This post should be used in conjunction with the Thursday 2/15 SPY daytrade melt-up post. In that post I included a chart of the SPY (first chart below), in which I was waiting for the resistance area included in that post’s chart to be hit. Even when I’m planning a daytrade, I use daily charts, not just one and five minute. That chart was first included in the 2/15 premarket comments, as my first target for the SPY to get to on this rally from the 2/9 powerful spring (#2 bottom). So I was waiting for that resistance area to first be hit, then exceeded, to set up an index short sale. Meaning using even the daily chart resistance, and being patient, for the next high probability short sale. When I do index trades, even with the QQQ, I look at the SPY also. The SPY (S&P 500) is the single most powerful index ETF, so it has great sway over the whole market. It doesn’t always work as I want to see, but it’s all probabilities, and if a trade does not set up well, or until a trade sets up well, then no dice – probabilities remember?
So allowing the SPY to get to its support and resistance areas first, can help the probabilities. It’s not a necessity, but can be helpful at times. For instance, it’s good to see springs or upthrusts in both indexes to set up higher probabilities. Again, it’s not a necessity to have both indexes doing this together. There are times when the QQQ sets up well on its own – each technical situation must stand on its own merits.
In Friday’s daytrade, I was using the Feb 23 expiration puts. Meaning, this thing was meant to be very short-term only. Why didn’t I then just use the Feb 16 expiration? That would just be cutting it too close for me.
I talked above about the initial setup, the rest is discussed in the charts.
The charts below chronicle my QQQ put trade – the initial entry at 1.32, putting in stops, selling 1/2 at 1.63, then setting a target of 165 to sell the rest, and selling the other 1/2 at 2.10. Full daytrade.
Hypothetically, say you think QQQ is going down to a 163.55 support, then what would you look for in March 9 puts as to volume, in/out of the money, open interest, premiums etc.?
Since that QQQ move would not be a big one, and just intraday volatility could do it, I wouldn’t get involved in the premium much if you stick to the around the in the money, as the volatility in that move would keep the premium elevated. The premium will really start eroding in the final week of expiration with the out of the money. Premium is tricky, a lot of math, but if your entry points are pretty solid, the premium shouldn’t work too much against you. And remember, when you’re entering in a turning point area (hopefully), at a high for example, the put premiums are fading. The 3/9 puts won’t have a lot of volume til after this Friday expiration, and that is another reason I like to keep the expirations close. That is unless I have a position trade mentality, then I will move out to the 3rd Friday expirations, like my GLD calls and my TLT puts.
So what I focus on is the $1-3 options, close to in the money, volume at least several thousand, 5000+ is better, that way the spreads are better and liquid. Open interest, not a focus for me as long as the volume is plenty and stick to the active ones.
Perfect. So many options in options. Is it fair to say then buying out of the money months out or leaps is a poor allocation of capital?
In my view yes for pure directional trading, it is a misunderstanding of how to use options.
Such as, January 2019 expiration; 200 strike, calls on QQQ $1.50
If I were to use LEAPS, it would be as a trade back to the old highs after a big selloff, but not using them to make a bet on some potential for all time highs down the road. Meaning, use them in a higher probability way – from magnet point to magnet point. What if 2018 becomes a volatile range trading year, and then with all of the opportunities to just trade this market, instead of sitting with a bet. For me it’s just the whole probability structure of what I know vs what I don’t know. I believe you will find the LEAPS sellers are rolling in the dough.