A Bear Call Spread is a stock market strategy employed when the market is extremely volatile and moderately bearish. Because of the erratic movements in a bear market, an investor will, in many instances, look to make moves that are profitable, yet hold low risk. The Bear Call Spread, also known as the Bear Credit Spread, is just such a technique that successful traders use in times such as these.

The stock option trading strategy for a Bear Call Spread is as follows. A trader sells a call option at one strike price and buys a call on the same asset which is further out-of-the-money (at a higher strike price). In most cases, both options will have the same expiration date. The profit and loss strategy for a Bear Call Spread is quite similar to a Bear Put Spread; however with this technique; the trader immediately receives a net premium when establishing the position. In a Bear Put Spread, the premium is paid when the position is established. Because of this difference, the investor already has money in hand at the inception of the Bear Call Spread.

The Bear Call Spread is lower risk than the Bear Put Spread; however, the profit potential is lessened as well. In a Bear Call Spread, the risk is minimized because the investor purchases lower priced calls that are protection if the price goes up significantly. Conversely, in a Bear Call Spread, profit potential is limited to the premium collected for the calls sold, less the cost of the premium paid for the calls that were purchased. As the name implies, this strategy is used in a bearish market, unlike the Bull Call Spread, which is employed when the market has become bullish.

A Bear Call Spread is a perfect example of successful trading. When an investor, through stock market technical analysis, realizes the presence of a bear market, it is imperative to modify the stock investing system. A bull market brings more opportunities for profitable trading; a bear market typically moves a trader into a more conservative approach of minimizing risks and finding trades that, while lucrative, are less risky. A Bear Call Spread is a perfect example of such a conservative move to find profits.

During a bearish period of trading, it is necessary for the investor to follow his, or her, stock trading plan. This requires solid stock technical analysis, stop loss strategies, and utilization of a stock trading system such as Japanese Candlesticks. This system, which has more than 200 years of success, helps the investor to evaluate the data obtained through technical analysis. Japanese Candlesticks is invaluable, especially in bearish times, as it assists the trader in drawing conclusions about the movements of the market.

A Bear Call Spread is one technique that an investor can use to find profits during an especially bearish market or a market experiencing volatility. Through technical analysis tools and learning how to read stock charts, a trader can focus on making money even when the market wants to take money from its investors.

Return to main Options Trading Category

We started off the weekend with a special ‘Hit & Run Candlesticks’ training session by Rick Saddler, aka Ricky Wayne, our Trading Room Moderator. We learned to ‘Keep it Simple – Keep it Mechanical’ with his easy to learn Mechanical Trading Techniques. His profit taking philosophy, ‘T-Line Technique’ and ‘Holy Grail’ setups gave us an eye-opening education. The session reviews were so compelling it prompted a business meeting between Stephen Bigalow and Rick. Look for a new addition to our website soon with more from Rick Saddler in our new ‘Hit & Run Candlesticks’ Traders Corner. 
 

Hardy Frank, James Farrell, AJ Vasaris, Pat Johnson, Kathy Card, Rick Saddler, Barbara Wollen, Agnes Bradt, Ed Cole, Ben Bass

     

Next on the Agenda – Friday evening Cocktail Reception

A good time was had by all – ‘What happens at the seminar – Stays at the Seminar’

  
 

 
Fun and Games are over – Back to work – Saturday morning Registration and kick-off for 2 full days of intensive training.

PAT JOHNSON & ERIC JOHNSON                            

If you want the Best Technical Analysis Tools then you need to learn the simplicity of Japanese Candlesticks!!

The Candlestick Forum strives to provide the best technical analysis tools available over the internet. Stephen W. Bigalow, author of “High Profit Candlestick Patterns”,  explains the history and profitable trading techniques for the best technical analysis tools — Japanese Candlesticks –for centuries of  proven profitable results.

