We made a very nice (paper trade) gain! 35% on the stock, 210% on options, details shown below

We followed the pre-established exit plan and sold our position on January 20^th, in accordance with the update comments of January 11 – and we made a very nice paper trade gain, the details of which are shown below. This paper trade has been undertaken to help learn some of the stock market basics and I hope that any reader who reviews this series of trades will agree that it has been successful in meeting that objective.

In our last post of Wednesday January 11^th, we commented that at $28 the stock had reached the target price last established on December 10, 2010 and were faced with a decision on what to do now that the price target had been reached with no indication that it would not continue higher. In that update, we re-stated a standard rule in the following words:

“The standard rule is to “Cut losses early, let profits run”
That is a good rule and we should follow it, meaning that we will hold the position unless it falls back in price by the amount we have established as our stop-loss position, which is about 9% at about$25.65”

So here we are, about 10 days later, to discuss the results of our paper trade that we exited on January 20^th by following our own rules, well-known rules that are similar to those observed by most successful traders.

Important, have a plan and trade the plan
An important objective for learning Stock Market Basics on this website is to always have a plan for when to enter and when to exit a trade. This trade, now closed, followed a simple set of rules that are meant to minimize the inherent risks of trading. The rules established a limit to the amount of the trading stake that could be lost and allowed most of any gain that might occur to be captured. When we started with the paper trade on November 24, 2009, there was no certainty of what might happen, even though our selection of ASYS was based on favorable news, increased trading volume, a rise in price and a particular promising chart pattern.

With this paper trading example we have followed the rules, we entered a trade on a promising stock only on a “breakout” price and have exited on a pre-established percentage “fallback” in its trading price.

For a beginning trader wishing to pick-up a few trading tips, if nothing more than those rules are learned, I contend that this Stock Market Basics Guide has made a contribution of value.

Now for the details: (Based on closing prices, not intra-day highs and lows.)

Our paper trade holdings, placed on November 24, 2010, and detailed on that date on this Stock Market Basics website were:

1. 100 of ASYS at $18.84
2. 2 ASYS option contracts, strike price of $17.50, with expiry date of May 2011 bought at $3.90

The stock – ASYS
ASYS had traded up to close at $29.07 on January 12, 2011, which we now know was its recent high. Our stop-loss plan called for an exit if the stock fell back by about 9%, see note above. On the 19^th January the stock closed at $26.46, almost 9% down from the high, it continued down slowly the following day, below our theoretical stop-loss so we made a paper trade exit and will count the close of the day, $25.42 as the exit price – although if it were a real trade and not a paper trade the sell-price would probably have been around $26.

It should be noted that the price could again reverse and continue upward to a higher price, that is often the case for quality stocks, but our exit was triggered by the 9% fall back from it’s previous high.

The options
Our paper trade holdings of 2 options contracts, strike price of 17.50 for May expiry, closed on 20 January at $12.10

Summary of trades:

1. Stock bought at $18.84 sold at $25.42 = 35% gain approximately
2. Options bought at $3.90 sold at $12.10 = 210% gain approximately.

That’s very good for about 51 days in the positions.

In conclusion
This paper trade was initiated as a training exercise in order to follow the series of actions that go into making a trade for stocks and options, that does not involve a lot of work, just the need to follow the stock market action until signals are triggered that indicate action is necessary. No profit can be guaranteed, losses and gains are all part of the process of speculation, the objective is to minimize the losses and not sell a winning position too soon.

After the initial ASYS reference was made on November 15th and the chart of ASYS was posted the following day, a series of follow-up posts was published on this site. At that time we could not have known how the trade would turn out but we followed a set of rules for the stock and a set of rules for the stock options. The rules help control risk and capture possible profits but they do not guarantee that profits will occur The fluctuations of the market can make things difficult but when a winning stock candidate is identified, such as ASYS in this case, the paper trade we made shows what can happen — when we make a plan and trade according to the plan.

When taking positions in other promising stocks, it is suggested that the steps described in the posts be followed, basically:

1. wait for a signal to buy in, in the case of ASYS the signal was a breakout from a prior resistance level.
2. be prepared to exit the position if it falls back from an achieved high by a specified amount, we used 9%.
3. Otherwise, stay with the position until it does, in the case of ASYS that was for 51 days.
4. If possible also take a stock option position, we bought 2 stock options in the ASYS paper trade. And that is where we expected to make the most money – and did.

