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>There are times when position traders do well to be flat and this looks
>like one of them to me ... 3-4 days of tight ranges in both bonds and
>spoo suggest that the move out will be explosive.
Here is a good case for the blended use of options, to pick up an
Earl/Ira/T-Bondo thread:
Stradde-ling / strangle-ing flag type consolidation patterns works well with
markets that are expected to break out but directional bias is not clear.
Both are long volatility positions, and as an initial move help the position
trader be setup for a neutral breakout stance.
At yesterday settlement, the
- OEX Jun 795c 785p strangle settled at $1,825 per lot with the
- OEX at 785 and
- OEX about 12.5 points above both its 20 and 50 day ema, and
- the 795 call strike being the high of yesterday's bar and
- the 795 call strike being 1.8 points below the flag high, where breakout
traders would want to enter long for a new rally presumably to old highs
- the 785 put strike being 2 points above the low of yesterday's bar and
- the 785 put strike being 4 points above the low of the flag, where
breakout traders would want to enter short for a downside reversal pending
gap filling at 777 and 20/50 ema failure thereafter at about 773.
For someone entering the trade yesterday the better set of strikes would
probably be 795c 780p. at $1,625, about 15% cheaper than my current
position.
In any case, this initial position would open up a few alternatives down the
road:
- lift the profitable leg at breakeven or a slight profit and ride the other
one into expiration for free
- in a runaway move one way convert the position into a butterfly for credit
- or lock in profits by selling some atm option for the cost of the
strangle, should the move be that big.
- and many more, esp if the OEX had an underlying futures contract like SPX
and NDX and DJX do.
To try this yourself as an evolving case study, this might be a good time to
start experimenting with how you would play the Dow breakout of this huge
triangle between 10.8k and 10.2k with the Dow settling yesterday roughly in
the middle at the inflection point of all major ma's - chart attached.
Posts to the list preferred, so that the group can benefit.
Gitanshu
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