I had to make a decision about the HOG Rider system today. At expiry (nearly two weeks ago) the setup was bullish, but there was no entry signal, and I have been watching HOG daily now for nearly two weeks, and last night the signal appeared. Please note the last candle is misdrawn by my software, but I have included suitable notes.
So I see a ''nearly Doji'' candle (only 1c between open and close) that has barely closed over the 9WMA. So the system requirements have been met - but is there some discretionary reason not to take the trade?
The next picture is the options chain and the light blue highlights are the options selected by the system. If you zoom in, you will see a very large bid-ask spread in the selected options. Buy spread is 10c and 30c, and the Sell spread is 46c and 57c, which are both significantly wide for normal HOG prices.
What should I do? Can I wait a night and see if the signal improves? Should I blindly follow the system regardless of the alarm bells concerning marginally acceptable signals and the wide bid-ask spreads?
I am entering the trade. I have been watching this pullback for nearly two weeks waiting for a bullish signal so I need to accept the fact that this is how the system works - the system has set me up to build a credit spread close to the price, and the Implied Volatilty caused by the falling HOG price has pumped up the options value which is excellent for the credit spread. It is also the reason for the widened bid-ask spreads. It is Friday, and if I wait another day then I will also lose the weekend Theta (time decay) gains that the credit spread provides, as well as lower prices if HOG does move away from the 63EMA, as well as possible IV drop as the market see HOG going bullish.
So this is the trade. I have shaved it (looking for better prices than the market makers are giving). The sell leg was 47c and 56c - so I shaved it to 50c, and the buy leg was 10c and 30c which I shaved to 22c (in both cases I found the mid-price and gave up some value by dropping my sell and raising the buy a couple of cents). I have sold four contracts to stay under my $1,000 limit. I will be staying up watching the USA open to get a fill as I may have to shift my price a bit to meet the market.