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Special attention should go to closing prices for a couple of reasons, overnight assigning being just one. According to a piece of Investor's Business Daily, a stock that closes at or near its high for the day will probably go higher early in the next trading day. Conversely, a stock that closes at or near its low will probably sink lower. The theory holds that various temporary forces that influence a share's behavior have spent themselves before the market's final hour and especially the closing half-hour. The stock is said to move with a truer, less-impeded momentum that carries over into the next day. This finding has proven an excellent guide to tracking IBM's motions these past few days before July expiration.
There is also the theory espoused by several financial writers that the trading day is comprised of two distinct time-sections. The morning hours tend to be dominated by amateurs, including many working people who phone buy and sell orders to the broker before going to their jobs. The afternoon hours form the pro traders' half of the inning and give them solidifying trends to ride.
Although skeptical of all theories, I must admit that the stock market made more sense to me when I stopped expecting the first and second halves of the trading day to resemble each other. Thus I routinely watched IBM shares zig in the morning, zag in the afternoon; they forgot their recent past during the final hour or half-hour and began rehearsal for tomorrow.
I write this during the weekend after the third-Friday/Saturday-of-July option expirations. The July 90 puts I sold expired worthless. The $652.47 premium I received for them: Pure gravy because time-decay or time-is-a-thief destroyed the IOUs I sold, burned the bets I booked.
On Friday, IBM stock chipped below 64 during the last hour of trading, with a low of 63-5/8 and a close of 63-¾. The "forgotten options" I bought, the January 95 puts I longed at a cost of $7,042.53, weighed in at the closing bell at 8-¼ bid 8-¾ ask. Rendered concretely with dollar signs on 10 contracts: $8,250 to $8,750. Time-wise this comprises my trader's diary 7/9 to 7/19.
What about this coming Monday? The shares closed snake-belly near their low on Friday and so should continue lower early the next trading day. More panned gold for a put-holder, thanks to what classical Dow chartists call: lower tops and lower bottoms" and the Ellioteers term "the a-b-c- downslope." Yet let us not forget Darvas' words: "There is no such thing as 'can't' in the stock market. A stock can do anything." Add to this my own hair shirt aphorism: "Anything is possible and I could be mistaken."
Monday and thereafter, selling the Januarys at a profit stands as a possibility. More so if a further wane of the stock boosts their poundage. Or I could hold them and create another diagonal spread by selling 10 August 90 puts which ended the day at 2-¾ ($2,750 minus commission). However, with the stock in the low 90s, a 90 strike price is too near to in-the-money. A steeper diagonal, perhaps, with August 85 puts? Tis a 1-3/8 point ($1,375 minus commission) opportunity, with more downward space for the shares to sink to. Or maybe no short end for now if the stock slides markedly.
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