Options perfect instruments for momentum play

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.

Technical analysis of Option call chart with an underlying stock in rally

It is very interesting to observe that the chart price movement of near the money, or near out- of money strike price. Unlike the underlying stock in rally, which maintains it pattern above the 30 day average, the option call chart has all sharp hill peaks and valleys.
I know exactly why this happens. The option prices sky rocket in short span,2-3 days, then fall down when 40-70% when the stock is consolidating. This behavior  is especially when the option call price is near out of the money strike price. Once the stock crosses the strike price, the option call price is more in tune with the Black-scholes formula price. What it means is that out of money call options are very volatile and in the money options are less volatile, the reason being there is more uncertainty and risk in out of money call option.

So, from this what do we learn about exit strategy of near out of the money call option? What we learn is that one has to get out when the option price is high. These high points of a call option are in the same range numerically, when the underlying stock is in rally. This is an interesting observation. For example, ISLN, as stock in rally moved from 20 to 27 in 2 month period. But the option moved from 0.5 to max 1.5. It moved to this high point at least 2-3 times in this 2 month period. But not more than that. I formed a high shaped peak when the stock jumped approximately 5 % during its rally, then the price of call option came down sharply to 0.5 to 0.8 range during consolidation of the stock in the rally. This is a very important observation for exit strategy. That means the call option does not move up smoothly like the underlying stock in rally above a base line like a 30 day Moving average. It makes hills and valleys in the same range.

An intelligent option call trader understanding this property of the technical analysis, will exit when the call option is at its high point. probably tomorrow at 2.00 dollars. One should not be gready because even if it does not reach 2 dollars ,even if it reaches 1.9 one has to get out. Because the stock is will be approximately 5 percent up from its last consolidation range. Hence from the observation of this specific stock the consolidation come around 15-20 percent. This stock last consolidation happened at 22.5. So tomorrow its going to 28.5. The time is close to another consolidation of this stock at the range of 27.
But the funny thing is the the call option price will fall off the cliff from 1.8-2.00 range to 1 $. So will you cash out at this peak or wait and feel sorry during the next consolidation.

I am getting out buddy tomorrow, at its peak. There are a lot of thing the graph can show, about the underlying stock and also the option call behavior.
Unfortunately, these graphs of options are not available on websites like yahoo, msn, or google. One needs to have an account with a good option trader with a good software.
Its good I made the effort to look into this behavior today.

Implied Volatility, Volatility crush ,stock rally and option pricing

" Checking the IV of an option is also a good way to avoid a trap, which  is known in options trading as the volatility crush. Buying an option with an extremely high IV can be a costly mistake. High IV is often associated with some intense excitement about the underlying stock, such as the rumor of a buyout, FDA drug approval, settlement of a court case, and so on. As soon as the excitement is over, the IV falls back to some more normal level, and the value of the option is "crushed". An option purchased with its IV is high will be reduced to a fraction of its purchase price when the IV suddenly reverts to its mean value." pg 220

The above passage is from Options for the Beginner and the Beyond, an excellent book, on this topic.
0. One has to pick a stock in a rally, to have any certainty of the option price movement. If one is not certain about the movement of the underlying stock, then one is playing casino gambling with options. and that can be very costly if one does not know how to get out with a minimum loss. If one waits till expiration or does not get out with a minimum loss, then options is not for you.
1. One has to always compare the present volatility with the past 1 week, 1month, 2, 3 months and see that it is comparable and the present volatility is not jacked up. When the present IV is artificially up because of some irrational exuberance, the demand of the option increases that does not have any correlation with the underlying stock. An option trader has to first find that such a costly mistake does not happen. This is step number one.
2. One can calculate the ideal price of the option using Black-Scholes formula. This formula needs the present IV for its calculations. With elevated IV, the option price may also come out high so this formula needs to be used after one is certain that the IV in question is rational.
3. My preference is to select a stock in  rally and buy the call option with expiry date of 2-3 months at the least. As is well known an out-of money call option needs to be sold 2-3 weeks in ahead, because the value of the option is all time value and it decrease at the option come closer to expiry date. Any way I would take my profit and get out.
4. To avoid risk one can do this, one can get out of the out-of money option before 3 weeks or its top point of the stock price and get into the call option with in the money. That can avoid risk of losing all the profits gain in the at the money, and close out of money call options. One needs to cash in the profits atleast 2-3 week before expiry.
5. One has to know the behavior of the underlying stock. For example ISLN moved from 25 to 27.5 in 3 days, then usually it has its high point at 28-29, this is the time when the call option at his 30 strike price is at its highest point. When the underlying stock starts to consolidate it goes back to 27-28 range. That is the behavior of uptrend and consolidation in a rally.  This is when the option price of say 4 week expiration out of money option may decline almost 40-50% from its peak.
6. What I would do is Calculate the rational price of the option at 29, and it gave me 2.8 with the option calculator. I would put the limit price to sell at 2.5 or so then sell it and get out with 130% profit. I bought it at 0.85 cents per share.
This will be my best entry and exit execution of my life. Never seen this kind of profit taking in my life.
Options are like double edged knife. If one does not know how to select an underlying stock that one bets on, then one is doomed. Options are not for the inexperienced. One has to be a master of trend behavior of the underlying stock.

