Short Term Trading Tactics....

[wallmann33]

Holding trades overnight has certain benefits and risks. Some consider it a necessary part of a trading plan. So following your trading plan and playing the proper share size are very important. Properly handled, over time the benefits should outweigh the risks. However, no matter how careful you are, you will have a morning where a position you have is gapping open against you.

Remember, overnight there are no stops. Let's say you are long XYZ at $30, and at 7 a.m. the next morning company XYZ makes some announcements. Let's say they are going to miss their next earnings number and the CEO just resigned and they think they have accounting problems. There is a good chance that when trading starts at 8 a.m. EST (pre-market trading starts with ECNs at this time) that your stock will be trading much lower. Let's say at 8am it's trading at $26 From 8:00-9:30 it ranges from $26 - $25 and then at 9am it opens at 25.10. It will not matter that you have a stop in place at $28.50. During pre-market, stops are not in effect. When the market opens, your stop will be filled (if it is GTC, or if you re-entered it at open) at the best price at the time, $25.10, not your desired price of $28.50.

So, how do you handle these situations? Here are some tips to put the odds in your favor to manage these situations in the best way over the long term:

First, do not panic. Easy to say, but hard to do. However, it will not be hard to do if you have a strategy in place out for these situations.

Second, ignore the pre-market trading. From 8 until 9:30 only ECNs are trading; some stocks don't trade at all. If your stock is gapping down like this, it will likely be trading, but will likely be trading erratically.

Third, when it opens officially at 9:30, do nothing for five minutes. That is right, just watch it. After five minutes, mark off the low and put a stop for half your shares a nicke to a dime under that five-minute low.

Then let it trade for 30 minutes. Then put a stop for the other half of your shares a nickle to a dime under that 30-minute low. At this point, if the stock did not violate the five-minute low, you will still have all your shares, half with a stop under the five-minute low, half under the 30-minute low.

You will find on many occasions, that you may still have all your shares, or at least half. Often, after a large gap, the opening half hour puts in the lows for the upcoming days. If your shares do stop, you are usually risking a relatively small amount extra.

From there, you can treat the trade as a swing with a one-day trailing stop, or the stock may rebound to prior levels and you can follow your prior plan. While the example given was for a gap down on a long position, the exact same rules hold true for gapping up on a short position. Use the 5- and 30-minute highs as stops.

Having this as your plan for disaster will help you minimize the losses over the long term.

http://clix.to/wallmann

[DionLoy]

Recently for short term swing trades, I've been using in the money options for the nearest month to reduce the overnight holding risk. Being in the money, and close to expiration reduces the time decay of value, while setting a definite max limit on the loss in case of massive gap up or down in the underlying security.

If the implied volatility of the options are at a historical high, I may just sell a credit spread in order to avoid paying time values, while maintaining the same downside limit protection that the options give me.

[wallmann33]

Shorting vs Puts

That sounds like an excellent strategy in this market.

People have written in asking why we sometimes prefer Put options over simply shorting the stock for a "longer term hold". Well there are many reasons, so let's get to the most important ones. First, put options are incredibly cheap compared to the actual stock's price. Remember when you short a stock , you are using margin money. So, let's say we think XYZ at 45 is ludicrous and it should be seeing the 20's. Do we want to go short with 45 grand? Well, we could, but if the "at the money" puts are just 6 dollars, for a December expiration, we could be "short" XYZ for just 6 grand.

Now, If XYZ doesn't fall, we are going to start losing money. But at "least" we already know the absolute amount we could lose. It's 6 grand. Unlike shorting, where the company could announce a major pact with say MicroSoft, and bounce up for 10 bucks and never come down again, our risk in put options is right up front. 6 grand, period. So, buying puts at least lets you know the maximum you could lose on a trade. That is at least comforting.

But the second reason we like puts is the "leverage" they bring us in terms of return on investment. Let's look at shorting. We think ZYX is insane at 45 and would probably end up being 25 in a lousy market. If we short it and it does just that, we have made 50% on our money. Certainly nothing to sneeze at! But look at what happens when our 6 dollar at the money puts start paying.

If we buy December 45 at the money puts for 6 bucks and the stock falls to 25, what are our puts going to be worth? At the very minimum, they will be worth 20 dollars. What is the return there? Over 200% So, we get the safety of knowing our risk and we get the leveraged return that options give us. Now, for every day shorting, such as hopping on a failed support level, we simply short the stock. It's much faster and still "easier" than using the puts, and the "spread" is normally much tighter. We enjoy simply shorting the stock versus buying puts on "daytrades". We DO use them at times, but somehow we all become creatures of habit and our habit is to short the stock for short term moves.

If you aren't familiar with using put and call options, we implore you to review those 3 option reports. They are not the bugaboo's that Wall street says they are, and certainly no more risky than most pure stock plays. And please, please remember, if a "put" play goes against you, sell it and cut your losses, you don't have to let them go all the way to zero!

http: //clix. to/wallmann