Trade of The Week: Eastman Kodak

Important note: This trade and this stock are not recommendations, this is “educational” material only and you should read the risk warning.

Did you see the news on 5 January that “Kodak shares tumble 28% amid fears about its future”, followed just five days later on 10 January by “Kodak stock rises 46% on new business plan”? Did you take advantage of those events?

I did, and it looked like this:

 

I’ve used an IG Index chart to illustrate this trade because, as I explained here, their charts are automatically annotated with your currently-in-play trades and orders.

Step 1: Bagging The Bounce

When the initial “bad news” story broke, I established a long position at what I hoped to be the low point, in anticipation of a bounce after the possible over-reaction. By the end of this chart, my position established at 45.77 (lower blue line) was in profit by 15 points (market price 60.73) and had been a little higher.

Rather than take the money and run, at this point I had managed to move my stop order (dashed red line) to a better-than-break-even 51 thereby securing at least 5 profit points (but not guaranteed) while leaving the position in play to run a while longer.

Step 2: Pyramiding

The next step is optional. It increases the potential profit, but at risk of coming away with no profit at all.

I created an opening order that will buy a second position at 56 if the price tests the apparent resistance level at that price, with a stop order at 51 that limits my potential loss on this second position to just 5 points.

See what I’ve done here? With both stop orders at 51, the potential loss on my second position established at 56 is exactly the same as my locked-in profit on the original position established at just under 46.

If the price falls to stop me out at 51, which is some 20% lower than the recent peak, I’ve lost nothing and gained nothing. In a sense this trade is now risk-neutral. But if the price heads higher, my profit will accumulate at twice the rate now that I have two positions.

I don’t know what will happen next, but I’ll keep you posted.

Who says “You Can’t Trade the News”?

Actually, I have said before that you can’t trade the news; well, not in the conventional sense of buying when the news is good and selling when the news is bad. As a contrarian I bought when the news was bad, and now I’m holding — maybe even pyramiding — while the news stays good and my overall position stays risk-free.

Tony Loton is a private trader, and author of the book “Position Trading” (Second Edition) published by LOTONtech.