The market saw some profit-taking today, as expected (see yesterday's article). Since the broader market ended little changed, I thought I'd do a case study on a very good trade.
Most traders know that ISRG can make big movements. For options traders, big movers are of special interest during the last couple of weeks before expiration. The market has been rallying higher and ISRG has been lagging, for no particular reason. I started commenting on ISRG last Friday, looking for a potential big moves to the upside:
July 9, 2010 12:49 PM
ISRG
no strength...
Yesterday, ISRG finally showed signs of life:
July 13, 2010 7:06 AM
ISRG
waking up
If you compare the ISRG's chart to that of SPX (or, those of many other market leaders), you can get a sense of what I was looking for:
SPX
A week ago, SPX had already jumped above its 10-day MA and had been spending time fighting the resistance at 1080. Yesterday, it broke above 1080 and is now testing the resistance at 1100.
ISRG
Comparatively, ISRG shows a very similar chart. But, after getting above the 10-day MA, it immediately turned lower. It tested the support at the $320 level again. Yesterday, early in the morning, it broke above $320, and, above its 10-day MA, again. That was my cue for a potential $20 move (from $320 to $340). In order to catch up to the broader market, ISRG would have to go above its daily MAs and test the next resistance at $340.
ISRG did exactly as it "should" or "could". What's happening here is that I'm obviously not the only one who's looking for laggers that can have big potential movements. Market makers are also looking for more stocks to drive higher. After today, ISRG's chart has pretty much caught up to where SPX is. You can compare the 2 charts and see the similarities.
I bought the ISRG July 330 calls yesterday morning at $3 and sold them as high as $10 today for a profit as high as +233%:
This morning, in our Trading Room, I commented:
July 14, 2010 7:28 AM
ISRG
almost $333, could see $340 soon
I sold 1/2 of my position at $6.5. As our members know, I often take profits on the way up in 2 or 3 stages. This is because after locking in some profits, I'd feel more comfortable to perhaps let the rest of my position ride a little longer. Cashing 1/2 of my position at $6.5, which was +117%, meant that the remaining 1/2 of my position was already playing on the house money. My risk had become zero. As the stock went up higher, I cashed out more at $10, +233%, and left a small position to perhaps ride higher. I estimated that at $340, those 330 calls were going to be at around $11 due to the premium. I was looking for a quick overshoot above the $340 mark to perhaps $342.5. So, I set my limit sell order for the last part of my position at $12. The high of the day on the stock was $341.05 and those options went as high as $11.69. It did get close, but, did not get filled. Then, I set a stop at $8, +167%, and got filled on a quick drop in the afternoon. These options closed at $8.91 for the day.
If you had bought just 10 contracts of these ISRG July 330 calls yesterday, you could have easily made $5000 to $8000 in a day!
Let's recap what we could learn from today's case study:
1) When the market goes in a direction fast, we can often look for laggers that have been market leaders to make the similar movement to catch up to the market.
2) Charts can often give you a pretty good idea of what your potential trade is, including entering and exiting points. (I often call out those targets in our Trading Room.)
3) When the trade does pan out in your favor, don't be shy to lock in partial profits. This can help keep you stay centered and be more comfortable to hold the rest of your position for potentially bigger gains.
Now that ISRG has caught up to the SPX, I'd say that ISRG will go where SPX goes next.
Good night and HappyTrading! ™ 
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