OPTIONS
Your Options Game Plan
Trend And Volatility
by Jesse Chen
This combination can help you determine your optimum spread strategy.
In options trading, you often either become attached to a few spread strategies or end up gambling on individual calls or puts. Unfortunately, no real methodology can be developed using either of these techniques. A steady and consistent trading income can come about only when you create a complete game plan for trading options. One such game plan or methodology involves the combination of trend and volatility.
USING IT
The first step is to find an underlying stock or future with a big options chain, such as QQQ or MSFT (Microsoft). The advantage of working with an underlying instrument with a big option chain is that it gives you more spread strategies and better liquidity.
Next, you need to find the trend of the underlying, which you can do by using basic technical analysis techniques. I have categorized a 30-day trend into the five levels displayed in Figure 1. These percentages are tweaked arbitrarily based on today's prices versus the price 30 days ago.
Figure 1: Here you see how the 30-day trend can be categorized into different levels.
...Continued in the February 2003 issue of Technical Analysis of STOCKS & COMMODITIES
Excerpted from an article originally published in the February 2003 issue of Technical Analysis of STOCKS & COMMODITIES magazine. All rights reserved. © Copyright 2003, Technical Analysis, Inc.