DaytradeTeam Brainzzzz
Trading Tips and Strategies from Traders at DaytradeTeam
SNDK Screaming for Another Strangle Spread
Now we find ourselves in a very similar situation as SNDK tests 52 week highs today and looks poised for yet another breakout in one direction or another:
Notice how SNDK is now challenging its old high. A penetration and close above 66.00 would indicate further movement to the upside and a nice breakout pattern. On the other hand, if SNDK pulls back here, it will form a bearish double-top formation. In either case, it is very likely that SNDK will move big over the next month or so, and owners of strangle options will likely make a handsome profit.
For strangle options, I always like to go at least 3 months out with strikes that produce a net debit of under $1.00 for the put and call combined.
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Stock Trading Tip: Sell Into "Lonely" Gaps
I know what you're thinking, "Andy, what the heck are you talking about? What is a lonely gap? Sounds like something you made up."
Well, yes--I did make up the term "lonely gap." See, a gap open occurs when a stock opens at a price significantly different than it closed at on the previous trading day, leaving a space (gap) when you look at the chart. A lonely gap occurs when the stock is gapping up without the help of the overall market. In other words, the stock is gapping up all by itself and without the conviction of the broader market to sustain the move (note that this is best used on stocks that do not have MAJOR news events driving the gap.)
For an example, let's take a look at the trade of FLEX that we just exited for a nice profit on Monday in our Small Cap Swing Trading System:
On the chart, you'll notice that on Monday morning, FLEX opened significantly higher than it closed last Friday, creating a gap up on the chart. In addition, this was a lonely gap, because the Nasdaq and SP broader markets were only slightly higher at the open and starting to sell off just a few minutes into the trading day.This made us hit the sell button very quickly. We locked in a profit of almost 5% in just a few days, with the bulk of the gains coming on the overnight move. After selling, we watched with pride as the stock fell 30 cents through the day to close at 10.85, happy that we took the gift given to us by the lonely gap.
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Options Trading Alert: SNDK Could Have More Downside
Unfortunately for SNDK shareholders, there are signs that this may be more than "just a pullback", and that SNDK may have another large move to the downside in its future.
Looking at the one year chart of SNDK, you can see the big run the stock had after its initial breakaway gap above 24 this summer. You can also see that SNDK may be in the final stages of completing a head and shoulders formation--typically indicating a reversal in trend and potentially spelling bad news for the stock.The "neckline" for SNDK's formation is right around $45.50/share. If SNDK can hold above this price and eventually make a new high, the bullish patterns continue. On the other hand (more likely), if SNDK falls through $45.50 on decent volume, the neckline will be broken. This price action would confirm the head and shoulder reversal and indicate a strong likelihood of a new downtrend emerging for the stock.
One of the best ways to play unconfirmed head and shoulder reversals is through the use of straddle or strangle options spreads as the stock approaches the neckline. By entering both a put and a call option at the same time, you profit from a large move in either direction--which is extremely likely if SNDK starts to test the $45.50 neckline.
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Options Trading Alert: AAPL Uptrend is Solid
First, let's take a look at AAPL's 20 day chart so that you can see exactly what I mean:
Notice how the stock has continually bounced off of the uptrending line over the past month or so, and despite the market weakness of the past week (and AAPL's own troubles), AAPL is still significantly above the uptrend line.Here's how we will be looking to play AAPL options over the next couple of days:
Look for low volume dips of $1.00 or more in AAPL stock price and spikes in the put option premiums. Sell the puts into this price spike and establish a bullish vertical credit spread or even leg into an iron condor or butterfly option spread position.
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"Extreme Potential" OptionsTrading Alert on RIMM Pending
When looking at the one year chart of stock trading on RIMM, the first thing I notice is a head and shoulders reversal pattern that has just been confirmed with Monday's close near $67.50. The other thing I notice is the relative weakness of RIMM to the Nasdaq Composite index over the past 52 weeks, most likely a result of investor angst and focus on the courtroom proceedings:
OK, from looking at the one year chart on RIMM I'm convinced from a technical standpoint that RIMM will be moving higher from here. On top of that, I also know that RIMM has about 14.5 million shares of its float sold short--about three full days worth of average volume, which means this stock could get a very nice day trading short squeeze on any good news for the company. In fact, I'm going to set a two-month price target of $92.00 per share on RIMM--which is approximately the price it would be at had it simply matched the performance of the Nasdaq over the past year.
