SPY Option Trade Anatomy

As there are several distractions recently, I have cut way back on my trading, observing and focusing on very solid setups only. For weeks I have been discussing that the lack of quality setups, plus the numerous low quality weak breakouts, were concerning overall. And this was a good reason to stay more defensive, and cut back on my own positions, selling into strength, yesterday with the bounce in CREE, and moving up stops. But there are always opportunities with calls and puts on the indexes.

Yesterday I discussed short-term index trading, and the resistance area in the SPY to trade off of, which I used as a parameter for my own trading:

“And today we are back into the previous bottom of the range before yesterday’s selloff, so another short term resistance area. More congestion, that is trading. The big trade requires a much bigger setup, so maybe into the next solid rally, then that setup could have much bigger potential.”

Yesterday I sent the first chart to a friend, as I was observing the action in the SPY and, ahead of time, I had staked out the next small daytrade area to use for an entry point for SPY calls. And again, I do not mindlessly draw in curves just because they look pretty. They are drawn in for a very specific reason. And as you can see the last curve was already drawn in and my area to get long was staked out – looking for the #3 push down. Also, the first and the third arrows, that alone is a solid trading system for anyone who would like to ask me about it, otherwise I’ll keep it to myself for now and discuss some time down the road:

So as you can see the SPY bottomed right into the pre-drawn-in curve, I entered a call position:

The magnified term view:

I explained my parameters, and always worked out before hand as part of the initial trade setup:

The trade kicked in and I sold 1/2, should have sold all as per my original thinking and ended up having to sell the rest on a little bounce after the micro top was in, and moved the stop:

Also observe the chart. Look at the res area, look at the volume. My belief was that we had seen an upthrust on the SPY, but again, this is options, very small moves can work especially expire week options. So, notice where the SPY stopped the selloff off of the upthrust top. Very nice area to do a totally in and out trade, almost a scalp. Your parameters are excellent, very tight. Use a very tight stop, and back into the high area is the exit. Do not sit there, get out, one way or another:

Also, notice the SPRING, did not do it, not quite set up, but likely for someone else: