Thursday, September 26, 2013

The Option Premium Always Follows the Stock

There has been a lot of interest in Options Trading again as new investors and traders have heard about Binary Options.  Unlike the high risk Binary Options, the traditional buy call or buy put simple option contract is regulated traded on US exchanges and is a low risk, low cost way to trade the stock market.
To be successful at options trading, you need to learn how and why The Option Premium Always Follows the Stock.  The option contract price and the stock price are always linked and move in harmony.  When you understand the connection the option has to the stock, trading options becomes as easy and simple as buying a stock outright.  The difference is that the option contract is far less expensive, and often the risk of the option trade is much lower than the risk of the stock trade.
What this means is there are two types of investors or traders who could use options trading instead of buying a stock directly.
  1. The investor or trader who has a small capital base.  
When you have a small capital base which is less than $10,000.00, then you need to be particularly aware of risk, and be far more careful with your trading decisions and your choice of trading instruments.  A stock is a trading instrument, but so is a stock option. Using a stock option dramatically lowers your costs. For example, the stock below is trading at $73.63 and you think this is a good entry after a correction. You have only $4000.00 in your trading account so you can’t afford to buy even 100 shares because you would need $7363.00 to put on this trade.  Instead you can buy a call option at the money for only $1.43 per share for a total investment on 100 share contract of $143.00 at the money contract. This means you can trade this stock because the option contract is within your budget, and your risk is now only $143.00 rather than $3000.00 based on proper stop loss and buy entry prices.

  1. The investor or trader who has plenty of capital, but the proper stop loss placement is far too much risk.
If you have plenty of capital to trade this stock, but when you study the actual entry price based on a professional bracketed order that protects from whipsaws and stocks that reverse suddenly, you find that the proper stop loss placement is far too much risk. You do not want to take this much risk but you really like the stock and are confident it is going to recover, and move back up based on strong indicators and strengthening fundamentals. To insure that the stock is going to continue to move up, that you are buying into strength, and are therefore avoiding the risk of a whipsaw the entry must be at $75.50 and the stop must be at $71.00. That is a 4.50 point risk or $4500.00 on your intended 1000 share purchase of this stock.
Rather than buying the stock for $75.50 x 1000 = $75,500.00 which ties up a lot of capital that you have to trade and is a high risk trade, you could use an option to  leverage into the stock using an option you intend to exercise.  
This means that for $1430.00 for 100 contracts, you have lowered your risk for this trade by $3070.00.  This is a huge difference in the risk of buying this stock.
Exercising a stock option is as easy as buying a stock. When the stock moves up to your intended entry all you do is place an exercise order for your stock option, and immediately your broker will execute your option contract, pay for it out of your broker account and now you own this stock.  Your initial investment was low and your risk was lower, than if you had bought the stock outright.
TechniTrader is the only company that teaches these techniques for trading options and exercising options.  When you use the stock chart to determine your entry, your stop loss, the risk of the trade, the potential profit of the trade, and the proper option chain it makes trading options simple, accurate, more profitable, and far less work than the out-of-date options strategies taught by other companies.  You do not need options indicators, you do not worry about implied volatility, or delta neutral. You don’t need to learn complicated, convoluted options strategies because The Option Premium Always Follows the Stock.
All you need to do is to learn to read a stock chart, where to buy, how far the stock will move, where to place your stop loss, and the risk of trading the stock versus trading the option contract. You can trade options whether you have a small or large capital base and dramatically lower your risk of the trade.
For additional information sign in to watch a free TechniTrader video titled “Options Essentials” at http://goo.gl/shPyCt
Trade wisely,
Martha Stokes CMT
Member of Market Technicians Association Master Rated Technical Analyst for Decisions Unlimited, Inc. Instructor and                                                          Developer of TechniTrader Stock Market Courses

©copyright 2013 Decisions Unlimited, Inc.  All Rights Reserved.
TechniTrader is the registered trademark of Decisions Unlimited, Inc.

Disclaimer: All statements, whether expressed verbally or in writing are the opinions of TechniTrader, its instructors and or employees, and are not to be construed as anything more than an opinion. Student/subscribers are responsible for making their own choices and decisions regarding all purchases or sales of stocks or issues. At no time is any stock or issue on any list written or sent to a student/subscriber by TechniTrader and its employees to be construed as a recommendation to buy or sell any stock or issue. TechniTrader is not a broker or an investment advisor, it is strictly an educational service.


