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Fellow RT'ers
Here's a sneaky low risk little trading strategy that has been very
profitable for me over the last few years:
THE SET-UP:
1. Market has less than 1.5 months to FND.
2. Market exhibiting consolidation pattern (Usually triangle or
narrow channel)
3. Implied option volatility < or = historical option volatility
IF parameters 1 and 2 and 3 = TRUE then
3. Look for DISTINCT market contraction in price. (You can use
a myriad of trading tools for this. I usually use one of these 3:
1. ADX: Below 20 in a market who's historical ADX lows were 20. Below
15 if market displays historical ADX lows of 15.....etc.
2. A cute little hybrid I have developed:
DownsIndex
Formula : Exponential average of RSI(14)-ADX(14).
For you TS junkies, that's
Plot1(XAverage(RSI(C,Len)-ADX(Len),Len),"DownsIndx");
Look for extreme peaks or troughs consistent with historical
DownsIndex Highest/Lowest historical Peak/Trough of market.
ESPECIALLY if you have the peak or trough and it has just formed
a little "hook" (Turned back on itself).
This indicator CAN be directional at it's extremes. Usually I
like to use it only as an indicator of a potential large breakout
in either direction.
(DownsIndex copyright @1997 Walt Downs/Commodity InfoSystems)
Free distribution with due recognition allowed.
3. Any form of contraction measurement such as OI and Volume...
etc.
IF Parameter 3 = TRUE then
Confirm that you have at least 2 weeks to option expiration.
DONT buy your options on a Friday :)
In the expiring month BUY 1 Call one "strike" above the market.
In the expiring month BUY 1 Put one "Strike" below the market.
THE STRATEGY:
We will look for the market to explode within the next 4 days of
trading.
Pay particular attention to which side of the congestion pattern the
market is closest to.
IF the market starts near the BOTTOM of the pattern :
IF........
the market explodes towards the TOP of the pattern, but
does not IMMEDIATELY break out of the top, Then SELL the profitable
option, and HOLD the LOSING option. As the market falls back into
the pattern, (Usually this is very rapid) you will collect back
your lost premium value on the loser. At this point,
If the market does not break out of the bottom of the pattern within
1 day, exit the remaining option for a small gain or loss. If it
does bust out of the bottom BINGO :) you're a winner on both sides.
IF........
The market immediately drops out of the pattern (Especially if it is
a triangle) HOLD the winning option and immediately SELL the losing
option (Go At the market if you have to. Believe me you DONT want it
at this point.)
OR SELL the Futures (Cancels the losing aspects of the call)
Reverse this strategy for markets that start near the TOP of the
pattern.
If nothing has happened within 4 days, we will exit our
trade. This should incur a small loss due to the rapid time decay
of both options.
Usual profits from this strategy will look like:
Trade1 : +400 -100
Trade2: -30 -60
Trade3: +275 - 35
Trade4: +400 +1500 !!!!
This strategy flies in the face of conventional options wisdom, which
says that it is foolish to buy options in the waning weeks of a
contract, due to the severe option decay.
BUT, ala Norman Winski, HERE is where the "traders" take the college
guys apart........
When you find the above mentioned setup forming, you have an
EXCELLENT chance of success. You also have a strong possibility
of picking up what is known as a " slammer" .
A "slammer" is where the commercials suddenly realise "Hey, I got too
much"
or "Hey, I don't got enough!" and the market goes APE.
see: Coffee, Copper, Yen, Bpound.
Recent examples of the use of this strategy from my own trading are:
September Copper : Near FND. Market pattern with contraction and
HABLO SLAMMER (Doing my best Jim Carrie imitation) DID YOU FEEL THAT!
September Yen last 3 days:
My Options:
On the open:
Day 1: Call 36 Put 44
Day 2: Call 45 Put 19
Day 3: Call 65 ! Put 19 Sold Call 75 when market stalled.
Market collapsed currently holding PUT at 33 :) and hoping for the
slammer.
This strategy represents what I always look for:
minimum risk.....maximum gain :)
Walt Downs
CIS Trading
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