Saturday, April 05, 2008

Qs Weekly Update

Qs are showing strength . . will the up trend be able to hold?
The above is the 3LRs study for the Qs (30,11,3).
Daily and monthly technicals are now positive suggesting more of the same to come. The weekly looks pretty frothy however, reflecting Tuesday jump and the lack of backtracking for the remainder of the week.
The caution is in the overbought RSI levels on the daily and the weekly, suggesting a (short term) retracement of unknown magnitude.
With earnings' reports picking up anything can happen and the corollary is that "anything" will likely happen when it is most disadvantageous to your position in the market. (obviously, I haven't bought into the bull run theory yet).
More reasons for expecting a retracement include the elevated levels of the A50, currently above the 200 DSMA and technically overbought. At the same time the A200 has decisively broken through the 50 DMSA which has provided overhead support since November. Surprisingly, the A200 is not as overbought as might be expected, so this indicator must be considered net positive.
Clearly some divergence among the technical indicators I watch (the market seldom gives up its intent easily).
For the near term I continue to manage risk by focusing on intraday pivot trades. With expiration 2 weeks out, I'll also look to sell the far OTMs (both puts and calls) just to pick up some premium decay (more on this tactic later next week).
Finally, I had a comment regarding Friday's options. For those who don't follow the comments I'll reiterate some of the points in my response as I think it helps define my market bias.
1. Never buy options in the last 2 hours of Friday. The market makers typically start to discount weekend premium decay about then and although the price of the underlying Qs may rise, it's not unusual to have the option price fall.
2. There is also about an 80% chance that the Qs price will decline in the last 1-2 hours of Friday as the commercials hedge risk by closing positions for the weekend. (Also see Thursday post on Newsom's SFO article). This typical negative momentum will further increase the risk of buying calls late Friday PM.
3. Friday's price pattern was what I call "an upside down day" in that 10:30 pst is often the low of the day (per Stock Trader's Almanac). . Friday's 10:30 was the high. With the Qs bounce off R2 and both the TICK and the NYAD going downslope, the odds for a rally into the close become very low.
4. My experience is that Friday is a time to sell options and pick up the short term premium decay over the weekend and for Monday and Tuesday. We are currently mid cycle on the Aprils (14 days to go) so decay is going to pick up next week (another reason to be a seller). Buy/writes is one approach, or depending on your level of trading approval, capital and risk tolerance, a strangle of the far OTMs can be very profitable short term (also risky, so the trade must be closely monitored).
5. Since we are in the midst of earnings and the economic climate is anything but stable, volatility can explode overnight and intraday, which is why I prefer the relative safety of day trades (for now).

And a final caveat. . . These comments reflect my own particular focus and risk bias based on about 35,000 trades and may not apply to the goals and tactics of your trading plan.


Sloof said...

Hi again - thanks for responding to my comments in your post and in email. I did not know about all the factors you mention - the market makers, time decay, Fib levels. I would rather daytrade the q's too, but I don't have daytrader status (25k) in my account so I have to hold overnight. I have a couple of questions

1) if you did own some April 45 calls, where would you put your stop on Monday morning? I had set a really tight stop on Friday and there was some technical issue so they did not trigger as we went down into the close. On Monday I'd like to give these calls some room to run since I'm already in them, but not risk too much more.

2) what do you think of the free "trading the q's" class at They recommend buying the .70 delta options (both calls and puts). They do make it seem a lot simpler than it is at times -- the factors you mention paint a much more complex picture.

bzbtrader said...

IE couldn't find the site you mention. . check address. There are many, many different tactics for trading Q options and, as I said, my tactics reflect my risk tolerance and experience. Bettertrades probably has an entirely different perspective, risk management plan, etc. so it would be rather presumptuous of me to comment. Free classes are always welcome, since you never know when you're going to pick up some nugget of trading wisdom that can help you down the road.
Regarding your present position- since you have aleady defined your risk stop, I'd be inclined to stick with it. There is typically a blip down in premium at the open, so if you have a standing market order, I'd pull it off line for the first 15 minutes. If the market gaps up, then obviously you set a trailing stop limit order that you can adjust as the option moves (up... hopefully). Check the premarket open at to help determine prospects for the open.
Good luck
Good luck