This trade continues to work well for me. I would like to update you on the status of the trade and what I am executing in the way of protecting gains. In this post I will update you on several of the potential follow up actions that I may be considering. UNH has moved up almost 16% without a down day and I would be a fool not to expect a small pullback. I will get into that more later in the post because I first want to get through the current status of the trade and the adjustments that I am making to the protective stops. As always I have a chart that has a few points of interest highlighted. Thanks again to free stock charts for the great charting service. All the charts that are on this site are from their great service at www.freestockcharts.com. I use that service all the time and find it to be very useful. Please refer to the chart as I cover some of the key points of the current status of this outstanding trade.
Positions:
07DEC09 Long 5 contracts JAN 2010 28 CALLS (UNHAT) @$1.50 currently trading for $3.75
11DEC09 Long 10 contracts JAN 2010 30 CALLS (UNHAF) @ $2.00 currently trading for $2.225
11DEC09 Long 10 contracts JAN 2010 30 CALLS (UNHAF) @ $1.73 currently trading for $2.225
Total Capital Invested: $4,480
Total Liquidation Amount: $6,325
Total Capital Gain: $1,845
Percentage Gain: 41.2%
NOTE: All totals discussed exclude commissions. There are many trading companies out there with many different rates so I am keeping it simple by just excluding the commissions from the totals.
Trade Update:
This trade is coming together nicely. I managed to get the anticipatory portion of the trade for a very nice gain (over a double now). The add on at the breakout is working nicely. I did pay up a little at the start of the day, but managed to add again at the end of the day around where I really wanted to get for pricing. I paid up due to the strong move and didn’t want to miss out if the stock continued to rally with little pull back. The average cost for the 20 contracts at the add on point is $1.865 which is respectable. I really was hoping to get around $1.75, but I am comfortable where I am and the stock has continued to move with very heavy volume. That volume is showing great conviction to the trade and makes me feel very good about this trade going forward. Here is where I am going to talk a little about being cautious at this point. Since UNH turned and started the rally it is up over 16% in just a few days. There is going to be a profit taking day, or a tough market day (maybe tomorrow with the FOMC meeting bullets) that causes a pullback. I am not saying this trade is done, but I am saying protect your gains. I am going to be protecting them with the following protective stop plan that is highlighted in the protective stop section. Here is an interesting note for you if you followed me into this trade. First, congratulations, and if I, we if you came along, will break even at expiration if the stock remains where it is right now. I feel that is a great situation to be in and provides great opportunity to create some follow on strategies. I have been looking at selling JAN 33 CALLS creating bull spreads. This lowers the risk of the trade by lowering the cost basis and the breakeven point, which puts the trade at a gain at expiration if the price remains where it is right now. I have also considered selling the DEC 32 CALLS also. Currently, they were trading at @0.25. I think that might be worth the short term (3 days) to lower the cost basis by $625 (about 14%). I would not be disappointed with the trade being called away at 32 if a move up occurred by Friday closing the trade. That would be over a 50% gain overall. If I decide to execute that trade in the morning I will Tweet it. That is fairly aggressive, and would be executed only if I decide I don’t like the JAN spreads at this point. I am also thinking a slight pullback is due and that would be a nice cushion to add with the idea of again selling the JAN CALLS on Monday to lower cost basis further and locking in more of the gains. Remember, if you feel that this trade remains extremely bullish, staying long only gives the best return outside of adding to the trade, or some other leveraging strategy. Again, if I change the position during the trading day, I will post it in Twitter which updates the blog automatically on the upper left section, or follow me at Option_Coach on Twitter.
Protective Stops:
Here is my thinking with these stops. I am going to give you two aggressive approaches and an absolute stop. I also will update my protective stop 50% rule for the record, but with the stops in place I should not get there, but I always put it out to ensure that this rule is always in place.
Aggressive approaches: (These are designed to lock in gains, and close position entirely)
Stop Loss set at near yesterdays low. UNH @ $31.00. Close all positions. This will lock in about 20-25% overall gain.
Stop Loss set if UNH @ $30.5. Close all positions. This will lock in a gain of just over $300.00.
Absolute Stops: (This is the absolute stop on this trade)
If UNH breaks 30 close entire position. The aggressive stops can be mental stops if you like and if you want to give yourself room for a pullback in this very bullish position. I have set a conditional stop on this one that automatically sends a sell order if the ask on UNH hits 30 all 25 contracts will be liquidated. This will result in a small loss around $370.00. This is a hard stop.
As always I put this in here. If at any time you are down 50% from where the trade opened that day close the position. I keep it simple. The current value for the position is just over $6,300 dollars, so if at any time the position is down to $3,150. I will liquidate the position. This should only occur if there is a large gap down in the market or UNH that bypasses the absolute stop in the above absolute protective stop.
My Current Protective Stop Plan:
My current stop plan is the one highlighted in the chart above. $30.5 is my stop because I am very bullish and I want to give the stock a little breathing room to continue higher following a huge burst with good volume, but I want to lock in a gain vice a loss. I gave several stop plan actions above for you to consider that make good trading sense. I always reserve the right to adjust. The absolute stops are in place at all times and the agressive stops are mental stops for me with the option of creating spreads. There may be a test pullback prior to moving up. I feel the catalyst of the bill not getting past and if it does with little effect to the HMO’s bottom line. Also, another catalyst to consider is that this would be a semi defensive play if interest rates were to rise. I could see capital coming into the health care sector as a defensive move to an interest rate hike or talk of it by the FED. The underperformance of this sector and it not being affected by rate hikes as much would make for another great reason to own this sector.
I will post any actions I take on this trade on Twitter which is updated real time on the blog as I stated before, and if I create any spreads as mentioned you will also see that post. Then, at the end of the day I will give you the updates to exact pricing and strategic plan for the trade from that point on.
Happy Trading!
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