New Trade - BHP Credit Spread
Hi everyone,
Amidst this market turmoil, where others see devastation and capitulation, I see opportunity! BHP is one stock I have been watching for awhile, and today it retraced to a target I had mapped out around a month or so ago, so with my other indicators lining up, I decided to place a put credit spread, which is a limited risk, limited reward trade.
Looking at the chart (daily) you can see I have drawn a distribution channel that began around mid June this year, but was confirmed in this range since about mid July. I have been waiting for the stock to break down through $34, which it did today and fell exactly to close at the bottom trendline of this channel I drew months ago. Incidently, the low of around $31, which the stock hit today and bounced from, is a key support for the stock, which you can see on the weekly chart more clearly. My trade entry was confirmed with my indicators Cstats & RSI nearing oversold, and the stock outside the bollinger bands. There was also bullish divergence on the Cstats on both the weekly and the daily charts.
BHP - Weekly Chart
BHP - Daily Chart
My expectation is that the stock will bouce from this level, and this is why I have placed the following trade.
Sell 2 x BHP $32 Nov08 puts for a premium of $2.905 = $5810
Bought 2 x BHP $29 Nov08 puts for a cost of $1.755 = $3510
In total I received $1.15 or $2300 for the spread. My total risk being $6000 (2000 x $3, which is the difference between strike prices), my reward being $2300 - My total return on risk = 38%.
If there is one thing I have learned in my years of trading it is that the quality of your mindset is critical to your success. It has taken me a lot of hard lessons to come to the realisation that no matter what you think you know about the market or how competent you are with a particular strategy, unless you learn to fully accept your RISK in each trade, you will fail. I mean this by either exiting a winning trade too early for FEAR that you will lose your profit, or exit a losing trade too late and deplete your capital and your valuable mindset!
To fully accept your risk in each trade, you MUST have a “what if I’m wrong” plan!
To illustrate what I mean, I will use my current OZL $1.80 put trade for example. Each day the stock is below my strike price, I workout how much it will cost me if I’m exersised. I work out how much I will have to put in and what I can get for writing covered calls etc, so as I am not taken by surprise in the event this happens. Doing this eliminates the PANIC and FEAR of the Unknown and allows me to simply monitor the trade day by day with no emotions and know what I will do in the event I am “wrong”!
The market is in non-stop motion…even when it is closed, there are still unknown forces at work setting the scene for the day ahead, all you can do is perceive opportunities and act, there are no guarantees!
After I place each trade, I work out my “what if I’m wrong ” scenario. My mindset has never been clearer and more intact due to this one shift in my thinking! Do this and I guarantee you will keep your mindset in tact in times of market turmoil. I hope this one piece of wisdom passed on, helps!
That’s all for now, as always, Happy Trading and remember…