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Well, there’s been a delay on the Visa breakdown, and it appears we’re nearing a breakout from a triangle pattern:

I had originally ignored the supporting upward trendline when I decided to go long on put options (betting that the price would break down.) However, I’m still convinced because of the extremely high volume day back in December that the price just isn’t going to go above 88. So while I wasn’t right about Visa tanking right away, I do think it will break out downward rather than upward. Because of the time nature of options, it just needs to happen within the next two weeks. We shall see!

A little while back I posted on a couple of options plays with XRX and ZION, and I wanted to follow up on those.

XRX – Xerox
This stock did exactly what I thought it would do.

I sold half of the position at the first red arrow, and the other half of the position at the second red arrow. It took a little longer than I hoped to get to 6, but it worked out pretty good in the end.

ZION – Zions Bancorporation
I should have been more worried about the earnings! If you recall, I was confident that the earnings report would result in a price increase in the stock becuase it had already broken out of a long term trend line and it had broken out of an inverse head and shoulders pattern. Well… I shouldn’t have been so confident:

As you can see, the price fell below it’s neckline back to the point of the long term down trend on the earnings announcement, and now the neckline is acting as resistance. Instead of the target of 20, we’re looking at 12.25. The options are currently worthless but if we break that neckline again they might gain some value.

Or more accurately, should I hold or should I sell?

Here are a couple of positions I’ve entered recently and now I’m faced with the age old dilemma of trying to pick the best time to take profits and exit the position. You want to “ride the winners” so you don’t want to sell too soon, but you also don’t want to get overly greedy and watch the profits evaporate on the pullback. So, that being said, let’s take a look at the positions:

XRX – Xerox
This stock is hammering out a bottom and has generated a clear reversal signal in the upward breakout of a triangle pattern. As a result of those signals, when the price was $5.30, I went ahead and bought MAY 09 6 CALL @.20, fully expecting the price to reach and exceed $6 before options expiration in May.

(click for larger image)

The reasoning for this is that $6 is still below the longer term descending trend, so the price shouldn’t meet resistance before then. In addition, there is an earnings report coming out on the 24th, which may cause the price to gap in one direction or the other. Currently, the price of those calls has gone up to $0.45, or a profit of $25 per option contract (ignoring commissions.) There is nothing on the chart to indicate that the target of $6 will not be met soon, which would raise the price of the options further. There is indication though that the price won’t go much above $6 if the resistance holds true. At this precarious point it’s hard to know what’s going to happen, so should you play it safe or gamble on the breakout?

Here’s what I’ll probably do: when the price of XRX makes a new high right around the $6 range I will liquidate a percentage of my position to cover the initial cost of the investment, not to exceed 50% of the calls. Then I’ll hold the rest of the calls through earnings and hope for the gap up to break the long term declining trendline. If I am wrong and the stock gaps down on earnings (bouncing off the resistance) then I won’t lose any money, but I also won’t gain any.

ZION – Zion Bank Corporation
This stock has completed an inverse head and shoulders breakout and retracement and is headed for the sky. As such, I bought call options on the retracement when the price was $12.50: MAY 09 17.5 CALL @.35. This company is also coming up on an earnings release, but since the stock has already broken out of a pattern and a down trend I’m not really worried about it. Even if the stock goes down on earnings I think it will have the strength to quickly rebound.

(click for larger version)

Again, there is no reason to believe that this current uptrend will reverse, but the question is: which target should I use? The target of the H&S; breakout is $19, but if you look at the more long term downward trend breakout and use Fibonacci retracement levels, there is also a target at $20 (38.2%) and $25 (50%) so where should I liquidate the position to maximize profits?

What I will probably do is simply cut it 50/50 and sell half of my calls when the stock price reaches $19 for a profit of $250 per call. Then sell the rest of the calls when the price reaches a new high or if it miraculously reaches $25. If the new high was somewhere around say $21, that would be a profit of $400 per call, and if it actually does make it to $25 that would be a profit of over $700 per call.

If I’m totally wrong about both of these stocks then I will have lost my initial investment in calls of about $20 each. When you look at the potential upside and the probability of it happening, the investment is well worth it. Even if I’m only right now and then, the overall profit will far outweigh the loss. Not all of my picks have been winners so far but most have them have either covered their initial cost or made a pretty good profit. I hope some of my current picks will work out to be homeruns but that will only happen if I ride the winners.