Best Mid-Term Trade
"Best
Trade" Newsletter (February 2, 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. February, 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 |
|
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.
As a rule, significant volume surges point to coming market reversals. |
|
02/02/2006 |
Buy Calls |
On February 2, 2006 we
noted low market sentiment readings. The S&P 500 advance/decline (A/D) issues and A/D
volume ratios
reached strongly bearish levels of 0.15 and 0.18 around 11:30, respectively. This
revealed an extremely bearish market sentiment, indicating the market
was oversold and thus prone to trend reversals. |
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 |
|
02/02/2006 |
Buy QQQDO Calls |
$41 |
4/21/2006 |
70 |
$1.75 |
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:
How can this chart be used by me?
Our main reason for publishing these charts is to allow our members to learn
by another trader's example how they can make trades based on our volume
and advance/decline indicators. Members can gain a better understanding of how to enter
and exit the market, based on when a signal is generated. To learn from these
charts, you don't need to trade the specific security mentioned in this
publication, but whatever security you feel comfortable with. The principles for
trading QQQQ shares will not change when trading something like S&P 500 futures.
Should I try to paper trade before trading options?
Yes! We suggest that anyone who is new to our signals and analysis try doing
some paper trading to start, at least until they are comfortable with
interpreting our signals. Only very experienced traders should trade options
because of the high risk involved. You can always trade index shares instead of
options and still make a decent profit, but returns will not be as large.
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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