One can get free data of historical and present IV from
http://www.cboe.com/TradTool/IVolMain.aspx

Tanikella Bharani - Anando Brahma Episode 22

Time after Time: Miles Davis

Calls and Puts options

I am kinda excited to get into options. I wonder why I haven't got into it. All you have to know it trend analysis and pick and choose that are following a trend up or down. Thats how I do pick stocks. Anyway, the profit potential in calls when the trend is moving up is almost double than the rate of change of underlying stocks. One note, the loss potential is also high if one does not follow the trend and picks stocks randomly. One can be wiped out completely. But for the few how know who to stocks in trends or rally, calls can be great.
I am following "options for the beginner and beyond" by Edward Olmstead. Such a good book I bought. Very very useful. I would never think of options without this book. Some books in finance have changed my life. This is one of them.

One should know when to buy and when to exit. I got a call for nov 10, and the best the time to get out of an out of money call is atleast 3 weeks ahead of the expiry, or the best policy i follow is when the stock is far far away from the 30 day moving average, and is coming down from the top to the mean 30 day Moving average. That is when the call has maximum price and that is the time to exit, even before the 3 weeks before the call expires.

My experience with tread and rally analysis, will definitely help me in options. Lets see how this new chapter goes. If the underlying stock performs well the option also performs well, i mean up tread is call, down tread is put. I want to keep it simple for now although there are many other strategies.

I got 5 options of Isln for 0.85 for nov 10, let see what happens. I should have used the limit order and got the price for 0.80, anyway beginner faults.
any way I am expecting this stock to go from 25 to 27-28, although my option will be out of money, i have to get rid of the option as soon as the stock gets to 27-28 and book the profit on the higher point from the
30 day MA, this is a good strategy for near out of the money option.
If one is certain that rally is upwards, then near out of the money option can give a lot of profit. More than the near with in the money option. In the money option is safer, but near out of the money is  better good too if one know exactly when to exit from it. One should never hold the option till it expires.

Geo-engineering

http://geo-engineering.blogspot.com/

Open letter to Dr Rajendra K. Pachauri, IPCC chair

Dear Dr Pachauri,
The Climate Congress presents an important opportunity to present all facets of the current situation, explore the ramifications, and suggest appropriate actions. The aim must be, as far as possible, to address the threat of a disastrous multi-metre rise in sea level and catastrophic multi-degree rise in temperature – whenever they might occur.

We would like to suggest a rather simple division of the problem/solution domain:

Part A: Emissions reduction About: Reducing emissions of greenhouse gases into the atmosphere. Target: Achieve near-zero carbon economies throughout the world by end century. Difficulties: International agreement, life-style changes, high cost. Rationale: Long-term sustainability.

Part B: Carbon stock management About: Removing CO2 from the atmosphere by various means. Target: Reduce levels below 350 ppm over next three decades. Difficulties: May involve change in agricultural practice, worldwide. Side-effects may be difficult to anticipate. Rationale: Reduce CO2 climate forcing below its current level, halt ocean acidification and protect carbon sinks.

