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| Articles and Tutorials |
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| "Four by Four Trading" |
| by Doug Sutton |
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Some months are diamonds and some are coal but most of the time I settle for gold. Last month was diamonds all the way; four trades on with four winners. In my book that is "Four by Four Trading".
To begin with, let me set the stage for the trades. On January 17th, 2003, every segment of the market took a major drop. The NASDAQ, DJIA, S&P 500, S&P Small Cap 600 and the Russell 2000 were all down. As a counter indicator, the Gold Index was trending upward as the rest of the market dropped. After the Christmas rush it was inevitable that the retail sector would suffer a drop, in fact it had its peak in late October and November and had started its drop in December.
So the January drop was a continuation of December's. Banking had seen its peaks coincide with that of the retailers and in early January had touched a resistance price that it had set in November and started to pull back. The biotech sector had been outperforming nearly every other sector at this time of the market with the exception of gold. It had actually made a new high in early January but gave up some ground on the 17th when the rest of the market dropped.
Then came the pullback of January 24th. With the stage so set and a large volume loss on the 24th it is time to trade! I entered three trades on Exchange Traded Funds or ETF's. The first was on the BBH (biotech ETF) which had set a new high at about $93. I went out of the money and sold the February 95 call and bought the February 100 call for a credit of $1, this was a 25% return. On the same day I sold the February 110 call and bought the February 115 call on the RKH (retail banking ETF) for a credit of $.85 for a 20% return. And finally, on the same day I entered a bear call spread on the RTH (retail ETF) by selling the February 70 call when the stock broke support at $67.80 and bought the February 75 call for a credit of $1.35 or a 37% return.
Timing is everything. All three of these credit spreads expired worthless leaving $3,200 profit in the account with an average rate of return of over 27%.
On the fourth trade let me just say that sometimes it is just as good to be lucky as it is to be bright. My website, www.marketmastergroup.com posts daily trades. One of the more promising of those candidates was Research In Motion Ltd. I purchased 300 shares at $12.44 and sold the February 12.50 call for $1.45. I was VERY fortunate that the stocked spiked back up prior to option expiration and the stock was called away. I ended up make $1.51 profit on a $12.44 investment.
Well, that was last month for me. The great thing about it is that YOU could do everything that I did with a good understanding of how to look at the broader market, assess sector performance and apply sound technical analysis. Nothing more than what I teach in my 2 day class "Fundamental Analysis/Technically Speaking" every month. See you there soon.
Good luck and good trading
Doug Sutton
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