So what will I be alerting DaytradeTeam members to do on RIMM Tuesday?
Well, as most of you know, I really hate risking a penny more than necessary on a position. With RIMM shareholders waiting on pins and needles for the whim of a judge to be passed down, it would be a big mistake to buy RIMM stock and risk a full $67.50 per share, so I'll be looking for limited-risk, bullish opportunities on RIMM options trading instead.
Tuesday morning I'll be analyzing the options chains on RIMM and looking to alert members to either one of these two positions:
- A Bullish Vertical Credit Spread that profits as long as RIMM stays above $60/share for the next month (and only risks $3.40 in the process)
- A Directional Call Trade that buys either the 80 or 85 call options for the March or Jun 2006 expirations. These positions would likely produce a gain of $6-$9/contract in the event that RIMM does get a short-squeeze higher, but only lose $1.50-$2.00/contract in the event that RIMM completely falls apart to new lows.
Make Sure You Get This "Extreme Potential" Alert on Tueday:
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Look for Sale Prices on MSFT and Go Bullish
Even better, the stock is looking very strong, nearing three-year highs and continuing one of the more "stealth" uptrends I've ever seen. Take a look at the three-year chart of MSFT to see what I mean (click to enlarge):
Notice how MSFT has moved steadily (and yes, very very slowly) higher over the last few years, making higher lows throughout the period and putting some very impressive high-volume rallies together in the process. Currently, MSFT is running right up against its three-year high on a month-long rally (highlighted in yellow) that is both impressive and unsustainable at the same time.
A pullback in MSFT is almost certain here, and that is exactly what we want to see. My Stock Trading and Options Trading Systems will be watching very closely for low-volume pullbacks over the next month to enter bullish positions on.
After all, what could be better than a company with a renewed "start-up" spirit, a genius staff, an uptrending chart and 40 billion dollars in the bank?
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Options Trading Alert: SIRI Breakout Near
Once SIRI breaks out of this consolidation area in either direction tomorrow (as highlighted in yellow), we will analyze the validity of the break by looking at both functional indicators and volume to determine if in fact the move is a signal of SIRI's next large move.At that point, we will likely issue a new options trading alert on SIRI to our members, most likely a directional put or call position with 150-200% target profit, although we could also issue a vertical credit spread alert that will profit from time decay over the next 10 days for the November expiration if we feel the move might be more subdued.
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Uptrend Trumps Earnings for Big Profits on AAPL Call Options
An uptrend is defined as a continued pattern of higher highs and higher lows in a stock price chart. This is exactly what we saw when we signaled the DaytradeTeam members to buy the Jan06 55 AAPL calls for $4.40 per contract on Oct 5th, 2005.
Let’s take a look at the chart of AAPL:
As you can see, when we entered the trade (first yellow circle) there was a strong uptrend in progress. About a week later, AAPL released disappointing earnings.
Our nerves were tested as the stock dropped several points on the bad news. We knew, however, that a strong uptrend is often more powerful than a simple earnings release, so we held and advised our members to do the same on this option trade.
In fact, if you've been a reader of the DaytradeTeam Stock Trading Blog for long, you will recall that we also posted an alert to you that AAPL's earnings gap down might be a solid opportunity to get in cheap!
Within days the uptrend pattern was resumed and AAPL was on its way back up the chart to new highs.
After a strong push on Nov 2nd, we found AAPL at the top of its uptrend channel—a great place to take profits. DaytradeTeam then issued a sell signal to its members and the average exit price was $7.50 per contract—a nice 70% gain in less than a month.
Options Tip: BEXP Call Options Very Active
Notice how the stock has extended its uptrend into new highs on increasing volume--a very bullish sign for a stock trade. We would look for opportunities to enter vertical credit spreads such as an "in the money" bull put spread on BEXP, so that you can profit from both time premium decay and the upward movement of the stock.
We will be monitoring BEXP very closely over the next few days for the best possible entry point. If you haven't tried DaytradeTeam yet, be sure to start a trial membership right now so that you are alerted in real time when we see big profit opportunities in option trading!
Diagonal Call Options Spread
Here are the basic steps to establishing and getting out of a diagonal call position for maximum profit:
- Find a stock that you believe will move higher in the near future. When using this options trading strategy, we suggest using a stock that is in a confirmed uptend.
- Buy a call option that is well in the money and at least 5 months from its options
expiration. - Sell a call option with a higher strike price (ideally out of the money) that expires within the next 45 days.
