Best Mid-Term Trade
"Best
Trade" Newsletter (March 8, 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.
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.
Below you will find a Table of Trade Motivations and a chart showing the trades,
including detailed trade calculations.
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Chart 1: |
Options trades on the
S&P 500 Advance Decline Indicators and High Magnitude Volume.
March, 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 |
|
03/06/2006 |
|
On March 6, 2006 we noted a high-magnitude volume
surge to the index downside. The (2/10) PVO was 7.3%, which
indicates that the volume seen on this day exceeded the average volume
over the previous 10 trading days by 7%. The bulk of this volume surge
occurred between 13:20 and 15:00 during a time when the index was in
decline (see 5-day index volume charts using a 15-minute VMA). |
|
02/28/2006-03/08/2006 |
|
As of February 28, 2006, A/D volume and
A/D issues ratios were in the red zone (i.e., below zero). An exception
was March 1, 2006 (see 3-month A/D charts with a 1-day VMA). That
indicates the accumulating of the negative sentiment for last 7 trading
days that started with the strongly negative sentiment on February 28,
2006 when the A/D issues ratio hit a level of 0.14. |
|
03/08/2006 |
Buy Calls |
On March 8 2006, we noted a volume surge to the
index downside. The bulk of this volume surge occurred between 10:30 and
12:00 during a time when the index was in decline (see 1-day index
volume charts with a 15-minute VMA). Following this occurrence, the
index started to rise. The volume surge on March 8, 2006 was not very
pronounced, but two additional factors prompt us to make a decision to
buy calls with the expectation of at least a short-term move higher: (1)
The market did not react to the buying surge on March 6, 2006. (2)
Accumulation took place during the course of the previous week where
market breadth readings were negative. |
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 |
|
03/08/2006 |
Buy QQQEO Calls |
$41 |
5/19/2006 |
100 |
$1.25 |
Fast Answers:
When do you normally close a particular "Best Trade"?
Under normal circumstances, we exit from a trade when we see a clear,
unambiguous volume signal. However, in order to play it safe,
we sometimes even terminate a trade in the absence of a volume signal - for
instance when we are up by 20 - 30%, or in the presence of certain market
affecting factors, such as news on geopolitical events, Fed announcements,
options expiration, and
others. In other words, there are certain situations where we may ignore our
volume indicators. It is our belief that in options trading, it is often better
to take a quick profit rather than overstaying and putting the entire investment
at risk.
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?
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 involved and if you have access to
real-time intraday volume and advance/decline charts (you can get these
from www.MarketVolume.com).
For logistical reasons, we cannot always send our newsletters out exactly at
the moment we open or close a specific trade. Even if we could, it might be
too late, since the market can react strongly to intraday volume surges or
negative/positive sentiment readings in our A/D indicators.
We welcome any questions or comments you might
have regarding this "best trade".
©HGH Associated Traders
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® 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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