Part C: Heat transfer and radiation management About: Mainly about albedo engineering and solar radiation management. Priority target: Cool the Arctic sufficient to halt retreat of Arctic sea ice within three years. Difficulties: Seen as tampering with the environment, and therefore intrinsically dangerous; but cost is low and side-effects should be manageable. Rationale: Reduce risk of massive methane discharge and stabilise the Greenland ice sheet.

International focus has been almost entirely on Part A until recently, when it has been realised that: (1) it is proving extremely difficult to achieve reductions; (2) the current trend is towards IPCC’s worst case scenario; (3) lifetime of CO2 had been under-estimated – even if anthropogenic greenhouse gases could be stopped overnight, the existing gas levels will live on in the atmosphere for centuries, causing the global temperature to continue to rise many degrees; (4) global warming of more than 2 degrees could be disastrous; (5) tipping points could be reached much sooner than expected.

It is generally recognised that the underlying primary cause of global warming is the excess of CO2 in the atmosphere. If emissions reduction can’t reduce it quickly enough, then we have to resort to some form of geoengineering – or more specifically carbon stock management – see Part B. Furthermore, ocean acidification is becoming dangerous, and this can only be tackled by removing CO2 from the atmosphere. So, within a decade or two, carbon stock management could become essential, and we should be doing large-scale experimentation now.

But the actions of Part A and Part B cannot prevent tipping points driven by positive feedback on temperature. Emissions reduction and carbon stock management cannot produce a cooling effect – certainly not on the time-scales we are talking about. We have to resort to other kinds of geoengineering, hence Part C.

As regards tipping points, our perception of the situation has changed fundamentally since the dramatic retreat of Arctic sea ice in September 2007. The IPCC had chosen to ignore potential tipping points, as being too difficult to model or lacking reliable data. But now some experts are talking about possible summer disappearance of sea ice within a decade [1], and this possibility is even mentioned in the introduction to Session 1 of the Congress [2]:
“Sea ice is changing and the sea ice in the northern polar ocean has retreated in the last few years and might totally disintegrate during the next decade.”

Sea ice disappearance will accelerate Arctic warming which could trigger the release of vast amounts of methane from permafrost (leading to many degrees of global warming) and/or destabilise the Greenland ice sheet (leading to many metres of sea level rise).

There now appears no other possibility to save the Arctic sea ice than to cool the Arctic region, by reflecting more sunlight back into space. There are two prime candidates for this: stratospheric sulphate aerosols and marine cloud brightening [3]. The former involves the injection of a H2S or SO2 high in the stratosphere, where it reacts to form microscopic droplets of sulphuric acid which scatter sunlight efficiently. This mimics the effect of a volcano like Pinatubo, which cooled the planet for two years from its sulphur emissions into the stratosphere. The latter – the brightening of marine clouds – involves producing a very fine spray of sea water from ships which sail underneath low-lying cumulus clouds, such that some of the spray wafts upwards, brightening the clouds and reflecting light back into space. Modeling suggests that each of these cooling technologies should be effective, affordable, fast acting, easily reversible and reasonably safe.

If we can save the Arctic sea ice, then we may be able to avoid other tipping points such as the methane release from permafrost. Such action buys time while we reduce CO2 levels and avoid other catastrophes such as from ocean acidification. On the other hand, if we do not act with the necessary urgency, we may soon find ourselves beyond the point of no return: doomed both to many metres of sea level rise and to spiraling temperatures, way above 6 degrees this century – temperatures for which the very survival of our civilization would be in question.

John Nissen
Email: jn@cloudworld.co.uk for correspondence

Stephen Salter
Professor of Engineering, University of Edinburgh

John Latham
http://www.mmm.ucar.edu/people/latham/

Oliver Wingenter
Professor of Atmospheric Chemistry and Climate Change,
New Mexico Institute of Mining and Technology

Peter Read
Hon. Research Fellow, Massey University Centre for Energy Research

Andrew Lockley, London UK
Former director of Friends of the Earth ENWI

John Gorman MA (Cantab), London, UK

Sam Carana, contributor to feebate.net
sam.carana@gmail.com

References:

[1] Climate Safety report, which can be downloaded from:http://climatesafety.org/

[2] Climate Congress, Session 1, in:http://climatecongress.ku.dk/programme/sessions06.03.2009.pdf

[3] Solar Radiation Management:http://en.wikipedia.org/wiki/Solar_radiation_management