Hopefully, the stock will continue its uptrend pattern, causing the lower strike price option that you own to increase in value, but will stay under the higher strike price so that you simply take the income from the sold position and sell another high strike price option again the following month.
Diangonal Call Options Spreads are ideal for income production within your portfolio because they profit from time premium decay while utilizing less buying power from your account than traditional covered call options spreads.
Option Trading is about making profits and putting the odds in your favor. Learn from experts as you trade with a DaytradeTeam membership--start a trial right now!
Options Trading Term: Expiration
Notes:
The expiration date for all listed stock options in the U.S. is the third Friday of the expiration month (except when it falls on a holiday, in which case it is on Thursday). For example, if you are looking at the November options on a stock, you should realize that they will expire on November 18, because that is the third Friday of November.
Typically, Option Trading is most profitable when you establish net-debit positions such as single call options or put options or straddles and strangles that have expiration dates 4+ months away from the current date. You should also try to establish net-credit positions such as iron condors and vertical credit spreads that expire within 40 or so days.
The Max Pain theory holds that options expiration dates effect the stock price of the underlying security.
Strike Price in Options Trading
This strike price is the price where the holder of a call option buyer can buy the underlying stock or a put option buyer can sell the underlying stock.
So naturally, call options become more and move valuable as the underlying stock price goes up. For example, if you own a call option on YHOO stock with a strike price of 30.00 and the stock is trading at 35.00, then the call option would have an intrinsic value of 5.00 (35.00 stock price - 30.00 strike price).
On the other hand, put options become more and more valuable as the stock price decreases in valuable because the holder of the option has the right to sell the stock at a specified price, making it more valuable.
Option trading can be most profitable when several options contracts with different strike prices are traded in combination.
Option Trading Alert: MSFT Call Options Active
Increasing implied volatility along with such a high ratio of calls to puts traded indicates that the market is predicting a solid move higher for MSFT after earnings are released Thursday after the market close.
As you can see from the 9 month chart above, MSFT has just broken out of its most recent downtrend, another signal that the stock could be ready to move higher once earnings are released.
DaytradeTeam members should be ready for the possibility of a new options trade being entered on MSFT Thursday prior to the earnings release, with a vertical credit spread on the Nov Puts (Bull Put Spread) being a top possibility because of the opportunity to profit from options time-premium decay even if the stock moves slightly lower on the earnings report.
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Options Trading: GOOG Options Watch
Notice how GOOG has been stuck in a trading range over the past month or so, with heavy resistance levels at 320. Well, if the stock holds the gains that it made in after hours into tomorrow morning, you will see a gap open well above resistance (highlighted in yellow).
Watch for the Oct 330 call options to go up in value by 1000% or more tomorrow, and look for opportunities to enter an Iron Condor or Butterfly Spread that has high profit potential at the 330 strike price, especially if time premiums on the options are high as expected at the opening bell.
Options Trading--Butterfly on AAPL Closed for +125%
First, notice the uptrending chart on AAPL as we saw it at the time of entry on October 11---making this move up near the 55.00 strike price this week a real possibility:
Now take a look at the butterfly spread trading alert that was sent out to our membership base that same day:
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Buying AAPL Butterfly: 52.50, 55, 57.50
Limit: 0.40
Legs:
Buy 1 AAPL Oct 52.50 Call Option
Sell 2 AAPL Oct 55.00 Call
Buy 1 AAPL Oct 57.50 Call
Anticipated Hold Time: Either 1 day or through OCT expiration
Analysis-- AAPL has earnings tonight and this is a pure earnings play. Odds of success are low, but the potential payoff is very high, about 5 to 1 (+500%). We are hoping for AAPL to pop on earnings and peg 55 for expiration.
Expectations-- We have a per contract gain of $210 if AAPL closes right on $55. We are profitable between our two breakeven prices, which are 53 and 57. Max loss occurs under 52.50 and over 57.50 and is only $40 per contract. This is a great risk/reward trade.
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AAPL continued higher (despite a small blip after earnings where it gapped down) as expected, and today we were able to close out the position for a nice gain just two days prior to expiration on Friday of this week.
Members were alerted to sell the butterfly spread on AAPL today for .90, a gain of 125% from our entry price of .40 in just 5 trading days!
We want to prove our profitability to you today! Our all-inclusive membership plan includes the Butterfly Spread System along with ALL of our other trading systems. Sign up for a one-week trial today!
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