Gaps, Statistics, and Candlesticks: $3,000 to 1 Million via Trading Options

[verial]

I put $3,000 into a brokerage account. Let's turn it into 1 Million!

Method:

-Use statistics to make decisions: Only use statistically backed strategies.

-Trade after gaps: Bet on whether the gap will fill or continue moving "away" from the gap.

-Use candlesticks to confirm direction: Use candlestick analysis post-gap to get a probability of over 90% that we are betting in the right direction.

-Use options as leverage and as income generation.

Notes

1. I already bought a call option that's increased in value, so I'm starting a bit above $3,000.

2. If you have any questions, please ask them in this thread.

3. I'm using eTrade, so commissions will be at least $10 per trade.

 

[verial]

Sorry for the delay!!
I've been traveling Japan for the last couple weeks and totally forgot about this thread. Anyway, the account is already above $4,000 (evidence below). I'll be posting the trades I made in the past couple weeks, one by one, as replies below.

Anyway, to start off, here's where the account is at the moment:

 

[neil]

Sorry for the delay!!
I've been traveling Japan for the last couple weeks and totally forgot about this thread. Anyway, the account is already above $4,000 (evidence below). I'll be posting the trades I made in the past couple weeks, one by one, as replies below.

Anyway, to start off, here's where the account is at the moment:

Will you be posting charts ?

 

[verial]

Will you be posting charts ?

I'm creating some charts now. But since you asked, is there anything in particular you'd like to see?

By the way, I'm having a good day at the market:

 

[neil]

I'm creating some charts now. But since you asked, is there anything in particular you'd like to see?

By the way, I'm having a good day at the market:

Not really. It's simply that a picture is better than a thousand words.

 

[verial]

The following posts will all be older trades, as I try to catch up. My goal for the future is to be able to show you live gap trades. But until I catch up, here's what I've done in the past:

KSS
The gap appeared on October 28 on the stock KSS. The high volume made it look like a breakaway gap. But the short candlestick hinted that it’s possibly an area gap.

If it turned out to be an area gap, this gap had the potential of a promising trade, as the gap’s size was $3. This means that every 100 shares of stock would yield us $300 in profit, should the gap close. To determine whether the gap would close, I watched the candlesticks.

Day 0: $3 down gap
Day 1: Thin candlestick, implying possibility of the gap filling.
Day 2: Doji star, implying investor indecision. A breakout is now highly likely, but the direction unclear. If on Day 3 the opening price is higher than $55, we will predict the gap to close and therefore buy the stock.
Day 3: Indeed, the opening price was higher than $55. I watched the stock drop a bit before buying (I bought a call option).
Days 4 to 7: The stock price climbed to close the gap. I decided to hold onto the call option, as I saw no evidence that the trend would reverse.
Day 8: The trend began to reverse. I decided to sell my call option the next day.
Day 9: I exited my position.

Results:

Is this a decent posting format? If you want to see a different kind of post, let me know.

 

[verial]

I'm still trying to catch up with everything. Here's the second trade. This was made on the 17th.

Play #2:

11/17/14 Bought To Open 1 SOXL Dec 20 '14 $120 Call(SOXL) @ $4.70 -480.76

Current price: $18.00 or $1800.

So, I could sell this off right now for an easy $1,300 in profit (270% ROI). But my analysis of SOXL implies it will continue upward. See the doji star? 80% of the time, a doji star in an upward trend like this implies continuation (though it means indecision).

The key is to watch the next day, looking for a black candle below the doji. If we see this, we have an evening star, which implies a bearish reversal. If that occurs, I will sell the option and take a profit.

 

[Tydixon32]

This is a great thread. I love options and will be following this every day. Hopefully you will give us a lot of updates.

 

[verial]

STUPID Mistake

Okay, so this happens to me about once a month. I accidentally enter something wrong when opening a trade. In this case, I chose "market" instead of "limit" and went through with the trade.

Bought 3 XONE Feb 20 $22.50 Call @ 2.30

It should have only cost me $1.4 per option! Stupid me...

Anyway, here's how the trade worked out:

Nov 17: Bought the Call Option two days after the gap:

December 1 (yesterday): The stock started to drop. I sold the call options at $1.85 each. It should have been a profitable play, yielding me $135, but instead I took a $165 loss.

That's the problem with having to stay up all night (I'm in Japan) to trade on the US stock market - sleep sinks in and you make mistakes. It's all part of the game, I guess...

 

[verial]

November 18: Opening an Iron Butterfly

Check out the chart for FUEL:

Check out that gap? You know what that means? Extra volatility!

And do you know what extra volatility means? Increased prices for options. It's an ideal time to sell options.

The Play: Iron Butterfly

11/18/14 Bought To Open 3 FUEL Apr 17 '15 $20 Call(FUEL) @ $2.43 -733.79
11/18/14 Sold Short 3 FUEL Apr 17 '15 $17.50 Call(FUEL) @ $3.15 940.18
11/18/14 Sold Short 3 FUEL Apr 17 '15 $17.50 Put(FUEL) @ $3.16 943.18
11/18/14 Bought To Open 3 FUEL Apr 17 '15 $15 Put(FUEL) @ $1.93 -583.79

Total Income: $1,694

 

[verial]

Still catching up here. This is another trade from November:

November 18: Iron Butterfly on FOSL

Just like the last play I introduced, this is a method of capitalizing on the increased implied volatility after a price gap.