Options trading has been discussed in several other posts on Stock Market Basics Guide.

It is now a month since we posted, on December 10^th 2009, an update regarding the stocks we are watching and specifically ASYS, the issue in which we had placed simulated trades as part of the process of learning the stock market basics, in accordance with the objectives of this website.

So now, after the market’s close on Tuesday, January 11, 2011 it’s time to again re-visit the stocks we have previously discussed.

ASYS, how we started out
First, a recap and an update on our prime prospect, Amtech Systems, ASYS. Our simulated trade position in ASYS, placed on November 24, 2009, is 100 shares held at a purchase price of $18.84 together with 2 options contracts with strike price of $17.50 expiring in May, 2011, purchased at a cost $3.90. For us these have turned out to be good paper winners to date and we will look at their current status as of the close of trading on January 11, 2011 – but first a comment:

It’s always nice to report good news, but remember this is a learning process and we should keep in mind that not everything turns out to be a winner in the way that our current paper trade is now performing.

As of our December 10 post we updated with:

“We have good gains on ASYS, in which, as our earlier posts detailed, we initiated a paper trade to Buy long on November 24 at $18.84 per share has now closed at $25.04, that’s up about 33 %.

The 2011 May $17.50 strike call options for ASYS that we purchased at $3.90 closed at $8.50, that’s up about 118% with a new delta of 84, so plenty of room left on that option play if ASYS continues to move up.”

Now to update – after the good moves in the market today on ASYS:

ASYS closed at $28.21 on heavy volume as a result of a very positive earnings release. That means an increase of over $9 above the purchase price of 18.84, equaling a gain of almost 50% as of now, but there is no profit realized until the position is closed of course.

We have a confirmed winner, what should we do?
So now we are faced with a decision about what to do. If you read our last update post of December 10, 2009, you can see that I had revised an opening target price upward to $28, the price reached today.

The standard rule is to “Cut losses early, let profits run”

That is a good rule and we should follow it, meaning that we will hold the position unless it falls back in price by the amount we have established as our stop-loss position, which is about 9% at about$25.65.

If we wish to capture profits right now, we can sell one or both of the option contracts we hold, as discussed below.

Remember this is simulated trading but in a real life situation of similar circumstances, the objective would be to find 3 or 4 other winning situations like this during the year, so that the working capital could be doubled by the end of the year and as traders we would then be better funded allowing us greater diversification in the future – but that is another issue we can perhaps discuss in the future.

For more information on ASYS, check out Yahoo Finance at http://finance.yahoo.com/ where you can enter ASYS in the “Get Quote” box and read the headlines on what is happening. That is also a good suggestion anytime when you are wishing to learn the stock market basics. Whether the news is good or bad, it helps to know what is happening in order to acquire that “feel” for the market that might aid in future similar situations as they are encountered later on.

Stock conclusion
So, for the stock, we are watching closely, ready to exit if a substantial fall back occurs but that is not expected, we hope to continue to achieve gains after perhaps a lull while some profit taking by others takes place.

Now for the options
which is where the gains should be really substantial and to find out we will again go to Finance Yahoo and enter the ASYS in the “Get Quotes” box at the top left sidebar and then click on the “Options” entry just below it and that will take me to the chart of the option pricing. I must then click on the appropriate options expiration date at the top of the chart, in this case the May 11, and up will came the chart we need.

The Options Price Chart shows that the options traded today at $11.00 bid, $11.15 asked, that’s about 180 % above our purchase price – but you will also notice the last trade was bid down for a last trade at $8.50 — we will look into that in the morning when we try to exit our simulated trade in the market.

In summary, good gains have been achieved on paper and it shows how winning option trades can provide greater profits, in terms of percentages, than the profits that can be made with a stock only. When trading options, it is important that we should always follow the pre-established formula set out in 4 rules for Trading Options.

In closing for today
After we can see how ASYS performs after the market opens on Wednesday 12 January, we can add to this post and then close this paper trade if necessary.