Since I have been in the process of building my funds back up in my account, I have been doing daily observance of the markets to see if there are any viable trading opportunities, and if there are, doing paper trades on them to see how they would play out. This will get me prepared to trade for real when I am in shape financially to do so. My wife still has some funds to do an option trade here and there, but her cash reserves are down, so I only do one once in awhile on lower-cost trades that really look good.
I've had a few good trades lately, and found that the 2-contract (could be just a multi-contract, but in multiples of 2) trades in one direction are working much better than trying to do two-direction trades. The market just isn't that volatile at this time.
The trade that seems to be working right now is using high-volatility stocks and find the ones that make 3-5 point swings within a few days. After it has gone up or down an unusual amount for several days, look for the sign of a turn-around. I've found that a larger gap up and subsequent reversal work the best. If it reverses to under the previous day's close, it is time to consider a trade.
I've also noticed that if there's an inside day after several up or down days, you can look for a reversal by the following day going below the low of the day the original hi (or low) was made. That's when a trade should be considered.
Now, remember to always have a plan in mind. Determine where the trade is going the wrong way and put stops. Especially when you have exited from the first half of the trade (we'll get to that later.) I realize that you can't really put stops on the trade to begin with in an option trade. You need to put a mental stop on the underlying stock when it goes the opposite way of your trade.
Generally, you aren't going to be wiped out by not putting a stop because we are dealing with small amounts here. You should figure out how much you have to trade and that you can lose the whole amount of the trade and still be ok. There is also an amount of time to consider. On lower priced options, generally, you are going to be kind of close to the expiration, so we can't hold the thing more than 2 or three days. Don't be trying to make a killing on every trade either. Generally, we are going to be taking small profits on a larger percentage of the trades, or breaking even, and then, once in awhile, getting a large profit on the second part of the trade upon letting it run.
We'll get into the specifics on exiting next time.
Later!
