GOOG - Bull Calendar Spread to Naked Calls
False breakout, exiting at a loss, and still making a profit
On Jul 5, GOOG printed stacked greens to open the day, flagging beneath descending trendline resistance before popping over on above-average volume. The initial breakout was strong versus the market and it was looking like GOOG was ready to test the Jun 7 swing high of $129.55.
I opened a 7/14-7/21 calendar spread with the $126 strikes. My thinking was if the breakout was legit I could cut the short side and ride the long side. If we did get some follow-through with an immediate backtest, or if the breakout failed, I had the short side to protect me.
Market Conditions
At this time SPY was nudging against the 52-week highs but working on the third tiny green body after a full gap up with low volume. That morning, while SPY had gapped down and quickly worked to fill the gap, it was finding resistance against an overhead slightly ascending trendline. So, the market wasn’t exactly conducive.
Sector Conditions
XLC was also running into resistance off the Jun 16 SH but unlike SPY was printing a new 52-week high, and on high volume.
Unlike SPY which had opened with the FGD, XLC opened with a (very) partial gap down and also stacked greens into a new 52-week high. XLC stayed above the previous 52-week high ($65.60) and held relative strength against SPY into the afternoon.
GOOG
GOOG has been in a descending wedge off that Jun 7 52-week high. Volume has also been below average. This coming after the full gap up with continuation from May 11. We’re also dealing with remnant support-turned-resistance going back to Apr ‘21. This area was key support in early 2022 while the market was dropping. Later, in Aug ‘22 after GOOG lost the $120-$125 area it was retested from below but failed, confirming support now turned resistance.
So, we had this “breakout” over off the May 11 FGUC rally but started getting mixed candles on the daily. GOOG squeaked out a new 52WH but just was unable to hold it. A little consolidation and after a follow-up long green candle off the Jun 27 SL, we get three doji candles then the Jul 5 long green candle. Follow-through. This seemed at the time like a good trade. Just needed the market to breakout.
On the five minute below we can see a good consolidation after a big opening rally right below DTLR. EMAs are wide but GOOG holds the 9 before breaking through with volume. From there, we ride the DTLR as support holding relative strength against SPY and XLC. GOOG looked prime to go.
The Trade
This was when the calendar spread was opened selling the 7/14 $126 calls against the 7/21 calls. With more confidence in SPY I open naked calls but I just did not like the three daily candles up to this point.
The next day SPY, XLC, and GOOG would open with a gap down and see opening continuation. At this point I had no interest micro managing the position. It sucks but shit happens.
It wasn’t until Jul 10 I bought back the short calls. GOOG opened that morning with relative weakness to both SPY and XLC, gapping down while both SPY and XLC opened breakeven. GOOG tagged DTLS off the 5/24-6/27 SLs and while the initial bounce off the DTLS was positive, there was no follow-through. On the subsequent retest of the DTLS I closed the long calls for a trade loss.
The Redemption
GOOG stayed off my radar after the close until I got an alert the morning of Jul 12; GOOG was crossing DTLR again. But, it was not an impressive cross and GOOG would quickly move beneath yet again. Still, GOOG held the open while SPY and XLC both moved into the overnight gap. This was interesting.
GOOG would finish the day with a small body but preserving the gap, closing green while SPY printed red. Volume was not exceptional so I had no reason to think we’d get a breakout. Still, we were at a key level and I set an alert for a cross over the close.
That alert trigged the next morning. GOOG got a full gap up of +1.6% stacking greens outperforming both SPY and XLC and a wide EMA alignment. Volume was also heavy so I had more confidence this breakout was legit. I bought the 7/14 $123 calls on just after the first “dip”. It’s tough to get in on moves like this because there’s always the chance that dip could get deeper. But, SPY and XLC were building support off the open and despite the bearish engulfing 9:55 candle, the follow-throughs were both dojis on the 3EMA followed by a green. I had good confidence we likely would not get a bigger dip.
GOOG would continue to ride an EMA alignment into the afternoon before action leveled off. Nothing exciting would go on the rest of the day but, as the market closed I added to the position. This despite the fact SPY was turning up and XLC was turning down. The way I looked at it, GOOG had done enough work for the day and just holding the highs on heavy volume was bullish enough for me.
On closing day, GOOG opened slightly up but printed a very large-bodied green candle on the open with relative strength. Again, GOOG started riding a bullish EMA alignment but it wasn’t long before that would begin to fade.
Going into the 10:00 hour GOOG would start printing dojis while SPY couldn’t get liftoff from the open. The position already covering the losses from the calendar spread, plus additional profit, I had no interest watching theta kill my profits. I closed the position for profits 2x my previous losses. Feeling lucky later as GOOG continued to hold high support while SPY dropped I bought a few calls back as a lotto play but those expired worthless.
Conclusion
It’s very easy to think I should have held on to the long calls after closing the short side of the calendar. My profits would’ve been significantly larger. But, I had zero reason to do so.
Annie Duke writes in Thinking in Bets about “resulting”; basing the quality of a decision on the outcome. If a decision leads to a good outcome, we consider it a good decision; a bad outcome is a bad decision. Traders frequently fall into this fallacy. “If only I had held on.”
What experience teaches you is that if you carry that mindset into every trade, you will quickly find yourself in a losing position. It’s easy to think “it turned around last time” to convince yourself some bullshit the price action is clearly not communicating. We fog our vision with emotion and trade on hope. That’s a dangerous combination.
I did not trust the market, therefore I took protection out just in case. If GOOG rallied after my initial open, I could buy back the short calls for a small loss and ride the long calls. Theta was my friend. If GOOG failed, I’d limit risk with the short calls. The fist trade went exactly like I feared, but planned.
But then the market situation changed. And GOOG changed. And, I want to emphasize this point; at no time did I think “I’m going to get my money back.” This was not a revenge trade as new traders are so wont to do. GOOG broke over the same trendline I had been watching. And, like the first time, it held the trendline.
But, recall I didn’t open a position again on the day of the second break. You got me the first time GOOG. Not again. The following day confirmed the breakout and I joined the party.
Revenge trading gets you watching your P&L instead of the price action. It’s the same error as thinking “the last time this happened so it’ll happen again.” Of course, it was nice to be able to recover the original losses and then some. But, these were two completely different trades. Both had similar entries. Both had completely different outcomes.