NTES Bearish Swing Trade for Stock & Options

Updates

We exited this position on a break on volume of the upper trend line on 10/24/17. We lost 40% of our investment into these put options. In retrospect, we should have been more aware of the possibility for the upper trend line break in case it wanted to form a symmetry with what could possible be a left shoulder. The options should have been sold at $280 which would have realized a loss of more like 30%, but price action on the 30 minute chart led me to believe that it was just a retest. The takeaway from this is to more rigidly follow the rules set in place prior to the trade.

Thesis

NTES will reside within it’s downward channel at least until earnings are reported on 11/8/17 after market. The thesis is longer valid when the upward channel is sustained broken either by a price spike or not maintained enough down days over time.

Entry Point

We’re likely going to enter this trade on Monday 10/16/17 at any point when the price is below $278.60 or below $280 with bearish intra-day price action. We are trading options but the same principals apply for selling short. We will be purchasing the Nov 10 270P, which might seem a little optimistic, but if the thesis holds true it’s a worst case ATM sale of what was originally an OTM contract, and will experience little time decay because premiums will remain high until earnings. Best case, it drops half way or even all the way to the lower trend line of the channel, which would be a major win.

Exit Point

We have a hard exit date of 11/8/17 because we do not want to be holding through earnings. For share trading and options trading set a stop loss at 2% (of the underlying) above the trend line. This would have to be adjusted daily due to the angle of this line. It’s fairly low risk trade assuming there are no major gaps that occur. We’d also like to maximize out profits by covering the lower trend line, or any loss in momentum should it start to actually fall early.

Notes

We view the risk reward ratio of this trade favorably and will be allocation approximately 20% more to out position than normal.

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