The Surprising Secrets to Finding Good Trades
OK, after yesterday, you now you understand the basic types of options and how they work.
If you’re interested in pursuing them, how can you find good potential options trades?
Here are some techniques for your arsenal and things to consider when choosing options:
Technical analysis can help you determine a stock’s movement in terms of how much it’s moving, in what direction, and how long it’s been going on.
Technical analysis is vital for narrowing down your choices for stocks to trade. Day traders already know this.
But it’s also an invaluable way of determining and identifying desirable options trades, too. Actually, since there’s a finite time period assigned to the options contract, you can use targeted technical analysis indicators to narrow down your choices.
Here are a few of the indicators that you can use to find options:
- Bollinger bands: It might sound like an indie rock term, but this is actually a measure of volatility.
With this indicator, bands expand with greater volatility and shrink with less volatility. If a price is closer to the upper band, it could be overbought, and on the flip side, if the price is close to the lower band, it may be oversold.
- IMI: Short for intraday momentum index, this indicator can help you look at options from an intraday point of view.
- MFI: Short for money flow index and also known as volume weighted RSI (see below) this is an indicator that shows you price and volume data at once. It keeps track of the flow of money into a security, both in and out, over a period of time.
- OI: No, not in a punk rock way. Short for open interest, this indicator shows you the open options contracts. Looking at this indicator can help you begin to identify or confirm trends in options.
- PCR: Short for put-call ratio, this indicator shows you the volume of put options versus call options. It can show you the overall market mood when it comes to options.
- RSI: Short for relative strength index, the RSI is an indicator that allows you to compare gains and losses over a period of time. This can help you see the price movements to see if options are being overbought or oversold.
Charts & Patterns
As a penny stock trader, I rely on charts and patterns to tell me a bigger story about whether or not a stock is a good pick.
I consider this a huge part of my success as a day trader and it’s one of the biggest things I emphasize to my students.
If you want to employ day trading strategies to options trading, making use of charts and patterns can prove immensely helpful.
Timing is key when it comes to trading. This is particularly true with day trading, where the pace is fast.
Personally, I’m a big advocate of waking up early, well before the stock market opens, so that you can do your research well before the market is in full swing.
This will give you a greater chance of recognizing opportunities as a trader. After all, a lot of the action happens right when the market opens, so you want to be prepared.
You can review what’s been going on in the market overnight, and see what’s going on in the foreign markets. You can check indicators, and look at charts to see if you can identify any trends.
If you ask me, one of the biggest keys to success in any trade is doing your research. This will not only help you make better choices about options to trade, but it will help you prepare a stronger trading plan which includes a well timed entry and exit.
A stop order is an order type where you specify that you want to buy or sell a stock only when it reaches a specific price.
This is called the stop price, and when it’s been reached, the order is executed as a market order.
A buy stop order is when you enter the trade at a stop price exceeding the current market price, where a sell stop order is when you enter the trade at a stop price below the current market price.
You can set up a stop order with options. This means that if the price reaches your specified price, the options order is executed at the market price. The idea is that you can potentially limit losses and control the trade a bit.
However, it can also limit gains. The thing is, the stock market is ever-fluctuating. So there could be a temporary event that has an effect on the price and causes your order to execute.
Even if your investment is doing well, this could be a quick pull trigger that keeps you from maximizing potential profits.
If you’re interested in stop orders while trading options, be sure to discuss your options (no pun intended) with your broker. The choices for stop orders with options may be different from those when you’re just buying stocks.
Sold yet? If not, I’ve outlined the benefits that come with having options trading in your repertoire.
I’ll share those with you tomorrow. Hang tight.
— Tim Sykes
Editor, Penny Stock Millionaires