Options Trading Rules of Engagement

Options Trading Rules of Engagement

·         Williams %R, 15 Day Avg: Extreme over bought or over sold condition. The shallower this line, the less likely the stock is to change direction.

·         Moving Avg, 30 Day: Strong trend in desired direction as indicated by Williams %R. While shallow trends can work, and aggressive trends can change abruptly, going with the trend wins more often than it loses.

·         Moving Avg, 7 Day: Close price should be above the line for Calls and below the line for Puts. Once this is established, wait until the next day, or look at the next day for stock to be trend in desired direction.

·         Volume 100+: 100 is the absolute low end limit, and the more the better. Avoid positions where the volume does not follow the “In the Money” positions, that is to say avoid buying an options that show signs of the volume falling below acceptable limits as the option ages.

·         Weight of Emotion: The market is driven by the emotions of the masses, do not buck the trend. Look for which option type has the most Open Interest and Volume and trade accordingly. If all previous indicators point to a Call yet the Puts have significantly greater interest and volume, reevaluate – if uncertain, move on.

·         Channels: Avoid trades where a stock has recently broken from a channel until the new nature of the stock in understood.

·         Ceilings & Supports: The trend line can deceive you, look at the peaks and dips in the 1, 3, and 6 month time spans, as well as 10 year highs and lows. Stocks don’t like to break ceilings or supports, and will go sideways more often than break them. Don’t trade against them barriers.

·         Volatility: Necessary for profit, but high day to day volatility can make profitable trading impossible. Look for month to month swings or longer. Avoid stocks that show tendencies for recurring single day spikes.