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Best Mid-Term Trade
"Best
Trade" Newsletter (February 28, 2006)
continuation of the
previous "best trade"
on 02/02/2006
and 02/08/2006
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,
B, C trades (Buy
Calls) are opened
in order to close it later with profit if the
index moves in our favor.
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Chart 1: |
Options trades on the
S&P 500 Advance Decline Indicators and High Magnitude Volume. February, 2006.
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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
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Date |
Trading
Decision |
Motivation |
| 01/20/2006 |
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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. |
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01/20/2006 |
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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. |
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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. |
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02/08/2006 |
Buy Calls |
At the end of the day on
February 8, 2006, on the
S&P 500 15-day chart, the fast index
moving average (20) crossed and ran over the slow index moving average
(80). This confirmed index reversal movement in reaction to the
negative market sentiment in the period from January 30 until February 7, 2005. |
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02/28/2006 |
Buy Calls |
On February 28, 2006
we noted extremely low market sentiment readings. Around 12:30 the S&P 500 advance/decline (A/D) issues and A/D VOLUME ratios
reached critical levels of 0.07 and 0.14, respectively. |
Below we list in detail the actual trades made,
along with the netted returns achieved..
Table 2: Details of the trades
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Date |
Trade |
Strike |
Expiration |
Contracts |
Contract
Price |
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02/02/2006 |
Buy QQQDO Calls |
$41 |
4/21/2006 |
70 |
$1.75 |
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02/08/2006 |
Buy QQQDO Calls |
$41 |
4/21/2006 |
90 |
$1.40 |
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02/28/2006 |
Buy QQQDO Calls |
$41 |
4/21/2006 |
120 |
$1.10 |
Fast Answers:
How should be invested in options?
If you trade
options, we recommend you invest only a small portion of your assets - an amount
that will fit your personal trading needs and risk tolerance. In our opinion,
that amount should be about 10% of your total portfolio; it should never exceed
30%.
At the same time, we do not recommend that you commit more than 30% of your
options portfolio to a single trade. If the market doesn't move in your favor,
but indicators remain strong, you may choose to invest another 30% of your
options portfolio on a second signal, and perhaps even on a third signal. By
proceeding in this way, each time you enter the market in a better position, and
usually the profit from the last trade will more than compensate for the loss
from your first trade.
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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