Thursday, August 20, 2009

"Special Trades"

Every so often, the market presents us with an opportunity to trade a stock that is having a "special" day. At Trading RM, we like to call these 5 Star setups.

It just so happens that this summer AIG has given us at least 3 of these (including today). While it may be easier to take money out of the market trading these plays, the key is to recognize early on that a stock is having its day and further, focus on how to maximize the money you can make on such a name.

Some of the signals we look for on our desk to indicate these trades are:

*Abnormally high volume
*Extensions on high volume, with consolidation on smaller volume
*Option bids staying firm, even during pullbacks
*Price action reminiscent of previous special day for the stock (AIG July 10th and August 5th)
*Breaking levels on daily ranges
*High short interest (for stocks on the long side).

If you look at the 5 minute chart of AIG today, you will see that many of these indicators were factors. Further, you will notice that having an appropriate "scaling out" approach to sales would have led to out sized gains. Traders may decide to keep part of their position in their "back pocket" as well. Whatever the given strategy, the key is to have a specific executable game plan for this scenario.

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