Jonathan Lawson

As I transition my seasons from trading season to ski season it takes some adjustment. The clothes are certainly different. If you knock on my door in the summer I am probably still in my PJs. The putting on multiple layers, making my way up to the hill and teaching @ 10,000-13,000 ft all day. But during the winter I am up early reviewing my contingencies for the day. I may still have 50 orders on when I am off to the mountain. None of which are very large.

I also turn on my Blackberry service during the winter time to keep track of market events and fills.

During the winter I reduce my total risk on a directional strategy below .5%, and between 1-3% on a non-directional strategies. All and all, pretty small and it keeps me sane while I am away from my office.

Today was pretty darn good.

Long DRR - 43.52
GLD - puts @ 84.05
HRB - Apr/Jan 20c - Added =2 units to go with my 17.5p calendar and 22.5c calendar
PSY - Exited 75% @ 6.08. 18% in 3 days.
KLAC - exited 1 unit of dec/Jan 20p calendar for .93
SAI- bought 1 unit of Feb/Jan 20c

It was a busy day for being present on just 2 of my trades. The ski day was exceptional, and people I skied with were a joy. Being up .6% on the day was a bonus.

I was asked about building Tranches to establish a position and create a basic trading plan. Here was an excerpt of my reply. Now I just have to learn how to pyramid positions when it is going my way. I am very good at doing this with Calendar spreads and short Iron Condors, but I have trouble doing it with directional positions.

Here was my reply:
On directional trades I may risk 2% of my capital on an idea. Let's say a 100,000 acct. I am willing to risk 2K.
Here are my numbers using the "Max Shares" Formula using 3 tranches, but you can do it with a number of tranches.
i.e 3 tranches: My first tranche I am willing to risk $2000/3= $667/tranche

Start buying @ 10. Profit target @ 16, loss target @ 8. Trade target Jan 25, 2009

Tranche 1: 334 sh @ $10/sh
Stock Price Tgts:
Profit Exit: $16.00
Entry: $10.00
Stop Loss: $8.00
Max Shares: 334
Potential Reward $2,001.00
Reward/Risk 3.00
Cost of entry $3,335.00
Target Date Jan 25 2009

Tranche 2: 667sh @ $9/sh
Stock Price Tgts:
Profit Exit: $16.00
Entry: $9.00
Stop Loss: $8.00
Max Shares: 667
Potential Reward $4,669.00
Reward/Risk 7.00
Cost of entry $6,003.00
Target Date Jan 25 2009

Tranche 3: 1334sh @ $8.50/sh
Stock Price Tgts:
Profit Exit: $16.00
Entry: $8.50
Stop Loss: $8.00
Max Shares: 1,334
Potential Reward $10,005.00
Reward/Risk 15.00
Cost of entry $11,339.00
Target Date Jan 25 2009

So, If we get down to 8.50 I will own 2335 shares. And my risk stays at $2000 if the stock goes down to $8. To use this method, it is VERY IMPORTANT to be strict about using your stops!
The risk in this market is of a gap down below $8. If it does, then the losses get steep. I use the 2% in a bull mkt, but I may use 1% or less in this market. This will offer added protection if there is a gap down open.

Using this method, I may also look for spots to trim my position. If I have 2335 shares on, and we get a rise to a resistance level @ 12, then I may take off a portion of my trade. And trade around a core position. Say.... $1000 of risk. And bank the profits on much of the position. Then if the prices moves back down to a support, I may add on again using the same tranche style set up.

I am doing this with PSY right now. Although, in this bear market I was up 18% in 3 days, I decided to take 75% of my position off. If we get a move back down, I will pick more up in 25% risk increments (approx $500 per tranche)

Before going into a trade, I know I will get out:
1)by a certain date
2) by a certain price (gain and loss)
3) with a certain reward/risk relationship