11/18/14 Bought To Open 2 FOSL Jan 17 '15 $115 Call(FOSL) @ $1.75 -354.02
11/18/14 Sold Short 2 FOSL Jan 17 '15 $110 Call(FOSL) @ $3.73 741.96
11/18/14 Sold Short 2 FOSL Jan 17 '15 $110 Put(FOSL) @ $4.98 991.95
11/18/14 Bought To Open 2 FOSL Jan 17 '15 $105 Put(FOSL) @ $3.01 -606.02

Total Income: $1,548

 

[verial]

Income updates.

Someone just informed me that I unnecessarily multiplied the income from the last two iron butterflies. The true income amounts are

FUEL: $565
FOSL: $774

Sorry.

 

[verial]

Still catching up...

This play is from 11/19.

Bullish Credit Spread on EMES

EMES experienced a gap in early November. Judging by the volume, it was an area gap, which usually fills. However, by mid November it still had not filled.

However, EMES also wasn't in a bearish mode. Instead, it was trailing sideways. The bullish engulfing candlestick on the 18th plus the statistical fact that area gaps usually close led me to believe that EMES would at least stay above 75, if not close the gap.

So, I decided to play the following credit spread:

11/19/14 Sold Short 2 EMES Mar 20 '15 $75 Put(EMES) @ $10.23 2,039.42
11/19/14 Bought To Open 2 EMES Mar 20 '15 $70 Put(EMES) @ $7.78 -1,562.53

Profit: $476

Astute readers will notice that EMES actually dropped well below $60. Luckily, I saw that coming and didn't get hurt (in fact, I profited from the drop). I'll explain how in the next post and the next, next, next post. I'll also post evidence on how I salvaged this play.

 

[verial]

Let's review the EMES play from last time. I'm just going to go ahead and finish this entire play in one post:

As stated last time, I sold a bullish credit spread for $476 profit. Should the stock fall to $70, my max loss would become $1,000, plus commissions. Well, obviously that eventually happened (and more so - that's why you never sell naked options!).

Luckily, I noticed the three black crows candlestick pattern before the drop. The three black crows candlestick pattern started on the 19th. It consists of three consecutive black (red) candlesticks and usually indicates a coming bearish pattern.

Now pay attention, because this is how you swing trade.

When I saw the third black crow, I committed to switching my position the next day. Instead of simply buying back the credit spread, I turned the bullish credit spread into a bearish debit spread:

11/26/14 Bought To Cover 2 EMES Mar 20 '15 $75 Put(EMES) @ $8.71 -1,748.52
11/26/14 Sold Short 2 EMES Mar 20 '15 $65 Put(EMES) @ $4.30 853.46

That is, I bought back the sold put, held onto the bought put, and sold another put below the bought put. The move cost me $896. But remember, I was already up around $500 from the credit spread (in fact, I bought the put back at a price lower than I sold it). So, in total, I'm down about $400 but have a debit spread.

Two days later, the stock drops hard. Once it hits $65, I sell back the debit spread at a net gain. Here's evidence of the entire play:

Total Profit: $193

In the past, I've made some good money from debit spreads. However, this time, both legs of the debit spread rose by about the same amount. In retrospect, I should have simply stayed with a put option. Theoretically, the debit spread should have yielded me $1,000 in profit when in fact it only yielded about $600...

 

[verial]

Call options on HKTV

I saw an opportunity in the following chart:

Unfortunately, I was probably wrong on this play. I'll explain it anyway:

The two down gaps between the 18th and 21st were likely different types of gaps:

The first was a pro gap, caused by professional traders selling the stock.

The second was an amateur gap, caused by amateur traders seeing the drop (pro gap) in the stock and subsequently selling the stock.

After this, the stock price tends to shoot upward. I decided to get in on this trend by buying a call option on the stock.

As you can see by the chart, the stock only shot up for one day, so I'm actually at a loss in my position here. Luckily, it was a small piece of my portfolio:

11/28/14 Bought To Open 4 HKTV Mar 20 '15 $12.50 Call(HKTV) @ $0.70 -293.06

 

[drtro]

I wish I understood what you were talking about. Options confuse the hell out of me

 

[verial]

I wish I understood what you were talking about. Options confuse the hell out of me

Ask a question and thee shall be answered.

 

[drtro]

Ask a question and thee shall be answered.

Idk, why do we exist would probably be an easier question to answer than trying to explain options to me.

 

[verial]

Idk, why do we exist would probably be an easier question to answer than trying to explain options to me.

Let's assume you believe that the temperature tomorrow at 5pm will be higher than today's 5pm temperature. At the same time, I believe the opposite: that the temperature tomorrow will be equal or lower. Because we believe the opposite things, we can make the following deal:

1. You pay me $100
2. In exchange, I give you a piece of paper that says, "For every 1 degree higher the temperature is tomorrow, I pay you $100."

Congratulations, you just bought a call option.

 

[drtro]

Let's assume you believe that the temperature tomorrow at 5pm will be higher than today's 5pm temperature. At the same time, I believe the opposite: that the temperature tomorrow will be equal or lower. Because we believe the opposite things, we can make the following deal:

1. You pay me $100
2. In exchange, I give you a piece of paper that says, "For every 1 degree higher the temperature is tomorrow, I pay you $100."

Congratulations, you just bought a call option.

So buying calls means you expect the price to go up, and puts are the opposite? And selling puts is the same as buying calls, and selling calls is the same as buying puts?