Today’s Trading Lesson From TradingMarkets

Ten
contributors to TradingMarkets.com respond to my question,
“What was your best trade ever?” Some are
brilliant, others involve a little luck…all are interesting.

Lewis Borsellino

The last time
the Fed cut — the surprise cut back in January — it was kind of
slow and mundane in the pits. I ended up getting long 50 contracts. I was trying
to scale out of it and all of a sudden, I saw everybody come to buy them from
me, so I shut up. The Fed announced their cut, and before I could open my mouth
I made $350,000 on a 50 lot. That’s always fun but then you go home and you
start thinking about reality — what if you were short those contracts?

 

Tony Crescenzi

I remember in
1994, when the Fed indicated they
were changing interest rates via their open market operations. On the first day
of a two-day meeting, the Fed did not take action on the open market, as they do
daily. The inaction on their part was a hint that they were going to allow the
Fed funds rate to drift higher. I was familiar with the fact that the Fed would
typically come in and do their open market operations somewhere between 11:30
a.m. and 11:40 a.m., but I knew it was basically by 11:33 a.m. or 11:34 a.m.,
and if they hadn’t acted by then, you could forget about them moving between
11:34 a.m. and 11:40 a.m..

I shorted five-year T-note futures.
Within an hour I was out at a profit, and next thing, the Fed announced their
rate hike. Their actions that day confirmed that they were raising rates. That’s
one my most memorable trades, because I thought I had a significant edge on the
market. Your knowledge of detail can put you on top, and ahead of the market.

Alan Farley

My best trade
ever was just when the bubble was starting in late 1999. It was a
stock I used to play on the American Stock Exchange called Interdigital
Communications — it used to be symbol IDC. They moved over to Nasdaq and became
(IDCC).
It was a speculative stock and used to attract momentum traders. It showed up on
my dip trip scan for Seven Bells. I bought 600 shares the next morning — it was
somewhere in the low 20s — and by the end of the day, it was in the 50s. It was
scaring the heck out of me. I made a decision to hold the stock overnight. The
thing gapped another 10 or 11 points the next day. I got almost 50 points in
that thing on an overnight hold. It just blew my mind.

 

Dave Floyd

The best
trades happened numerous times from January through April 2000. When
the Nasdaq was just getting pummeled, there were times when the Nasdaq futures
were lock limit down. A lot of times when those things came off lock limit,
they’d gap down a little bit, but then they’d come screaming back with a
vengeance. You could buy the Qs on the breakdown, once they stabilized a bit,
and you catch pops of anywhere from a buck to a buck and a half within a matter
of three minutes. The Fed announcement trades are fun, too (see

Meet the Traders).

 

Dave Landry

No trades
really stand out because most of my trades are really short-term
oriented. I have some examples in

my book. I hit some home runs very early on in my trading in the futures
market, but in hindsight I realize that was just through luck, excessive risk,
and sloppy trading. There are a few times a year where everything lines up —
the sectors are set up, the market is set up, the market bias is set up — those
are the times when you’re going to have your best trade.

 

Don Miller

This was back
in April 2000, and the stock was (QXLC),
which was a European auction company, similar to eBay, Ubid, that sort of thing.
That morning, an analyst — I forget which firm it was, one of the smaller ones
— came out with an upgrade of the stock, basically touting the thing as the
next eBay. They put a price target on the thing in the multiple hundreds — it
was either 200 or 400, I can’t remember — it was some astonishing price target.

One of the problems was, this stock
had just split before the analyst upgrade. The stock was languishing around $20
after the split, and they came up with this multiple-hundred-dollar target. Tom
Costello and everyone else on CNBC hyped the darn thing, and of course that was
in the midst of the euphoria of the market. When that thing opened, it shot up.
I think it opened in the 80s, and it quickly shot up to over 100. I got the
short in at 100, and I just sat there.

