Frequently, I am asked how I go about placing my trades so quickly, as this strategy is so depending on getting into and out of the trade as quickly as possible.
Before I go into this more, I would like to add the link to the last of my other articles on this strategy that I published on Seeking Alpha. This was a five-part series, and I will write an article now and then on questions I may receive periodically.
I generally like to start every article with the basics on how to use this strategy with the five technical indicators. Here is a quick summary and recap (Note: if you are already familiar with this strategy, you can skip this part):
Bollinger Bands - I use the 12,2,2 as my parameters, i.e. (12) as the Simple Moving Average ((NYSE:SMA)) and Standard Deviation, (2) as the standard deviation of the top band, and (2) as the standard deviation of the bottom band. As a personal preference, I will not begin to even consider making a trade until I see the current price action move below the bottom band (calls) or above the top band (puts), but this is only one of the indicators needed out of five (5) total.
Relative Strength Index - I use a length of twelve (12). The RSI is an indicator that shows when a stock is at overbought and oversold levels. It has a range of 0-100. A reading on the RSI of 70 indicates overbought levels, while 30 is considered oversold. Some traders like to go even below the standard 30 level for a buy confirmation, but it is ultimately the trader's choice.
Intraday Momentum Index - The IMI is invaluable as far as I'm concerned for an options trader who gets in-and-out of positions quickly. The Intraday Momentum Index is similar to reading the Relative Strength Index, in that both of them have a range of 0-100. Again, 70 indicates overbought, while 30 is considered oversold. I also use the range of twelve (12) to correlate with the RSI. Again, it is the trader's preference as to what length works and what he or she likes to use. The Intraday Momentum Index is a very powerful technical indicator to use for any type of trader.
Money Flow Index - The MFI follows the IMI as the next indicator. The MFI is a momentum indicator that is used to determine the conviction in a current trend by analyzing the price and volume of a given security. The MFI is used as a measure of the strength of money going in and out of a security and can be used to predict a trend reversal. The MFI is range-bound between 0 and 100 (like the RSI and IMI) and is interpreted in a similar fashion as the RSI and IMI. The fundamental difference is that the MFI also accounts for volume, whereas the RSI only incorporates price. It is also different in the fact that instead of the number 30 indicating oversold levels, the Money Flow Index uses 20 as oversold and 80 as Overbought.
Full Stochastic Oscillator (do not use only the Fast or Slow Stochastic) - Used by many Forex traders, I find the FSO tremendously helpful in my trades as another indicator that confirms what the previous four have already done. Combining all of these indicators together really validates when it is an opportune time to buy. The FSO is a combination of the Slow Stochastic and the Fast Stochastic and is more advanced and more flexible than the Fast and Slow Stochastic and can even be used to generate them. Readings above 80 act as an overbought signal while readings below 20 act an oversold signal. The parameters I prefer to use are (10,6,6) for daily trading.
For the most part, the criteria that a stock needs to qualify it as a trade possibility follows:
The stock should at least be $100/share or more.
The options for the underlying stock must have liquidity.
The underlying stock has large price swings daily (i.e. volatile daily).
There are some exceptions, which I will mention later in the article.
To keep up-to-date with the current stocks I am using with this strategy, they are the following:
Apple Inc. (AAPL)
CF Industries (CF)
Wynn Resorts (WYNN)
F5 Networks (FFIV)
I also have an alternate list of less expensive stocks that also work very well with this strategy. They are the following:
Las Vegas Sands (LVS)
Direxion Financial Bull 3X (FAS)
Direxion Financial Bear 3X (FAZ)
EMC Corp. (EMC)
Marvell Technology (MRVL)
MGM Resorts (MGM)
Research In Motion (RIMM)
AK Steel (AKS)
Bank of America (NYSE:BAC)
please check my InstaBlog for the latest updates and additions/deletions.
To get into the basis of this article, I want to stress how important it is to have your trade ticket ready to go before it even is ready. This will save you valuable time. Even if the trade never materializes, it will ensure that if it does, you will not be missing out on quick price changes that often happen with Apple, Google, CF Industries, Baidu, and so on. These stocks move a lot by the tick, and a $0.20 or $0.30 swing is seconds is common.
Since this strategy is based on capturing quick gains, whether it be on buying a call or put option, it is vital that you get your order placed on time. Look at it this way: Assume you have ten (10) contracts in mind to place on Apple. The stock is moving near the bottom Bollinger Band (oversold) and you decide to wait until it crosses and the other four indicators are also near their respective "buying" points. In my opinion, this is too late. By the time Apple hits the bottom Bollinger Band and crosses it, along with the other four indicators being reached, the chances are that you have probably missed the best time to get into the trade at optimal point. Yes, there are exceptions, the stock can always move down a little from that spot, but you really want to already have the delta, strike price, and month already up so you do not have to worry about doing so when the time comes to place the trade.
One of the first things I do when i train someone on this strategy is preach the importance of the trade ticket being ready. By simply scanning the grid view on platform, the possibility of what trades look to be potential candidates will present themselves. From there, if the Bollinger Bands are being approached by the price action, this is when you would then put the ticker symbol into the "main" streaming chart.
While it may seem tedious, as many possible trades never reach the parameters of the strategy, it is best to get into the habit of consistently doing this and getting your ticket ready. I can assure you that not only will you make better trades, but you will not overpay (trying to get into the trade too fast), panic, or wonder if you choose the right strike price. Since you will already have a trade ticket up ahead of time, it will also give you time to make sure everything is where it needs to be.
You can also contact me by e-mail at anytime if you have any questions related to the strategy or meeting at some point. Thanks again for reading my articles.