Even investors new to trading, quickly identify price movements with a high degree of accuracy. due to the simplicity of candlesticks. Trading the stock market requires a great degree of discipline.  Ask any trader what is the biggest obstacle they had to overcome. Repeatedly, the answer is letting go of a bad trade. Even the best technical analysis tools can not help you fight the urge to hold onto loosing trades. Candlestick Signals remove the emotional trading that cause good trades to go bad.

The best technical analysis tools provide quick and easy methods for identifying price reversals, strong trends, weakening trends, and chart patterns ready to put money in your pocket. The 12 Major Candlestick Signals  provide  the best technical analysis tools you will ever need! Be sure to follow our Free Resources area for all the trading explanations of:

Major Candlestick Signals, These 12 Major Signals provide more profitable trades than most investors will ever need. However, it does not mean the remaining patterns should not be considered.

The Candlestick Continuation Patterns, Identify periods of ‘rest’ in a trading entity. The Japanese insight is, ‘there are times to buy, times to sell, and times to rest.” Learning these continuation  patterns will help investors know to place their money elsewhere.

Finally,  the Candlestick Reversal Signals, are highly effective patterns for identifying price reversals. An important element to any portfolio is the ability to identify when it is time to take profits, or close poor performing trades.

This week we add the “Concealing Baby Swallow” for identifying reversal of a downtrend.

CONCEALING BABY SWALLOW

Description

The first two days of the signal, two Black Marubozus, demonstrate the continuation of the downtrend. The third day, the Reverse Hammer illustrates that the downtrend is losing steam. Notice that it gapped down on the open, then traded up into the previous days trading range. This demonstrated buying strength. The last day opens higher and closes below the previous days close. It completely engulfs the whole trading range of the prior day. Although the trading ended at the trends low point, the magnitude of the downtrend had deteriorated significantly. Expect buying to show itself at these levels. This is a very rare signal.

Criteria

1. Two large Black Marubozus make up the beginning of this pattern.
2. The third day is a Reverse Hammer formation. It gaps down from the previous day’s close.
3. The final day completely engulfs the third day, including the shadow.

Pattern Psychology

The bears have been in control for awhile. At the end of a downtrend, two Black Marubozu days appear. The third day gaps down at its low, then trades up into the trading range of the previous day. This buying is then negated by the sellers stepping back in. However, the bears have taken notice of the buying that occurred. The final day opens higher, again causing much concern for  the sellers. As it sells off for the rest of the day, the concerned shorts have time to cover their positions. The new closing low is not of the same magnitude of the previous down days of the trend. The buyers do not run into very much selling resistance from here.

Commodity trading software is not  very effective if price trends cannot be analyzed. Whether using commodity trading software for executions, or for an analysis of commodity trends, without candlestick signals the software becomes much less effective. Keep in mind, candlestick signals were developed while trading the most basic of commodities. Rice! Japanese Rice traders analyzed and observed signals that would reoccur in price trends. Through the centuries, reversal signals and continuation patterns were discovered to work very effectively. These patterns incorporated the recognition of consistent and predictable investor thought processes. Most computer trading software does not allow the instant determination of a reversal in a price trend.

Learning how to use candlestick signals effectively will eliminate any use of commodity trading software. The analysis that can be provided by candlestick signals has one great benefit. The human mind can calculate what other outside influences might be affecting a commodity price. This is something that most commodity trading software cannot do. Being able to incorporate the knowledge that is provided by the candlestick signals while also interpreting what other outside influences may be doing to a price has huge benefits.

Having the ability to analyze whether a reversal is occurring is the primary function of technical analysis. Most commodity trading software does not have the inherent analytical processes to consistently produce profitable trading results. Utilizing candlestick signals puts the probabilities in the investor’s favor. This analysis can be applied to all commodity trades as well as stock trades. Do not depend on commodity trading software. Learning how to use candlestick signals successfully will permit any investor to successfully trade in any market in any condition. Learn the signals! They have already been proven for over four centuries of studies providing a strong statistical base.

