Be among the 1st in the investment community to learn advanced strategies in warrant-trading from world-renowned trader, author and speaker, Mr. Daryl Guppy. Whether you are a new or seasoned investor, come to this half-day Seminar and gain cutting-edge tactics for consistent returns.
Learn from Daryl Guppy how he is able to trade warrants
with recent returns of 100%+ in 3 to 7 days!
with recent returns of 100%+ in 3 to 7 days!
Daryl Guppy's REAL Trading example
TRADING THE FALL WITH WARRANTS FOR 22% PROFIT IN 3 HOURS
Dramatic market falls provide opportunity. These notes detail the way in which a personal warrant trade was assessed, assembled and executed. The notes are an extract from the weekly newsletter, Tutorials in Applied Technical Analysis available from www.guppytraders.com.
In our weekly Market Outlook notes we have mentioned the preparation for this situation. The strategy is summarised below:
- By calls on the day after the fall, but only when the market shows signs of a rebound.
- Be prepared to sell calls quickly if the market fails to rebound.
- Sell calls as soon as the market shows a sign of a retreat after the rebound.
Why not buy puts when the market falls? The answer is shown in the chart extract. The reason is that trading in puts and calls is not symmetrical. People are reluctant to trade puts, so the puts are less reactive to falls in the market. It takes a while for puts to start moving. Calls, on the other hand, are more reactive. They lose value immediately as the market falls. This loss in value is not reflected in an increase in value in the puts. This skew in the market provides us with a trading advantage.
When the market rebounds, the calls regain value very rapidly. Perversely, the puts lose value immediately.
We start with the statistics, and also remember that we are in October - the month where fear in the market assumes mythical proportions. The market may continue to fall on the open, but then recover later in the day to close higher. The objective is to buy calls once there is evidence of the market rebound. This is not a strategy that buys calls on the open. In a severe market retracement, the fall may persist for several days before a rebound occurs. Traders continue to apply the analysis, waiting for the rebound to develop before buying calls. In a prolonged falling market, put trades become more viable.
Markets trade in repetitive ways, although the detail is different in each case. Over the past 13 years there have been 84 one day falls of over 1.5%. The next trading day has a 62% probability of rising. This is a high probability rebound. The interesting feature of this behaviour is that there is a greater probability of a rebound when the fall is larger than 1.5%. When the fall is 2% or greater, there is a 72% probability of a rebound on the next day. These statistics provide the core of this trading strategy but the strategy does not rely on the day closing higher than the previous day.
It comes with some warnings. First, the rebound does not start as soon as the market opens. Second, the rebound might not last the entire day. The application of this strategy calls for intraday monitoring of the price action. The objective is to catch the start of the rebound and sell before the end of the day if any market weakness develops.
These repeated behaviours give us the confidence to look for stocks which have strong trends. There are 56 stocks which have call warrants available. The search list is reduced to those stocks where there are several warrant series available.
This strategy relies on strong trends in the parent stock, and the probability of a general market rebound which will carry these stocks higher. Our preference is for a trend where the short term group of averages is not too far above the long term group of averages. This is a judgment call. We are looking for a higher probability of a rebound from a strong underlying trend. The greater the distance between the two groups of averages, the greater the potential fall, and the smaller the probability of an immediate sustainable rebound. The chart extracts illustrate the judgments.
The ANZ trend is strong and well supported with little trading activity. This suggests any sell off will be shortlived. The NAB chart shows a slower trend, but a higher level of trading activity. There is less confidence in the underlying trend, and this lowers the probability of a rapid rebound. The WBC chart is similar to NAB, with several successful penetrations of the long term group of averages.
This style of warrant trading is based on the behaviour of the parent stock and the broad market. It depends on the degree of reaction in the warrant. Warrants with traded volatility are preferred to those that show reduced volatility. The fall in value of the ANZ call shows a higher level of practical reactivity. In extreme market conditions there are advantages in trading with liquid warrants that show high crowd activity because this is where emotional trading causes the greatest price changes. Trading with the market maker reduces the advantage because their bids and offers are constrained by theoretical pricing rules. However, in opening the trade, it may be necessary to trade with the market maker before the crowd recognizes the opportunity.
For tutorial purposes in the newsletter we add ANZWMJ to the case studies as an example of this trading technique. (This was also a personal trade that was completed before it was covered in the newsletter. Our purpose is to teach the techniques) It has the potential to be more than a one day trade, but as the market turned down prior to midday, the trade was closed to capture a quick profit. The chart extracts show the entry and exit points. Entry is made as soon as possible after the ANZ price turns upwards. The exit is taken as soon as possible after the price turns down. Return for the trade is 22% in about 3 hours.
This type of trade calls for close monitoring during the day. We watch three screens.
- The parent stock – ANZ. We want evidence of buying pressure or selling pressure.
- The broad market. Reversals in the XJO value are a leading indicator of changes in the parent stock. ANZ is an XJO constituent. It will follow the XJO. We are not looking for stocks that are going counter to the broad market trend.
- The ANZWMJ warrants screen. We may have no choice but to trade with the market maker as the trend changes develop. As discussed in previous newsletters, traders may have to build a position with multiple buy trades from the market maker. Selling or unwinding the trade may require the same techniques. Generally there is good crowd activity near the end of the uptrend.
- The raw balance of buys and sells on the parent stock. We move about 10 order lines down and calculate the volume ahead.
- The activity or speed of trading. Lots of trading on a rising price signals excitement. Lots of trading on a falling price signals fear.
- The composition of the order line. Is there a block of support or resistance nearby? Is the order line thin – only just a few buyers at the higher price levels? Is the order line thick – many buyers near the upper price levels? The same analysis applies on the sell side.
- The rhythm of buying or selling in response to changes in the XJO. Is the stock marching to its own tune, or is it reacting closely to the XJO? If there is a change in this relationship it signals the need for closer attention to the pattern of trading.
- Finally, there is just the 'feel' for the market behavior. This is based on experience and is difficult to quantify. It comes from many small features in the market behaviour. Each, by itself, is insignificant, but in combination they help us to understand the developing market behaviour.
For info or to register, call NextVIEW at (852) 2815 9000
or (86 21) 3304 1245 today
or (86 21) 3304 1245 today
Sponsors:  | Organiser: |