ERTS Breakout Trade Strat

• stevenplace
• May 19th, 2009

That’s right, I’m going to make some money because of this guy, your friendly local WoW player:

Although I won’t trade the story, ERTS has a great looking chart pattern that I think is exploitable. Let’s take a look and then we’ll go into some option plays.

Great looking multi-month breakout with the intermediate term moving averages all pointing up. It hasn’t exactly broken out on the dailies, but it’s close. We need to be careful of the 200DMA that’s bearing down and will probably provide resistance; there’s also a couple fibonacci confluence points running around above the price.

So here’s two plays I like. The first one:

Sell ERTS Jun 20 puts for .50 or better

This puts your basis at 1950, so your return on basis is a whopping 2.5% (or 5% if on 2x margin). And that’s fine for this kind of play. The options board with the current volatility is giving you nearly an 80% of success… and I think that with the 3 day weekend coming up, the 200DMA bearing down and the other moving averages acting as support, the price action won’t be nearly as fast as we think… so buying straight calls will give you a nice burn mark from the time decay.

Here’s another way to play it:

BUY  CALENDAR ERTS JUL/JUN  24 CALL @.40 LMT

This is an OTM calendar spread. You are expecting that by Jun expiration the stock will be within 22 and 26– those two price levels are the breakout price and just above the 200DMA, respectively. And you should pick up some front month theta pretty quickly. I like this trade as the front month extrinsic value is about 1/2 the next month extrinsic, so if the front month expires worthless, you still get a nice discount on the Julies.

The problem with the calendar is that it is a tighter range– only a 40% chance of success, but I think those odds are higher given the price levels that we’re looking at.

Will ERTS pullback? Probably. I see 2150 as a pretty good entry point just below the breakout, so you could try legging into that calendar spread to get a sweeter entry.

The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

Tickers: ERTS

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