ADVANCE BLOCK

Description

The Advance Block is somewhat indicative as the Three White  Soldiers but it is a bearish signal. Unlike the Three White Soldiers, having consistent long candles, the Advance Block shows signs of weakness. The bodies are diminishing as prices rise and the upper shadows becoming longer indicate that the bulls are getting more resistance from the bears. This pattern is going to occur in an up-trend or occurs during a bounce up in a downtrend. It is visually obvious that the rise is losing its power.

Criteria

1. Each white candle occurs with higher closes.
2. The opens occur in the previous day’s body.
3. The bodies are getting smaller and/or the upper shadows are getting longer.

Pattern Psychology

After an up trend or a bounce up during a long downtrend, the Advance Block will show itself with an initial strong white candle day. However, unlike the Three White Soldiers, each proceeding day becomes less strong. If the bulls try to take the prices up, the bears step in and take them back down. After three days of waning strength, the bears should confirm the reversal with further deterioration.

Training Tutorial

Candlestickforum Flash Cards  These unique Flash Cards will allow you to be “trading like the Pro’s” in no time.

 

Just like the Major Candlestick Images and Explanations page, this page provides all the information you need to learn the Candlestick Secondary Signals.

The Secondary Signals are titled as such because they do not appear as frequently as The Major Signals. That does not negate the effectiveness or their importance for identifying reversals. Being aware of the implications of these Secondary Signals in Candlestick Charts provides additional opportunities during the course of investment decisions.
 

Tri Star Pattern

Recognition: The Tri Star pattern is comprised of a three-day pattern, all doji days.

Pattern Psychology:  Doji reveals indecision in the bull’s and the bear’s camp.  Any investor that had any conviction is now reversing their position.

Related Articles: Trading the Tri-Star Pattern
Training Tutorial: Candlestick Forum Flash Cards

THREE BLACK CROWS

Recognition: Three long black candles occur, after a strong uptrend, all of close to equal length.

Pattern Psychology: The uptrend has now reached levels where the sellers have started to step in. This persistent pressure by the Bears provides the potential for a strong downtrend.

Related Articles: Trading Three Black Crows Pattern
Training Tutorial: Candlestick Forum Flash Cards

THREE IDENTICAL CROWS

Recognition: The Three Identical Crows have the same criteria as the Three Black Crows. The difference is that the opens are at the previous day’s close.

Pattern Psychology: After an uptrend a long black candle forms. However, the selling is more severe and there do not appear to be any buyers at the next day’s open. This indicates a much greater motivation to get out of the position.

Related Articles: Trading the Three Identical Crows Pattern
Training Tutorial: Candlestick Forum Flash Cards

TWO CROWS

Recognition: It is a top reversal pattern only after an obvious uptrend.

Pattern Psychology: After a strong uptrend has been in effect, the price gaps open but cannot hold its gains. The further the third day closes into the last white Bullish candle, the more bearish it is.

Related Articles: Trading the Two Crows Pattern
Training Tutorial: Candlestick Forum Flash Cards

UPSIDE GAP TWO CROWS

Recognition: Three-Day reversal pattern with a Gap Up in the Uptrend

Pattern Psychology: After a strong uptrend, there is  last gasp buying at the top causing a gap in price.

Related Articles: Trading the Upside Gap Two Crows Pattern
Training Tutorial: Candlestick Forum Flash Cards

UNIQUE THREE RIVER BOTTOM

Recognition: Three-Day reversal pattern at the end of a strong downtrend.

Pattern Psychology: After a strong downtrend the Bears would appear to be in control, but this rare pattern provides an early indication of a successful reversal ahead.

Related Articles: Trading the Unique Three River Bottom Pattern
Training Tutorial: Candlestick Forum Flash Cards

THREE WHITE SOLDIERS

Recognition: Three-Day reversal pattern is easily identified by three large Bullish candlestick signals, an obvious pattern of buying.

Pattern Psychology: A strong downtrend or flat trading period with buyers  overcoming the early sellers.

Related Articles: Trading the Three White Soldiers
Training Tutorial: Candlestick Forum Flash Cards

THREE INSIDE UP & THREE INSIDE DOWN

Recognition: Three-Day reversal pattern alerted by the appearance of a Harami signal.

