A Lesson in Options
The markets received some medical treatment from the Fed last week that helped prop up prices in the equity markets with a surprise interest rate move. Unfortunately, this is typically just a band aid that only temporarily eases the pain. We will watch for lower prices in the equity markets from key supply levels above in the coming week. If you have any questions about the various global markets or any of these trading ideas, I can be reached by email at sseiden@tradingacademy.com. Typically, I will respond to emails quickly. On weeks where I am teaching an Online Trading Academy class, it may take a bit longer to respond.
Education
At Online Trading Academy, we have recently rolled out our new course on options and after teaching it a few times, the response from students is terrific. Unlike other options courses in the industry, our course focuses on "direction" and not subjective pricing models that don't work. I thought it would be a good idea to share some of the course with readers here…
Let's review: Area "A" represents temporary price stability which gives the appearance of supply and demand equilibrium. Once the rally in price occurs in "B", we know that area "A" was really a price level where supply and demand were out of balance. "B" can only happen because there is much more demand than supply at price level "A". Therefore, if and when price revisits price level "A" for the first time "C", we can say that price is revisiting a level where demand greatly exceeds supply "C". In any market, when price reaches a level where demand greatly exceeds supply, prices rise. "C" is the lowest risk/highest reward time to buy into any market or take action in options.
The Opportunity in Options at Demand
This is potent information for any options speculator and here is why. During the dramatic decline in price to demand "C", three things are happening:
1) Volatility is increasing 2) Calls are becoming cheap 3) Puts are becoming expensive. The calls are CHEAPEST and about to become expensive at the exact time our rules tell us to BUY CALLS, at the demand level "C". We teach this in our course.
Trading Ideas
NASDAQ (E Mini Futures)
This is a chart of the NASDAQ Futures. While Friday was an impressive rally, caution on Monday if you are considering buying into this equity rally. The key is location. In other words, buying anywhere near the supply levels shown on this chart is very high risk and low reward as there are likely many more willing sellers in these areas (red lines) than willing buyers. For day traders, you may want to consider shorting into these supply levels. If you do, try to make sure that you short the FIRST time price revisits the level, not the second or third as the probability of shorting success is decreasing with each rally into the supply level.
Euro/Yen (Cash Forex)
After a dramatic decline in this market, it has rallied and formed a support (demand) level just below current price. Active traders can look to buy into this market if and when price revisits this level for the first time. To keep your trading low risk, let price decline into the demand level and then buy as price is rallying from the level with a protective sell stop just below the level. The rally from the level has opened up a decent profit margin on the upside. This market is a very active market and is a non-dollar currency pair which is ideal.
Euro/Dollar (EC: CME Futures)
This trading idea is a bit far from entry but as we saw from the first letter a few weeks ago, there can be some big winners if we keep tracking these levels. The supply level seen on the chart is well placed on the supply/demand curve and there has been a substantial decline from that level suggesting a strong supply/demand imbalance. The low risk entry would be to let price rally into the supply level and then short when price declines from the level and place a protective buy stop just above the level. A trail stop would be a good idea for this opportunity as it is well placed on the curve and has some room to decline, should price reach the level.
If you have any questions on this, please email me. Have a great week.
- Sam Seiden, sseiden@tradingacademy.com
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Sam brings over 15 years experience of equities and futures trading which began when he was on the floor of the Chicago Mercantile Exchange. He has traded equities, futures, interest rate markets, forex, options, and commodities for his personal interests for years and has educated hundreds of traders and investors through seminars and daily advisory services both domestically and internationally. Sam has been involved in the markets since 1991 both on and off the floor of the Chicago Mercantile Exchange. He has served as the Director of Technical Research for two trading firms and regularly contributes articles to industry publications. Sam is known for his trading, technical research, and educational guidance.