CSCO short term short scalp with puts

Sep 27

Someone once told me never to short a stock on a bull run. My algo at that time said the stock was historically overbought, so of course I listened to the algo. I made 42% the next day. I can't say who was right or who was wrong generally, but I usually listen to the algo and I'm doing it again.

My algo tells me CSCO has been overbought for 6 days (including at this point today). It has only stayed overbought for that long 3 times in the last 8 years, and the most recent time was March of '21. I'm betting that this 6 up days in a row rally takes at least a one day break in the next 1 or 2 trading days, possibly as early as today, which is why I didn't wait until the end of the day to buy.

AVGO had a similar but even more historically extreme setup but I didn't find it until after the market closed last night and it opened sharply lower, so I missed my chance there.

I went long the Oct 4 $52 puts that cost me .25 with the stock at 52.99 and I will sell as soon as they are profitable at the end of a trading day. Maybe sooner if a drop happens this afternoon.

This is market based edutainment and involves a system still undergoing testing, so it is not intended as investment advice. Particularly the short date on the expiration makes it a somewhat riskier trade.

Oct 4

Trade closed manually

Well the trade wasn't "closed" per se. The put ended the day worthless. I should have sold it 2 days ago but it was simply at break even at that point. I broke my own rules and paid for it with the put ending up being a total loss. Lesson re-learned. FOLLOW YOUR RULES. Luckily, while experimenting with my new system, I am using smaller than normal lot sizing anticipating "failures" along the way. This one wouldn't be a failure of the system as much as a failure of the human running the system - me. I'll say it again, with any system that has been tested rigorously, the weakest link is usually the human one and this was a concrete example of that.

Obviously, in hindsight, the short duration to expiration hurt me here. However, given that most of these trades resolve positively in 5 days or less, I still think a longer dated option probably just puts more capital at risk, while not providing as large a return if things work out quickly. Most of these trades are 1 day trades, based on my backtesting. This still needs more testing in real-time, since backtesting isn't a perfect simulator of that.

Another thing to evaluate is whether to use in the money rather than out of the money options for this. An in the money option would have still had value and been better than break even on the day this option only reached break even. It would have returned less, had CSCO gone down more, however. The verdict is still out on that.

Obviously something like a put spread would have reduced capital outlay here, and had I been trading a larger amount, I might have considered it. But the money I made from the ABNB put last week more than offset the total loss I took on both this trade and the SNAP put that washed out, and I knew that going in, so I decided to roll the dice on straight long puts and call any losses an "evaluation investment". Between the ABNB, SNAP and CSCO put trades and a fourth put trade I closed for a 20% profit in two days this week in PARA I'm still profitable despite the total loss here and with SNAP.

I'm still evaluating and will look at more short trades using puts next week. Stay tuned and have a good weekend!

Oct 4

Note

Trade summary for my records

Wins - 0 Losses - 1

Lot 1 - CSCO Oct 4 $52 put
Bought at .25 expires worthless.

Average loss per lot = -100%
Average days held = 5 trading days
Average loss per lot per day held = -20%
Annualized loss per lot per day held = -5040%