Pattern Psychology: The Harami is the first indication that the trend has stopped.

Related Articles: Trading the Three Inside Up or Down Reversal Pattern
Training Tutorial: Candlestick Forum Flash Cards
 

MEETING LINES

Recognition: Meeting lines are formed when opposite colored bodies have the same closing price.

Pattern Psychology: After a strong  trend, there is a continued gap in the direction of the trend. (see detailed description in Trading the Meeting Lines)

Related Articles: Trading the Meeting Lines
Training Tutorial: Candlestick Forum Flash Cards
 

BELT HOLD

Recognition: Strong trend in price, followed by a gap in the same direction as the trend.

Pattern Psychology: After a strong trend, there is a gap in the same direction but the opening price does not hold causing investors to begin covering their positions.

Related Articles: Trading the Belt Hold Pattern
Training Tutorial: Candlestick Forum Flash Cards

 

THE BREAKAWAY

Recognition: A gap down found during a declining trend

Pattern Psychology:  If the gap does not fill the Bears have maintained control.

Related Articles: Trading the Breakaway Pattern
Training Tutorial: Candlestick Forum Flash Cards

THREE STARS IN THE SOUTH

Recognition: Obvious down-trend in stock price.

Pattern Psychology: The shadows, or tails, indicate that some buying has presented itself.

Related Articles: Trading Three Stars in the South, Three Stars in The South.
Training Tutorial: Candlestick Forum Flash Cards
  

ADVANCE BLOCK

Recognition: In an uptrend, or a bounce up during a long downtrend, the candle bodies becoming increasingly smaller.

Pattern Psychology: Reveals a slowing of the buying.

Related Articles: Trading the Advance Block Pattern , Advance Block Pattern
Training Tutorial: Candlestick Forum Flash Cards
 

DELIBERATION

Recognition: Uptrend in stock with candle sizes diminishing.

Pattern Psychology: A slow down in represents buyer weakness

Related Articles: Trading the Deliberation Pattern
Training Tutorial: Candlestick Forum Flash Cards

 

CONCEALING BABY SWALLOW

Recognition: The pattern is in a downtrend, two large black candles continue the downtrend and is followed the third day with a gap down reverse hammer formation.

Pattern Psychology: While the trading ended at the low, the magnitude of the downtrend is greatly diminished.

Related Articles: Trading the Concealing Baby Swallow , Concealing Baby Swallow
Training Tutorial: Candlestick Forum Flash Cards

 

STICK SANDWICH

Recognition: This pattern looks similar to an ‘ice cream sandwich’., with one white candle sandwiched in between two dark candles.

Pattern Psychology: The Bears are forced to cover short positions upon seeing new buying strength coming into the market.

Related Articles: Trading The Stick Sandwich
Training Tutorial: Candlestick Forum Flash Cards
 

HOMING PIGEON

Recognition: Similar to the Harami except for the color of the second day’s body.

Pattern Psychology: The appearance of support in a strong down trend gets enough attention from the Bears that they begin covering their short positions.

Related Articles: Trading the Homing Pigeon
Training Tutorial: Candlestick Forum Flash Cards
  

LADDER BOTTOM

Recognition: A strong downtrend is in effect with the reversal apparent with a gap up on the fourth day.

Pattern Psychology: The gap up causes the Bears to start scrambling to cover their positions before the Bulls take over.

Related Articles: Trading the Ladder Bottom
Training Tutorial: Candlestick Forum Flash Cards
 

MATCHING LOW

Recognition: A downtrend is in place when two trading days close on their lows, at the same level.

Pattern Psychology: The Bears get uneasy upon seeing their presence is no longer moving the price down.

Related Articles: Trading the Matching Low
Training Tutorial: Candlestick Forum Flash Cards

This is the last pattern in our series for Candlestick Secondary Signals. You are now ready to move on to Candlestick Continuation Patterns.

Any great endeavor starts with a great plan. What would the Eiffel Tower look like if there were no plans? Or if the builder of your new house want to just “figure it out as I go” would you allow him to build? Great successes are born from great planning and this is true in the futures market when your trading rules create a successful futures trading plan.

