Possible Fades (Strategy)

Regardless of the overall trend I believe there are always names that can be shorted. I prefer to sell call spreads or buy a put versus shorting the stock as I have defined risk by doing so and that helps me sleep better at night. Here’s a simple scan that I run every night to see if there are any names of interest.

  • Price closed above the upper bollinger band (20)
  • Price is below ma(50)
  • Average Volume(90) is above 500000
  • Close is between $5 and $500
  • Optionable

While there may be days or even weeks before a decent setup appears I still run this scan and many others. Here’s a list of the names that appeared Tuesday evening:

  • $AU
  • $DWA
  • $M
  • $PVH
  • $SNI
  • $STZ

I like to have a technical stop in place for these trades and that’s why I have the criteria of being under the 50 SMA. Let’s face it, the market has been in a grind higher for months now and strong trending stocks are well above their 50 SMA. With the current trend looking tired it makes sense that the 50 SMA would provide resistance for those names that are late to the game. If I’m wrong and the stock continues to move higher then the loss is minimal as I close it out when the stock closes the day above the 50 SMA.

Of the names that appeared Tuesday I like Macy’s the best. Two caveats are that there is a potential gap fill and earnings are on 2/22/11 and the combination of both may be too much for shorting. There are dollar strikes, decent volume and good open interest so it’s attractive and allows for some nice 1:1 risk/reward scenarios. If I’m looking to sell call spreads I’ll play the weekly or front-month options. If I’m looking to buy a put I’ll go out beyond 30 days and pay a little more for the time.