Option Trading With Candlestick Signals.
Huge profits can be made trading options. It is easy to do. At least that is what a multitude of option trading services preach. “Use our program and watch your profits soar”, is what is promoted on option trading web sites over and over. Unfortunately, reality finds that there are few investors that have been made wealthy from these sites.
Why shouldn't it be easy to make big profits with options? All you have to do is find stocks that are going up and buy the calls. Find stocks that are going down and buy the puts. The sites or programs that are doing well for demonstrating how to use options successfully stand out like sore thumbs. Everybody knows about them. When something is working well in investing, everybody becomes instantly aware. Oops, you don't know about these easy-to-learn programs for successful option trading?
If they were out there, you would know about them! Everybody would know about them. Option trading is like any other investment program. If investors want to be successful at trading options, they need to learn their own program.
Candlestick analysis becomes an integral part of formulating a successful option trading program. Options strategies, just like any other investment strategies, require proper application of correct principles in different market conditions. One trading program that may work successfully in today's markets may not work in the trading atmosphere 90 days from now.
Understanding the different elements of successful option trading is the first step. Options have more parameters involved in their successful applications. Unlike most investments, where direction is the main criteria, options require the analysis of a number of criteria.
What makes options attractive to investors? Leverage!!! The following explanations may appear to be relatively elementary. However, most investors approach trading options without realizing all of the criteria that need to be fulfilled to make a successful option trade. Having a full understanding of what makes for a successful option trade will make the utilization of Candlestick analysis, for option trading, much more clear.
What is the intriguing element of trading options? A small amount of investment funds can control a large amount of assets. Essentially, a small amount of money controlling a larger asset base, timed properly, can produce huge profits. The dream of every investor!
Option Trading Criteria
Unlike investing in stocks, options have a time element involved. The infusion of a time frame to an investment creates dramatically different dynamics. The time factor creates three crucial criteria. DIRECTION, TIME, and MAGNITUDE.
As has been experienced through the centuries, most investors have difficulty in mastering the direction of a price move. Implementing Candlestick analysis greatly increases the probabilities of at least having a price move analyzed in the proper direction. Knowing the direction of a trend-move, with a relatively high degree of probability, allows an investor to produce high profit option strategies.
The direction of a price move is only one key element to a successful option trade. The amount of time available for that price to move is also an important factor. The strategy for a trade will have a vast difference when considering a trade that will expire in one week versus a trade that will expire in two months.
Magnitude is a third key element. Magnitude or volatility! Just because a price moves in the correct direction does not guarantee that an option will make money. The Candlestick signals provide the search technique for finding the trades that will move in the magnitude required to make successful trades. Utilizing gaps with the Candlestick charts provides a source of high profit potential trades. Gaps, or Windows, work as very clear indicators that investors want to get in or out of a position with vigor.
Identifying a Candlestick 'buy' signal, followed by a gap-up in price, becomes the opportunity source for a high profit option trade. This trade set-up provides the elements for a successful option trade. The direction is well identified after the Candlestick 'buy' signal. The gap-up implies a strong move in the making, satisfying the 'magnitude' parameter. The 'time' element now becomes an easy analysis.
Gaps, or Windows, become an excellent indicator for implementing option trades. When used in conjunction with Candlestick signals, option trades can produce consistently high profits. The Candlestick Forum provides very informative training CDs on how to use the gaps effectively. If you are serious about wanting to develop high profit option trading strategies, take the time to learn how to use gaps effectively.
The UNH chart demonstrates a Candlestick signal, the Long-legged Doji, that gapped down from the previous day's trading. The gap-up in price the following day becomes a significant reversal signal, a Morning Star signal.
This trade shows evidence of a big fast price move. The fact that a strong Morning Star signal is evident, with stochastics in the oversold area curling up, alone, makes this a strong 'buy' candidate. Reviewing the historic price movement of this stock also lends credibility. Notice in this uptrending price, a strong Candlestick buy signal occurred three months ago just as the price came below the 50 day moving average. From that point, the price had a strong move for the next week of trading.
Anticipating that same type of reaction now allows the Candlestick investor to develop an option trade strategy. The simple strategy would be to buy the August 50 calls. The close of July 22, 2005 had the August 50 calls trading at $1.80. What would be the profit potential?
If the target is $55 a share in the next week or two, the recent high, the option price could move up into the $5-$6 area. This would make a decent profit. Another trading plan could be to also sell the August 50 puts, trading at $.75. Based on the assumption that this price has a high probability of moving in an upward direction, a combination of buying the August 50 calls and selling the August 50 puts reduces the cost basis to $1.05. Now, if the price goes to $55 a share and the option price goes to the $5- $6 area, the percentage return has expanded nicely and the money exposed to lose is significantly reduced as long as the price stays above $50 a share.
Are there any additional risks associated with this trade? Yes, that will be addressed in later writings. The basis for this trade is that the Candlestick signals have provided a very strong buy signal when stochastics are in an oversold condition.
In the next few weeks we will be addressing options strategies in our members chat sessions on Monday nights. If you have specific questions about particular option strategies with Candlestick signals, please feel free to e-mail to us or put them on the forum.
Market Direction - Although the indexes showed some toppiness lately, there hasn't been any severe sell signals witnessed. A week ago, the Dow formed an Evening Star signal. It was negated the following day when the Dow came up through the high of the bearish candle of the Evening Star signal. Thursday, the Dow formed a Bearish Engulfing signal. Friday closed positive.
Both the NASDAQ in the S&P 500 have shown some selling but neither have shown a Candlestick sell signal. This scenario would imply that there might be some consolidating in these areas but as of yet nothing has indicated a reversal of the uptrend. Continue to hold the long positions that have been acting well, in sectors that are maintaining their strength. These positions can be maintained until a signal reveals that the uptrends are over in the indexes.