreadsheet literally tell you in words what to do with an option, a checklist you go through before you buy, monitoring key metrics as they occur and so on.

Another thing you may want to do is avoid trading earnings. as long as you have data inputs coming in when earnings are you can set up a formula what today's date is and then one to alert you if a stock is within X days of earnings date.

All of this can help you avoid virtually every mistake you can think of ahead of time as long as you create a plan and rule for it and method to ensure you avoid it.

How To Identify Exact Entries: Trading Triggers

Certain classic bullish chart patterns can be traded. I like to buy before the move is confirmed. I am basically playing volatility compression since volatility expansion tends to follow but I'm not waiting for the initial move to signal range expansion.

I have designed a spreadsheet to spot a list of opportunities. From that I manually create a watchlist off of my own manual filter scanning for visual setups.

The watchlist contains setups that I may consider trading if I have some sort of entry point. To find these I'm looking for a "trigger".

Trading triggers can help you narrow down your watchlist into actionable entry points. I like using a 5 period RSI because it tests well. You can use the same 5 period RSI on an intraday chart like a 5 minute or 1 minute if you really want to narrow down the buy trigger within the buy trigger and be extra precise. Backtests of buying a cross below 20 and selling a cross above 50 provides a compound annual growth rate of over 24% if you ignore transaction fees.

Another triggers include an inside day or cluster of a few days trading in a narrow range or multiple days where the open and close are inside one of the prior day or days.  Yet another trigger is a bullish hammer candlestick pattern or a break above a prior candlestick high. Or perhaps just buying at support of the pattern or looking for an intraday pattern within the pattern. I like to have numerous triggers because I'm looking to add multiple stocks and stock options and I use small 0.50-1% positions (and occasionally 2 or even 3% in certain exceptions) out of the money options to gain control over many price movements.

Some of these triggers have been backtested to beat the market. A hammer candlestick pattern with fixed time exit like 5 day hold or 10 day hold provides about a 15% compound annual growth rate(CAGR). The 5 day RSI has 24%. Others have not been tested, but I believe from experience it provides an edge. The inside day seems to work well.

Learn to fine tune classic chart pattern anticipatory entries or even breakout entries by looking for the right triggers. You can try backtesting methods but I have several potential concerns with this that I'll cover later..

Solar Setting Up

Solar is setting up for a move longer term. Look at the consolidation.

Tesla Breakout

As an update to this post on Tesla, we can see as expected, Tesla ripped through the 190 mark and kept going. I expected lots of reasons that the ultimate top in Tesla is not in yet. Despite eventual overhead resistance, the tendency for Tesla to rip through 190 and keep going without really slowing down too much gave me plenty of optimism. Even so, I expressed concern that into strength there may be some risk that Tesla would roll over, and even if it wasn't the most likely move, the shares of TESLA could become top heavy and filled with people that either shorted from above and had no reason to expect the move was done, or bought from above and are trapped in from higher prices with little support below.

I was considering eventually shorting into strength due to the risk/reward profile but did not actually place the trade because the stock didn't seem to have trouble finding supply and as I considered, there was enough short sellers that needed to cover to initiate a short squeeze. Traditional volume profile provides reference points for support/resistance but is no guarantee that the psychology of people will act the same way everytime which is why using the past as a reference can be useful.

To the cynical, trying to explain reasons for both sides is a way of hedging your bets and to them I'm trying to speak out of both sides of my mouth. But to the experienced trader, they know you have to always identify a spot in which you are wrong, and manage your risk so that your reward provides a disproportional upside relative to the risk as that allows you to be wrong more often than not and still make money. The high probability trades can work too, but still require a risk that is not too disproportional to the reward.

For example if you are right 75% of the time, the sum of your wins have to add up to more than the sum of your losses. Since you will lose once in 4 trades you need your loss to not exceed 3times your win. You can win 3 times lose on the 4th and still break even.
Conversely if you have a reward to risk of 3 times your loss, you can lose 3 times, win on the 4th and break even so you only have to be right 25% of the time.

Although the case I made for Tesla was higher and that is where I believe the odds and edge was at the time, should Tesla trade higher enough into the [210] range the stock would represent tremendous reward to risk in that you can clearly identify where the bearish case is wrong, and if you are right about the bearish case you can stand to make several times what you are risking.

This is where things can sometimes get confusing because if you have a call position you shouldn't necessarily sell at the same point in which buying a put makes sense. That's because you still are betting on a fast move as much as you are betting directionally and until the move shows signs of absorbing supply you shouldn't sell and you should also develop the habit of letting your winners run and only selling it when there's evidence the trade isn't working. You might however decide to take some profits.

There's sometimes a weird range when both HOLDing an existing bullish trade and buying a new bearish trade may make sense. That's because if for example you buy a put at 208 and sell at 212 while holding a call at 208 and selling if it begins to roll over or show weakness (say around 206) you still have disproportionate upside on both trades so that you don't have to be right about either trade reaching a technical target very often. You aren't basing your trade off of high probability, but high reward when the probability is in your favor. Should the stock breakthrough and keep going, there's a technical target of as high as 270 just based upon falling wedge patterns returning to the prior high. Additionally, if it breaks 270 and continues to respond well, the measured move from the low to the high added onto the high of the pattern puts this stock's target above the all time high and somewhere around 360.

Short squeezes can propel a stock quickly, especially one that has a tendency to move quickly and is typically either a high growth name or a negative earnings name with high potential for completely turning around it's earnings to positive where the valuation can quickly become much more favorable, especially on a big earnings surprise. The mere expectation of higher growth or earnings revision or positive earnings surprises can fuel the shift in sentiment to propel a stock higher with increased confidence and buying. This is another reason that support based upon price history hasn't exactly worked so far for Tesla and why the stock has swung above and below levels that should act as support/resistance in many other stocks.


There's still a chance Tesla's short sellers who covered now start selling. There's still a chance buyers from higher combined with a shift in confidence can reverse the stock below what was resistance and is now more support. If that happens there is a top heavy stock full of potential bagholders who suddenly all want to sell and few buyers below to pick up the pieces which is a recipe for a quick decline. However, as we've moved above this level the stock is currently buyer controlled with buyers and past sellers below that will typically look to buy should prices dip.

As such, if you are looking for a spot to sell this name, you probably will be better waiting until the conditions change or a bearish pattern develops. If you are long you may have taken some profits near the volume profile zone of resistance at around 210 and you may take some more profits as a stock moves higher but I wouldn't sell out completely yet until there's evidence of a reversal, buying euphoria or buying exhaustion or a stock reaches it's next target.

Additionally your target should be consistent with your system which considers reward, risk and winrate and maintains long term profitability with plenty of margin for error.

As always, see the disclaimer.