Here are some of my notes from a great article by Chuck
Hughes called Path to High Accuracy Option Trading
Step 1 – Use trend following systems to select stocks
Step 2 – Use historical price data to select time length
with high accuracy
Step 3 - Purchase in the money options with low time value
Option Time Value Characteristics
- Options consist of time value and intrinsic value
- Options lose all time value at expiration and consist of only intrinsic value
- The time value of an option is a wasting asset
- In the money options have more intrinsic value
- Out of the money options consist of only time value
- Goal is to minimize time value and maximize intrinsic value
Advantages of In the Money Call purchases versus Out of the
Money
- In the money calls allow us to employ money management to limit losses
- In the money calls contain less time value and more intrinsic value
- Does not require large stock price increase to break even or profit
- Helps prevent a total loss of investment
- Less overall risk
- Higher percentage of wining trades
Reduce risk by setting stop loss at 25% below premium
Check the 50 day and the 100 day moving average for areas of
support
Check the 1 month and the 20 month moving average for areas
of convergence
Trend Confirmation:
At any given time there can be hundreds of stocks in a price
up trend
Trend confirmation indicators can help us narrow the list of
eligible buys
- Volume
- New 52 week high/low
- Industry grouping
- Price level confirmation
On Balance Volume Line:
Need to see up sloping line to confirm trend is supported –
buying pressure is exceeding selling pressure
Buying pressure must continue to exceed selling pressure in
order to sustain a price trend
Confirmed up trend – stock price is trending up, volume
increasing on the days the stock closes up, volume decreasing on the days the stock
closes down.
A new 52 week high confirms the price trend
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