There are certain indicators to find the momentum of the stock in rally.
1. High volume and breaking the base is one important initial indicator for momentum.
If we want to take the maximum advantage of Options one can buy and hold during a up momentum and sell after the end of the momentum. One has to observe that the stock in rally has consolidation phases. This is the time when the option price falls more than 50 % sometimes back to its original price. This falling back depends on the out of the money or in the money call option. If the option is in the money the fall is not steep because a certain security and less speculation is obtained. But the out of money call option is very speculative and its volatility is very high. Hence for maximum profit potential, if one buys a near out of money call option and if one can manage to sell before the consolidation phase of the underlying stock then that would be the best thing to do. So, what is the ideal thing to do. It is to sell the option once the momentum is over using a limit price. One should not be greedy for the extra profit. If one does use the limit price, then the consolidation phase may start the option price fall down rapidly. If one does not sell at the right price, the option goes back, so sell even if you are losing another 20% profit, the option has already risen 80%. And using reasonable limit price can secure more profits.
So on a good day, sell and get out is the wisdom of the option. This way one can take advantage of the stock in rally in every consolidation with at least 2-3 consolidation phases in a rally.
2. Other very useful indicator of momentum is the Relative strength(RS) of the stock. When the momentum is rising from the consolidation phase, it is the time to buy the call option for a stock in rally. When the RS is at its highest usually around 80-90 then sell and get out with more than 50-100 profit.
3.The end of consolidation is when the stock price comes closest to the 30 day moving average or a 20 or 15 day moving average for a fast moving stock. Usually, each stock has its own pattern of consolidation phases. If one can get an idea of the previous pattern, one can also get an idea of when the present consolidation will end. I am aware at past data is not always reliable but after observing many many charts, I conclude that a reasonable pattern is observed in many cases.
4. The volatility of the option is calculated with as Implied volatility. It is the change is option compared the change in stock price. This is not always a good indicator because sometime the option price is jacked up too high because of speculation. One can compare it with historical IV though to keep things in perspective.
5. Important thing is to know the consolidation indicators, the movement of the stock price above and close to moving average, the relative strength of the stock( rising or lowering) during the rally for purchasing options in between consolidation phases stock rally. This way one can make more money on an out of money call option.
6. The call option is cheapest during the consolidation phase and highest at the end of the momentum phase of the rally. So buy at the end of consolidation, when the RS is rising of the underlying stock and sell when the RS is at its maximum or close. This the the best way to reap a profits in options.
7. In this example I am talking about a stock in rally and enter and exit strategy for call options.
8. When the fundamentals are weak and if the company stock price is coming down below the 30 day MA, then one needs to learn to use Put option. Also when there is a systemic risk, like what happened in 2008 stock crash, if has the knowledge of put option one could have reaped exponential profits.
Remember, option call price of out of money call option moves in rapid successions. I makes small hills, peaks during the up momentum, rapidly falling during consolidation,valleys. One can learn to make money from all these hills. One has to climb the hill but not jump with the option. Let the option jump itself and you get out before the jump. Wait for the option to go down to the valley then catch again and come up. And let the option jump, and you get out safe.
During all this time one has to keep a keen eye on the movement of the underlying stock. Intuit the end and the beginning of the momentum and the consolidation phases of the stock.
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