Disclaimer – This example was selected for the demonstration provided below. These trade setups happen all the time and on every chart but your results may vary. You should always do your own due diligence before making investment decisions and/or consult a registered financial advisor. This page is not a recommendation for you to buy or sell any securities or attempt the information provided. It is for education and entertainment purposes only.
Identifying Options Trades
Let me start by saying…
I’m NOT a fundamental trader, I’m a technical trader. In the pages of this site you’ll notice that most, if not all, of my decisions are based on technical alerts. Trend lines, Support and resistance, etc. For more on the indicators I use along with other highly used indicators please take a look at the technical indicators page.
Now, with an understanding of what the options market is and the tools at our disposal lets turn our attention to the assets from which they’re derived.
First, take a look at the chart below and attempt to determine what the stock will do next. The following steps are what I do with every chart and before ever placing a trade.
Click to enlarge.
This is a daily chart of Delta Airlines (DAL) on Feb. 8th, 2016. Can you tell what state this stock is in? It shouldn’t be difficult… its in a nightmarish downtrend! Well, its really only a nightmare if you were long the stock or for our purposes, if you were long a call option.
* For this example lets assume that no detrimental news or any other black swan event is affecting Delta’s share price.
What can be concluded about this stock on Feb. 8th?
– Delta is in a steep downtrend.
– Trend lines confirm the downtrend.
– The stock is nearing a major support level.
– Bollinger %B suggests the stock is heavily oversold.
– The moving averages confirm the downtrend.
– No signal from the PPS indicator suggesting a reversal.
*This list isn’t intended to be exhaustive.
With this information it’s clear there isn’t a trading opportunity at this time.
Because the stock has already moved substantially lower, for it to be profitable, the move down would need to continue. True… It could continue lower, maybe all the way to zero but I have to make a reasonable decision. To jump in now hoping for more is, in my opinion, just gambling and I’m not a gambler.
Fast forward 8 days…
Delta just 8 days later. Click to enlarge.
What can be determined here?
– The stock has rebounded sharply off support.
– The Bulls appear to be entering.
– Bollinger %B is suggesting neither overbought or oversold.
– The moving averages have reversed. Suggests new uptrend starting.
– Next major area of resistance still ~$6 away.
– Received a signal from our PPS indicator suggesting the stock will continue higher.
Now that I’ve determined a trading candidate I can dig a little deeper…
I’ll start by taking a look at the chart for the volatility index (VIX). The VIX moves opposite of the broad market and is a critical piece of the puzzle for finding trading opportunities. I also take a quick look at the S&P 500 (SPX) chart. Stocks tend to move in the direction of the broader market so placing a trade without at least considering VIX and SPX wouldn’t be good practice imo.
Volatility index and SPX below. Click to enlarge.
What can be determined from the two charts above? I’ll examine them both individually…
“The S&P500 trades opposite the VIX”
Volatility Index (VIX)
– VIX has pushed back off upper resistance.
– Appears to be the start of a new downtrend.
– Bollinger %B suggesting neither overbought or oversold.
– The moving averages have reversed course and are moving down.
– PPS indicator suggests new downtrend has started.
S & P 500 (SPX)
– Strong push back off support at the low.
– Bulls appear to be entering.
– No significant near term resistance.
– Bollinger %B neither overbought or oversold.
– The moving averages are reversing course and moving up.
– PPS indicator this day suggesting new uptrend.
Pulling it all together. A quick recap…
– Delta (DAL) is entering an uptrend.
– (DAL) Moving averages suggest an uptrend.
– (DAL) PPS suggests an uptrend.
– S&P 500 (SPX) suggests an uptrend.
– The Volatility Index (VIX) suggests a downtrend (VIX moves opposite the market)
With this information I would decide to place a trade on Delta Feb. 16th, 2016.
Now… with the tools to win… How can I drown out the noise and make profitable decisions in this environment?
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