Trades do not always work as precisely as the one in Citigroup did on Friday, when we shorted a spike opening three cents from the intraday high, then took profits on half the position on the nasty pullback that followed. The strategy we used is worth reviewing, since some crucial elements came together to help us beat a game that is rigged to allow Da Boyz to effectively fleece retail customers without breaking any laws. In coming out ahead despite the odds, we were competing not only against the dirtballs who dominate the options game (full disclosure: I was an options dealer myself for a dozen years), but with their arse-bandit mentors on the NYSE, specialists and firm traders who deftly manipulate stocks to their advantage for a living, particularly in the opening and closing minutes of the day.

The rally target we were using was a Hidden Pivot at 53.72 that nearly precisely caught the acutal, panic-driven high at 53.75. Here is the recommendation exactly as it appeared in Friday’s Touts section:

(Click on text to enlarge)

Initially, I doubted any subscribers could have bought the May 52.50 puts for 0.55, since only ten of the 4383 that changed hands on Friday were done at that price, the low of the day.  However, one person in the Rick’s Picks chat room said he’d bought them as directed, so I established a tracking position intraday, and recommended that half the position be covered for 0.70 at that time for a small gain.

This reduced our cost basis for the remaining half of the position to 0.40, providing us a cushion that will endure as long as Citi does not pop above Friday’s short squeeze-driven high. It may do exactly that, of course, but our risk at this point is minimal. Plus, if the peak that we shorted turns out to be an important high, we’ll have some May puts that we can hold till they ripen. If the stock were to fall, we would have the option of reducing our risk to nearly zero by shorting some May 50 puts against them. Ideally, we would try to leg into the May 52.50 – May 50 vertical put spread for zero cost by shorting the latter for as much as we’d paid for the May 52.50 puts. That would give us a shot at making up to $250 per spread with no loss possible.

Options Freebie

We have used this strategy often, and it is described in some detail in an article that I wrote a while back for Stocks, Futures & Options magazine.  Our edge over option professionals lies in our ability to predict more accurately than they where a stock will turn. If our forecast proves correct, we will be better prepared to catch the low price on any puts or calls that we would seek to buy when the underlying stock is hitting a tradable top or bottom.

I will make the article concerning this strategy available on the Rick’s Picks web site next week, but if you are not a subscriber and would like a copy, simply click here and I’ll gladly e-mail you one.