What is a Futures Trading Plan?A futures trading plan is similar to a stock trading plan; both represent your set of “terms and conditions” for making trades. By establishing your futures trading plan before you enter the market, you can establish rules void of the emotions that will grab you in the heat of the moment. Why is this important? Whether things are going well or poorly, there is a tendency for people to react emotionally. Emotions are a great thing normally, but a poor guide when you are making major money decisions with your investments. Some things you might want to include in your futures trading plan are:

• A Beginning Amount to Start – This is important not only from an investment prospective but from a personal one as well. It is important to understand that there is a direct relationship between the amount of capital invested and the probability of successful trading. Professional recommend starting your investing with a minimum of $10,000; starting with less may leave you vulnerable to greater risk since you can’t apply proper risk management principles. Starting with less than this will put you at a disadvantage but you can overcome it with a conservative approach. Remember the story of Richard Dennis; he isn’t the typical investor but he built a $200 million fortune from just $1,600. 
• Counting the Cost – Your initial investment shouldn’t only be considered the amount you are willing to invest but the amount you are able to lose. This is the reason it is called “risk capital”. Risk capital is defined as money you can afford to lose without affecting your standard of living. It should also be money that you feel comfortable risking. Think of your commodity account as an investment in a business. Many businesses fail; that’s life. If you aren’t afraid of losing your money you are more likely to make correct trading decisions.
• Being in the Trenches – Every investor needs to map out a strategy in their futures trading plan for the actual buying and selling decisions. Some people are very disciplined and able to remember the general principles of defensive investing while others need a plan for every scenario possible. Be honest with yourself and evaluate your tendencies. This is not some indictment on your character; this is your only opportunity to protect you investment, so be thorough and honest.
• Stop Loss Plans – No one wants to think about what they if they lose; everyone wants to win every time but in a futures trading plan. This becomes part of a stop loss strategy. There are defensive techniques for not only recognizing when to get out of a buy but also how you should do it. Without solid charting and analysis, it is impossible to determine whether a downtrend is temporary or devastating.
• Technical analysis – This is the backbone of any futures trading plan. Through charting and research, an investor has the best view of which direction a commodity is heading and why. Committing to a trading system like Japanese Candlesticks is invaluable to accomplishing your technical analysis due to its powerful charting principles.

Principles to Live By
There are four central precepts for every futures trading plan; these principles should be written at the top of your futures trading plan and posted next to your computer. These principles are:

1. Trade with the trend
2. Cut losses short
3. Let profits run
4. Manage risk

These rules outline everything that is important in a futures trading plan and everything else that you include must recognize these for principles. By establishing your futures trading plan you are able to learn the ideas of successful and profitable investing in the futures markets.

There is no shortage of stock market information, whether you are researching the internet or the book stores. Be prepared to be flooded with material covering stock market information. The biggest decision is how to go about selecting which materials to start reading. Do you want to learn about day-trading? Are you more interested in learning options, or trading commodities? Maybe you  want to be better educated to discuss your portfolio with your Broker. How do you know if the stock market information you are reviewing was written by someone qualified in the subject? Perhaps you will allow us to narrow the field a bit. Stephen Bigalow is not only the author of ‘High Profit Candlestick Patterns’, and ‘Profitable Candlestick Trading’, but He Trades For A Living!    The same information he teaches throughout this website, and in all his training products, is the same information he uses every day to make his own trading decisions.  He contributes new articles each week to aid other investors on the advantage of combining candlestick signals and how to read candlestick charts. We hope you enjoy the following training information for the Shooting Star Signal. For additional articles on trading individual candlestick signals please begin with Candlestick Images and Explanations.

The Shooting Star

Description

The Shooting Star is comprised of one candle. It is easily identified by the presence of a small body with a shadow at least two times greater than the body. It is found at the top of an uptrend.  The Japanese named this pattern because it looks like a shooting star falling from the sky with the tail trailing it.

