Best Mid-Term Trade
Mid-Term
Trade (January 20, 2006)
In the following example, we have based our
QQQQ options trades on S&P 500 index volume indicators and on advance /
decline indicators. Using the principles outlined below, you may wish to trade
options on the SPDRs (SPY), ^SPX, DIAMONDS Trust, Series 1 (DIA), as well as on
other underlies that generally tend to move in concert with the
S&P 500 index.
It is also conceivable that an analysis similar to the one shown below could be
used to trade options based on the NASDAQ 100, Russell 2000, and other indexes.
Below you will find a Table of Trade Motivations and a chart showing the trades,
including detailed trade calculations.
For this "Best trade", A trade (Buy
Calls) is opened
in order to close it later with profit if the
index moves in our favor.
|
Chart 1: |
Options trades on the
S&P 500 Advance Decline Indicators and High Magnitude Volume. January, 2006.
|
 |
In Table 1 - a "Table of Trade Motivators"
- we show the motivating factors that led us to take the above trades.
Table 1: Table of Trade Motivators
|
Date |
Trading
Decision |
Motivation |
| 01/20/2006 |
|
On January 20, 2006 we
noted extremely low market sentiment readings. The S&P 500 advance/decline (A/D) issues and A/D VOLUME ratios
reached critical levels of 0.11 and 0.09, respectively. This
revealed an extremely bearish market sentiment, indicating the market
was oversold and thus prone to trend reversals. |
|
01/20/2006 |
Buy Calls |
On January 20, 2006 we noted a
high-magnitude buying volume surge. The (2/10) PVO was 16.2%, indicating that that the average volume was more
then 16% higher than it had been for the previous 10 trading days. |
Below we list in detail the actual trades made,
along with the netted returns achieved.
Table 2: Details of the trades
|
Date |
Trade |
Strike |
Expiration |
Contracts |
Contract
Price |
|
01/20/2006 |
Buy QQQCO Calls |
$41 |
3/17/2006 |
70 |
$1.40 |
In choosing the options for these trades, the
following criteria were used:
- We chose options with at least two months
left until expiry;
- We chose one of the cheapest available
in-the-money options.
Fast Answers:
What is a Buying Volume?
Simply put, that means that most of the volume surge was connected with the
index while it was moving down. The magnitude of a volume surge measures by the
divergence between two 2 VMAs with different settings (Percentage Volume
Oscillator - PVO).
If one of your trades has not yet been terminated (by the time you report
it as a "Best Trade), should I try to follow it?
Our "Best Trade" feature is designed primarily to teach you how to
use our volume and advance/decline indicators. We do not wish to suggest that you should mimic these
actual trades, even if they are still open. Only follow an open trade if you are
aware of the risks and if you have access to real-time intraday volume and
advance/decline charts
(you can get these from www.MarketVolume.com).
Important:
The analysis results presented in the "Best Trade" may differ from
the outlook presented in the daily Market Commentaries. Results may also differ
from the trading signals generated for Exchange Traded Funds (ETFs), or from any
other research and analysis efforts shared with our members. These are products
developed by independent research teams, delivered to MarketVolume® members.
While sharing some research results, these autonomous research teams may use
different systems and may have dissimilar market outlooks.
| Disclaimer: This newsletter is intended
for educational purposes only – it does not constitute trading advice,
nor does it make or imply any market trend predictions. This newsletter illustrates
examples based
principally on MarketVolume®'s index volume indicators and
advance/decline (AD)
indicators. We do not mean to imply that you should follow
our exact trades, but rather wish to suggest that you may make use of our
analytics to develop your own trading style. |
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