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Not such a good trade

Two months ago we began a trading attempt to determine a strategy of making money based on market volatility. We thought that all the necessary elements to make money were in place. This time around, we were completely wrong.

The first criteria we choose was a volatile stock. We wanted one that was prone to move faster and harder than the market. The one that we thought would work for us was JDS Uniphase (JDSU). This is a stock that had an enormous trading range in the prior two months, at least in percentage terms.

The second criteria to make the test fair was to execute the options trade while the stock was at an options pricing point. On November 30, at 2 p.m. JDSU hung right around the $10 mark. So we executed the buy. We paid $1.30 per contract for 10 contract of JDSU, putting $2,600 at risk.

What we did not count on was the market settling into a tight trading range. The big mistake here was thinking that the market was going to go fast in some direction. It did not, JDSU did not and we got whomped.

On Saturday, January 19, the options expired. The calls expired worthless and the puts automatically executed at $1.40 a contract. In cruel, harsh terms, the numbers stunk. We risked $2,600 and got back $1,400. The loss was $1,200.

We will try a few more trades of this type in the months ahead. One trade does not validate or invalidate a strategy. We will report the results as they happen on this very page.

For our front page, click here.

Shmuel Protter
investmenttool.com

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