Criteria

1. The upper shadow should be at least two times the length of the body.
2. The real body is at the lower end of the trading range. The color of the body is not important although a black body should have slightly more bearish implications.
3. There should be no lower shadow or a very small lower shadow.
4. The following day needs to confirm the Shooting Star signal with a black candle or better yet, a gap down with a lower close.

Signal Enhancements

1. The longer the upper shadow, the higher the potential of a reversal occurring.
2. A gap up from the previous day’s close sets up for a stronger reversal move provided.
3. The day after the Shooting Star signal opens  lower.
4. Large volume on the Shooting Star day increases the chances that a blow-off day has occurred although it is not a necessity.

Pattern Psychology

After a strong up-trend has been in effect, the atmosphere is bullish. The price opens and trades higher. The bulls are in control. But before the end of the day, the bears step in and take the price back down to the lower end of the trading range, creating a small body for the day. This could indicate that the bulls still have control if analyzing a Western bar chart. However, the long upper shadow represents that sellers had started stepping in at these levels. Even though the bulls may have been able to keep the price positive by the end of the day, the evidence of the selling was apparent. A lower open or a black candle the next day reinforces the fact that selling is going on.

No matter what you do in life there is always a first day. Walking as a baby, driving a car or starting a new job all fall into this category. This is true of beginner’s options trading in the stock market as well. Even if you have experience trading stocks you might not know the difference between a call and a put; don’t get worried because this isn’t going to lead to a pop quiz. What is going to happen is that we will look at options trading for beginners and give you some of the basics to get you started. If you have never been exposed to options trading, welcome to your first day!

What Are Stock Options?

Let’s start our beginner’s options trading discussion with the topic of what options aren’t. Stock options are not ownership in anything; unlike stocks, the holder of an option doesn’t possess part ownership in a company; this is simply an agreement between two investors that one party agrees to deliver something to another party within a specific time period and for a specific price. This eliminates the ownership part of the agreement as well as the idea that you must possess a particular stock in order to implement a position. Interested in selling short an option? In the stock market you have to borrow the stock to do it; in options trading beginners only need to understand that there is no ownership and no problem making the transaction.

What Are the Advantages of Stock Options?Options have a number of nice advantages that the options trading beginner should understand. Among these benefits are:

• Leverage – Options also have the advantage of leverage; your option is purchased with a multiplier of 100 so your fortunes are affected by 100 shares of stock and not only one.
• Limited Risk – This is not true of all options investing, but overall options trading has limited risk. When buying options, your risk is limited to the price of the premium, or the amount you paid for the option. For example, if you buy straddle (the name for a particular option) and the price of the stock is wrong for your position, you can, in essence, allow the option to expire. This offers a great start in options trading for beginners since they can purchase options without the fear of staggering losses.
• No Risk Paper Trading – Thanks to the power of the Internet, paper trading has become a valuable asset for the options trading beginner. You simply register to use the software and follow the directions of the site. You will be able to implement positions and see the effects of your decisions on your “account”. Lose your money? No problem, it was only virtual money but a real experience beginner’s options trading.

What Do You Need To Do To Get Started?
Getting started is never really difficult. Remember, it is your first day. However, there are several things you need to do as a beginner in options trading:

1. Start Learning – There is no substitute for education. Read books about options trading, talk with others that trade options and search the Internet for information about options trading. Once you start investing your own money, you will be glad to understand options trading.
2. Create a Stock Trading Plan – This is just as important as your education. You need to outline your goals and objectives as well as your strategies in an unemotional manner. This way, when emotion tries to creep into your decision making process, you will have already decided your course of action.
3. Select a Broker – This is a personal, but important part of the process. You can implement your own trades but you need someone to actually place the orders. Some full-service brokers offer more services and most Internet brokers offer lower commissions. Even though you’re a beginner in options trading, define what you want from your broker and find someone who meets your needs.
4. Use Japanese Candlesticks – This powerful charting system will help not only the beginner in options trading but is valuable to the “expert” as well. Candlesticks will help you to find the trends in the market that most others miss.