There was so much confusion; folks
were finally starting to realize that the target that this analyst put forth had
not been adjusted for the stock split that had just happened. I’m sitting there
with my hands in my pockets, shorting. I believe in tight stops and risk
management, but I let that thing go — it was so thin. That thing was traveling
so fast; I let it go to about 120 — I didn’t touch it. Once everyone started
figuring out what was going on, and once it started to fall, you never looked
back.

Checking my records, I see I ended up
covering that the next day at $45. I was even lucky to even get the short off. I
came to find out later that the guy who made the upgrade, had been a vacuum
cleaner salesman a few months before. Even the charts at that point I don’t
think had been updated for the split, so you really had to know what was going
on behind the scenes. That was the best day I had that year.

 

Jon Najarian

My best trade
was ahead of the Gulf War. Volatilities were very high. Any time
there is an unknown event out there, volatilities normally go up. When
uncertainties are at highs, premiums you’re going to pay for insurance are also
at highs. Every once in a while, that premium, even though it’s expanded, is
worth owning, because maybe the event is going to be extraordinary. Anybody can
say in hindsight that you’d love to be long volatility going into a war. The
uncertainty of the outcome made owning options extremely attractive.

When you own options, you’re
betting on an extraordinary event. If you’re buying options, you’re betting that
the computer models are wrong, or that the volatility assumption is wrong, one
or the other. When you’re buying a (naked) option and not hedging it, you’re
looking for an extraordinary event. If you don’t get it, the option buyer loses.
It became apparent that an extraordinary event was happening, and the market was
making an extraordinary move to the upside. We had positioned ourselves with
straddles — long calls and long puts — and we stood to benefit from that
extraordinary move.

That night, when they started the
bombardment, we saw that our technology worked. The next day, (IBM)
opened up something like $15 — that was one of our big positions. It was
trading 100 or 102. Owning the 100 calls and puts meant we were positioned to
make money if the market made an extraordinary move — to the upside or
downside. That’s not normally the way we trade. We elected to do it ahead of
that because we thought it was a rather extraordinary opportunity.

 

Tim Truebenbach

In 1999, the
market was flashing accumulation signals, telecom was taking off and
Qualcomm (QCOM)
was the leader. Profits were skyrocketing. I got in around Spring 1999, and the
stock moved up solidly into December 1999. I sold half when I was up 100%, and
then it started a climax run towards the middle of December and it literally
gained 104% in three weeks, and I sold the rest.

Len Yates

(XMI)
puts, nearby, about a week to go. It was the gambler in me. This was
about eight years ago. It looked like the market was set to fall, and starting
to fall, so I threw my money out there. This isn’t the kind of risk that most
people ought to take. Anyway, they were trading about a dollar, and went to ten.
I still do the same thing quite a bit nowadays — I look for when the market
seems to be set up for a fall, and I like playing falls better than rises
because they’re swift and more reliable when they start.

Also, Spring 2000, during the selloff.
I bought Verisign (VRSN)
puts on April 7, and sold them April 17. I paid 5 7/8 and sold them for 39 3/8.
Look at that chart (see below), on the seventh it was peaking. That was one
anticipation job, right there! With the steep fall it had experienced just a few
days before, I knew that it was going to repeat and was going to revisit lows.

 

Goran Yordanoff

I was short a
very big position in eBay (EBAY)
recently, at the 70 area. I only got between 8 and 10 points on the trade, but I
had so many shares that it was a gigantic profit. From a percentage return, the
trades are in the retail group — Christopher and Banks (CHBS),
Charlotte Russe (CHIC),
Bebe (BEBE)
— all those trades returned roughly 40%-50%. Also TRC (TRR).
All of those stocks had something in common — we were able to identify negative
divergences that were occurring in their internals. From Sept. 1, 2000, I don’t
think I’ve written too many buy tickets. Based on the fact that I consider us
being in a secular bear market, I focus on stocks that are rallying into
resistance and topping, or stocks that were overextended.