SIMPLE OPTIONS STRATEGY
With Trump obliterating the stock market daily every time he says the T word — learning to trade options has been like learning to sail in a tsunami.
So after battle the rough seas, the storm seems to be calming down. There have been a lot of ups and downs, trading with Bishop is finally producing gains (up until now it’s been a see-saw of profit… loss… profit… loss — which left me at break even) but this week has been primarily gains (up $3k today alone!).
During that time, I’ve been testing a few other strategies and one seems to be proving work quite well!
Keep it simple!
The Backstory
Basically it boils down just focusing on one stock and learning the way it moves and behaves. For me this happened to be AMD.
It started after a successful trade of AMD. I was hoping to catch another good breakout from it but it was a very slow and boring day — not much happening other than it rising and falling in the Chop Zone — the space between Support and Resistance.
It was then that I realized that it signals really well for Morning Star and Evening Star candlestick patterns.
It just kept going up to the Resistance level, signal an Evening Star then back down to Support, signaled a Morning Star and back up.
I decided to keep watching and make notes about the options premiums to see if there were gains to be had…. turns out, even in the Chop Zone, there are! (More on that below)
The Strategy
Like I said, I’m keeping this simple. So when I find a MS or ES setup I like, I get the following:
- At The Money Calls for MS or Puts for ES. I choose these because once they go In The Money the Delta increases more significantly and results in faster gains.
- DTE — I mainly look for whatever is in the $1.50-$2ish range… it’s usually this week’s expiring options. Though this is risky as you don’t have as much time for the move to work itself out — so far that hasn’t been a problem
- In theory, you could also go farther out and look for options with a Delta around 0.3 or more in the same premium price range.
Let’s take a look at the notes from yesterday’s chart where price pretty much just ping ponged in the Chop Zone:
And continuing on, here are the notes from today’s chart with a slow and steady climb up:
You can see that even though price isn’t rocketing to the moon there are still lots of gains to be had.
For the sake of keeping this simple, let’s run numbers for 1 option contract…
NOTE: Unlike some people who like to “juice” their profit % numbers by saying they bought at X price and the price want to Y but use the ASK for both — I’m using the Ask price for the buys and the Bid price for the sells since that’s what you can actually get a fill at.
In Chart #2, you can see a nice Morning Star to kick off the day. Around this time the ATM option strike price for calls was $93 for 2 DTE options was $2.01.
REMEMBER
You have to multiple this by 100 since each contract is for 100 underlying shares. So the purchase price for 1 options is $201 + fees (for ToS it’s $0.65 on each end)
From there the price pretty much did a slow and steady move up. There were a few moments it backtested Support and even the majority of the day tested that 20 SMA level but never fully broke down.
There were a couple of Evening Stars where it again tested a Support level but never broke.
By the end of the day this contract was worth $5.00 (x100 is $500) so in the course of the day you’d make $300 per contract bought. And if you notice, it’s still going up after hours.
You can also see in Chart #1 at the end of the day the $96 3DTE Puts were at $1.55 when the Evening Star signaled. At the first candle the following morning (Chart #1) they were at $4.10. That’s a $255 gain per contact!
Additional Notes
It’s important to note that I don’t use the MS and ES alone. There are a few other things I’ve noticed…
- When the price is under the 200 SMA and a MS appears it’s more likely to go up to at least the 200 before coming back down.
- The opposite is true if above the 200 SMA and an ES appears.
- It can go past, as you’ve seen in Chart #2, but this is just the 1st Target for me.
- The signals can be invalidated or validated — more often than not, after the MS I watch the following candles to see if one closes above or below the MS’s 3rd candle. Above means it’s likely valid, below means it’s invalid (the opposite goes for ES). This doesn’t have to be the exact next candle sometimes there a few candles that stay between the range of the MS’s 3rd candle top and bottom.
- And even this isn’t always true — look at the two yellow boxes at the end of the day on Chart #2 — we have candles going to the level of the first first and even below on the second box but they hold Support.
Major Caveat
While all this sounds well and good, remember this is just what I’ve notices LATELY and specifically watching AMD. Other stocks will behave in their own way and have to be studied to see what patterns you can glean from them and use to your advantage. It’s might not be MS/ES patterns at all but bull flags, or head and shoulders etc…
The point is, do the work, watch a stock closes, take notes, and test your strategy before diving in!
Hopefully you found this so enlightening that you’re inspired to buy me a coffee :)
Trade long and prosper!
🖖
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