Conclusion
Is that enough information for your beginner’s options trading lesson? Remember that this is your first day but everything you do will build off of it.

When deciding on which stock market trading tools to use for trading your own portfolio – Nothing beats Candlestick Signals! Stock charts displayed in bar chart formats are difficult to interpret and frustrating to investors new to the stock market. Even if you are unfamiliar with reading stock charts, Candlestick Charts provide  clear and easy to identify patterns. Reading about the Japanese Candlestick signals is interesting and it aids in remembering profitable pattern setups. The Candlestick Forum presents stock market trading tools that help investors read stock charts and recognize dependable trading patterns.  These patterns produce predictable results which are easily combined with other technical analysis tools.  Stock market trading tools do not have to be difficult, especially if you begin with Candlestick Charts.

 
Three Inside Up and Three Inside Down

Description

Note that after the long candle day that is in the same direction of the trend that the Harami pattern occurs.  The Harami is the first indication that the trend has stopped. The third day confirms that the harami has indicated correctly. The three-day pattern is a modern era confirmation of the Harami pattern.
 
Criteria

1. The Harami pattern is the overriding signal component of this pattern.
2. The harami body should be the opposite color of the long candle day.
3. Day three has a close that is higher than the open of day one.(Three Inside Up) Or lower than day one in the bearish indication.(Three Inside Down)

Pattern Psychology

After a trend and the occurrence of a long body day that extends that thread, the harami pattern shows that the trend has stopped. A factor that helps identify the strength of the reversal is how big the harami is compared to the previous day’s body. A body that is relatively large indicates more strength in the opposite direction. Additionally, the magnitude of the strength in day three adds to the potency of the reversal.
 
Training Tutorial
Candlestickforum Flash Cards  These unique Flash Cards will allow you to be “trading like the Pro’s” in no time.

Return to Candlestick Explanation for Secondary Signals

In times when there is low stock volatility and a large, unpredictable breakout move is expected, a successful trader might consider making a straddle buy. A buy straddle is implemented by purchasing a call option and a put option on the same asset with the same strike price and expiration date. Because the stock is poised for a breakout but the direction isn’t known, buying a straddle can be an excellent stock market strategy.

A buy straddle affords the investor a limited investment risk, while offering an unlimited profit potential on a major move up or down. In such a strategy, the potential loss is limited to the premiums paid for the call and the put, as well as commissions. A major move in either direction allows the investor to sell the opposite option and ride the one making the money, thus creating a highly successful trading situation.

When technical analysis with Candlesticks indicates that a stock is trading in a triangle pattern, it is a prime target for a buy straddle. Frequently, with this type of trading pattern, an explosive move occurs near the tip of the triangle but the direction of the move is not readily known. Since the call and the put cover both directions of movement, a reward is quickly realized in this maneuver. Once the direction is known, the other option is liquidated and the investor can ride the trend. At this point, it is important not to ride the trend too long since time decay works against the trade in this position.

When buying a straddle, the put and the call that are purchased are either at-the-money or close to it. After identifying a triangle trading pattern with a tightening trading range, a position is initiated near the tip of the triangle. Because volatility is low, the options will be cheaper before a breakout occurs. Since this technique requires buying both a put and a call, buying before the spike is even more important. Straddle buying has excellent risk reward ratios since the actual risk is limited and the reward is potentially unlimited.

As with other stock option trading strategies there is risk, though limited, in a straddle buy. The actual purchase will be more costly since both a put and a call are being purchased on the same option. If the option fails to break out before the expiration date of the call and put, the trader will lose money on the purchases. Decay is also a factor working against a buy straddle, but it is eliminated by initiating a position before the breakout and quickly selling the option on the wrong side.

A buy straddle is an excellent tool to use in a stable market when stock market technical analysis indicates that a stock is ready to break out of a triangle trading pattern. In such a case, the trading range is very tight and the stock is likely to make an explosive move. Buy straddles create the potential for significant gains with limited risk of investment when investing in the stock market.

---

Return to main Options Trading Category