Thursday, August 21, 2014

LB Puts

Click on Charts to Enlarge

Today I purchased a couple contracts of LB Sept 62.50 put options on LB, Limited Brands.  Typically I like to purchase a longer amount of time, but on this trade I am looking at a potentially competed rising wedge in LB, in conjunction with a short term overbought general market with some hourly time frame divergences.  I am setting a limit order of just over 100% gain to exit the trade, which may only take a 3-4% move down over the coming week.

I entered the trade in the afternoon for 0.95 per contract.  I am setting a limit order of 2.00 to exit, GTC.

The charts above are weekly, daily, and hourly.  The weekly stochastics is in the overbought position below the recent bull market high.  The daily stochastics is in the overbought position.  And the hourly momentum shows a bearish divergence between the current highs and the highs last week.

The chart pattern appears to be a rising wedge and contracting triangle.  The current move has over thrown the upper boundary of the wedge, and from a charting standpoint, this is the type of action often seen at the end of a pattern.

It is interesting to note the key points in the pattern.  In the current move up over the last month, the sales report came out and led to a gap up in the stock on 8-7-14.  Then today, earnings was released, and there was very mild movement to the upside in conjunction with the hourly chart divergence.  So it seems that the price driver to the upside has probably already occurred, and now the last weak move on earnings may be an exhaustion point.

Particularly with the broad market appearing to be on the verge of a consolidation or pullback for at least a few days, I believe this stock has the ability to decline back into the $60 region within the next few weeks.

This trade example is for learning purposes only.  And being an out of the money option trade, if the trade does not go as planned, it will result in 100% loss of capital.  So I have that factored into my trade size here.  I only purchased a couple contracts, and can stand to lose the whole amount within my money management plan.

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