General Trading Strategy and Options Expiration

Per J's request, my post on 7/20 (Trading Deep-in-the-Money options) sums up the options component of my trading strategy. It's hard to get too detailed as different market conditions require different strategies. As you've seen on previous posts, I had a few failed break-outs the past few weeks because the market has been choppy. I had to switch to a shorter time frame and daytrade a bit more.


In general though:


Stock selection - I trade momentum stocks depending on market conditions, long financials and short energy/commodities seemed to work this past week. Looks like tech and healthcare will move to the forefront this coming week. In a trending market, I'm looking for stocks that are bucking the trend and showing strength on down days and/or showing weakness on up days. I like to use the 30-min time frame to identify the longer term trend reversal.


Entry - I use support and resitance levels making sure 1, 5, 15 and 30 min timeframes are lined up. Also, trading with the market trend will help minimize false breakouts and breakdowns. One of my biggest challenges is staying patient for a narrow range to develop where I can find a reasonable price to set the stop.


Exit - Once I've established a position, I usually switch to the 15-min candles and take partial profits after a few points and use a trailing stop based on the 30-min or daily chart moving averages on the remaining position.

Options Expriration - For expiration week, this week, I'll be transitioning to at-the-money and out-of-the-money options as most of the time premiums have dried up. This sets up many low-risk, high reward opportunities while maintaining the same overall risk parameters. I'll usually focus on stocks currently trading above $100 since the dollar movement will be more important then the percentage movement. For instance, there's a higher chance of capturing a $5-10 movement on AAPL/RIMM vs. ADBE.

Whatever the case, I ALWAYS stay with the front-month options, especially now with the volatile daily swings. As an example, if I buy AAPL Aug 170 Calls tomorrow for $3.00 and it runs up to $180 by the end of the day, I should be able to exit at $10 for $7.00 profit. On the other hand, if I had picked up the Sep 170 Calls, it would cost me $8.40 in premium and if AAPL runs to $180, I would exit at 14.50 with only a $5.90 profit. In both cases, I'm prepared to exit before expiration so it makes no sense to pay the extra premium for the September calls as it works against me. If I decide to hold into next month, I can always roll the options on Friday afternoon before the market close.