Stairs Up, Elevator Down!

A treader needs the courage to trade when the setup is good but it feels bad. Shorting AAPL while it appeared to still be in an uptrend felt bad. I don’t like shorting stocks in an uptrend but when the price action is telling me, no, not telling me, screaming at me, that this rally is running on fumes and is likely going to see a strong reversal that’s the best time to make a trade. So where does a trader get that courage from? What really helps me make those ‘courageous trades’ is I buy cheap, OTM options or spreads. Cheap options typically have a large reward/risk associated with them and, truth be told, don’t really require much courage after all.

Below is a look back at my posts on X regarding the AAPL short. This chart showed how, as price was making it’s way higher, the low of each rising candle was barely above the prior day’s low. When price is in an uptrend many bullish traders place sell stops below prior lows because, in a strong uptrend, price makes higher lows. The problem for the AAPL bulls is this overlapping of rising candles causes those stops to be close to each other. One good day of selling or a gap down can cause the effect of sell stops triggering causing price to drop causing additional sell stops triggering and so on and so on…

Started a position using cheap OTM Put Calendars and Diagonals.

In general, adding to a losing position is a very bad idea but as price continued to levitate the momentum became even weaker. The old saying price takes the stairs up and the elevator down is applicable to the 15 minute chart below. Imagine the prior day’s HB (Half-Back or midpoint) line as a staircase. Price was only able to advance by walking up the stairs. In a strong momentum rally price rises up and away from the ‘stairs’ only returning periodically. This was a very well advertised weak rally that was very likely to reverse!

Finally, a sign that the rally had likely ended exactly at $250.

Because options pricing is based on expected move they can be expensive when price is moving less than the expected move and very cheap when price moves more than expected. That’s why buying OTM options or spreads can be relatively cheap!

Below is what price looked like when it decided to take the elevator down. 1 down day took out the prior 6 day’s lows!

A breakdown of my trades showing initial risk and the strategy of reducing that risk when price moves in the expected (profitable direction).

Here are the fills.

Once price gets on that elevator down it often moves rapidly lower because all potential shorts had closed their orders while price was grinding higher. There’s nobody interested in buying right here. See the Fib retracement target areas for the pullback on the chart below.

Notice how well the 3 SMA bands ‘frame’ the price movement and highlight when a price trend is reversing.

Finally, my post on X mentioning I had now locked-in a minimum profit of $800 while still maintaining a bearish position. I’ll exit that trade IF price closes a daily candle above the 3SMA upper band.

3/3 Update: Sold 20 of the remaining 70-lot for a $2,000 credit. Price did not close above the 3SMA upper band so I’m still holding a 50 lot. Current risk profile below.

The complete fill list for this position is below.

3/4 Update: Made another trade today to cash in more of the position. There’s several ways to reduce risk in a position. Obviously exiting part of the position will reduce risk but it also reduces potential profit. Rolling a position out (further OTM) will typically result in a credit reducing risk but not necessarily reducing potential profit. In this case, I chose door number 3; I rolled the back-end of the spread (long Puts) from Mar28 to Mar21. I kept the same strike, I just sold off 1 week’s worth of time. Like the old saying: time is money! That brought in a $.55 credit or $2,750. The minimum profit at expiry is now $5,500.

Below is the updated fill list.

I mentioned earlier in this post that I wouldn’t exit this position until a daily candle closed above the 3SMA upper band. As you can see below that isn’t the case so I’m still in it. BTW, notice where price found resistance today and reversed lower? Right at last week’s HB. That’s a very common area of support/resistance.

3/5 Update: Below is the current risk profile about 90 minutes after the opening of trading today.

Well, that didn’t take long. Exited the trade this afternoon. Total profit was $8,650

Final list of all fills.

That’s all I got on this trade. If you have questions or comments, post them down below!