Monday, September 9, 2013

Tracking The Large Lot Institutions

Martha Stokes CMT discusses how to Track Large Lot Institutions...



TechniTrader® Stock Discussion for MetaStock® Users: "Tracking The Large Lot Institutions"
MetaStock® SPRS Series - Week 135 – September 6, 2013 - MetaStock Spatial Pattern Recognition Skills Series written by Martha Stokes CMT


Main challenges retail investors and traders face today, is figuring out when High Frequency Traders are going to suddenly appear and when Dark Pools are quietly buying or selling.
There is a distinct pattern to tracking the Large Lot Institutions that repeats over time, and here it is step by step:
  1. Dark Pools are buying into a stock. Their “interest” in a stock is no longer seen on the market maker limit books prior to the execution of their trade.  These are giant investors buying for the long term, most of the time.
  2. Professional and Floor traders who are closer to the action of the Dark Pools jump in for short term trade action. Some are Intraday traders, while others are Swing traders.
  3. High Frequency Traders HFTs discover the Dark Pools either via a notification once the Dark Pools have bought what they want which is a news alert, viewing the transactions posted after clearing, or due to a ripple in volume.  The ripple in volume occurs when a Dark Pool order can’t be totally filled on the ATS platform, so some of that order is filled on the exchanges.
  4. Smaller funds chase the HFTs due to news, causing price to surge with emotional responses to the HFT action.
  5. Retail traders chase the smaller funds ending up getting into a stock, just as a whipsaw or reversal occurs due to sudden profit taking by the HFTs.
This pattern of buying by these Large Lot Institutions is repeated over and over these days, often frustrating retail traders who unwittingly get in the way or buy unaware of who is controlling price at that time.
The patterns are in the chart candlesticks, and every retail investor and trader needs to learn them.  Part of the pattern is in price, the other is in volume and in large lot versus small lot indicators.
The first candle indicated by the red arrows is HFTs which is evident in price, volume, and TechniTrader Quiet Accumulation TTQA.
The green vertical rectangle is Dark Pools and Pro Traders.  Dark Pools are accumulating, while Pro Trades are trading short term.  The small green horizontal rectangle is the high price range or top level price for the quiet accumulation buyers. They will not buy any higher than this which means Pro Traders are going to take profits.
This brings the price down to the support low, which is the trigger level for more quiet accumulation. Meanwhile quiet accumulation is going on, while uninformed retail traders are trying to sell this stock short.  They struggle to push price down but due to lack of numbers, they are unable to control price.
Then as quiet accumulation ceases HFTs gap down price at market open, then drive it down on an inconsequential retail news item, and quiet accumulation drives it right back up.
But smaller funds chase HFTS trying to sell or sell short. It goes deeper this time as quiet accumulators wait, then start buying again. This is discovered by the HFTs which gap price up.
Learning to read charts properly is not just using an indicator cross over or a candlestick pattern.  Relational Analysis must be applied to really understand who is in control of price. If you can recognize the Large Lot Institution group controlling price and you know which groups chase price, then you will have a much stronger understanding of what price is going to do near term. In addition recognizing the levels where quiet accumulation will trigger because these are automated orders, will help you avoid being on the wrong side of the trade.
Being on the wrong side of the trade aka trading against the Large Lot Institutions is the main reason retail traders have so many losses.
To learn more about High Frequency Traders, sign in to view our free webinar titled "Ride the Velocity Express of High Frequency Trading Action Using MetaStock" CLICK HERE or http://goo.gl/IMJlgF
Trade wisely,
Martha Stokes CMT
Member of Market Technicians Association
Master Rated Technical Analyst for Decisions Unlimited, Inc.
Instructor and Developer of TechniTrader® Stock Market Courses
For additional training visit http://technitrader.com
This Stock Discussion and Training Lesson is sponsored by TechniTrader.com
MetaStock® Partner


©2013 Decisions Unlimited, Inc. dba TechniTrader® All Rights Reserved.

Disclaimer: All statements, whether expressed verbally or in writing are the opinions of TechniTrader® and its instructors or employees, and are not to be construed as anything more than an opinion. Student/subscribers are responsible for making their own choices and decisions regarding all purchases or sales of stocks or issues.  At no time is any stock or issue on any list written or sent to a student/subscriber by TechniTrader® and its employees to be construed as a recommendation to buy or sell any stock or issue. TechniTrader® is not a broker or an investment advisor it is strictly an educational service.

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