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Chart School |
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Best Short-Term Trade
January 25st, 2004
Go to Best Trades
Archive
Our index options trader traded QQQ options for this
week’s "best trade of the week", but could instead have
traded NASDAQ 100 index shares or options using the same
method. This trade was based on our volume indicators
and our Market Outlook.
NOTE: We discuss our "best trades of the week"
here mainly for educational purposes. We don't
recommend that you follow our exact trades. Instead, we
urge you to develop your own trading style and to paper
trade before committing your money to real trades. Our
volume analytics will help you do this.
|
Security |
Return |
| Put
#1 (QQQ March) |
+21.43% |
| Put
#2 (QQQ March) |
+30.77% |
|
Total Profit: |
+$4,200 |
Even though the trades shown above were not entirely
without risk, they resulted in a
profit of $4,200
Why did you trade
QQQ options?
Generally we trade options, and in this case QQQ
(NASDAQ 100 index shares) options because they offer a
high return, but are less risky than futures for the
NASDAQ 100 index. One can trade NASDAQ 100 index
futures, QQQ stocks, QQQ options (as we did), or even
NASDAQ 100 options on futures. There is a wide array
of trading vehicles that are tied to the NASDAQ 100
index, and it's mostly up to the individual trader as
to which is preferred to trade.
Why buy expensive
options that will expire in 2-3 month?
Even though next months Call & Puts options are
more expensive, they tend to be less volatile in
reaction to market swings, and they don't devalue as
quickly as a current month options. By trading options
that are at least one month ahead, you can protect
yourself from unforeseen short-term fluctuations in
the market. Also, if the uptrend continues on a
long-term basis, one can hold these options for a
longer period as they will substantially substantially
in value.
In the following, we would
like to show you the motivating factors that led us to
take above trades. For this purpose, we have created
what we call a 'Table of Trade
Motivators':
|
Trade |
Volume Motivation |
Market Outlook
on Members Home Page during the trade |
Buy Put #1
01/08/2004 |
After 13:00 despite
the large amount of selling volume the market
continued moving higher throughout the rest of the
day, moving the major market indexes to new highs by
the end of the day. |
The fact remains that
there is a large amount of accumulated selling
volume for which the market has yet to react.
Because of this we still expect that the market
may move lower in the short-term as it should
have a short-term pullback in order to account for
the large amounts of accumulating selling volume. |
Buy Put#2
01/9/2004 |
By 12:15 the largest
selling VMA surge of the day peaked. |
We still believe that
the market may continue its pullback in the
selling volume to the upside. |
Sell Put#1,2
01/13/2004 |
During this descent,
the market encountered a moderately large amount of
buying volume to the downside, which was focused
into two peaks: a moderate buying VMA surge at
10:30 and a large buying VMA surge at 12:00. The
|
The mid-term market
is quite bullish and is likely to continue on its
current uptrend. |
Buy Put #3
01/15/2004 |
During the market's
late morning and early afternoon advance it ran into
a very large selling VMA surge to the upside. This
selling volume surge began at 11:30, but quickly
came to a peak at 12:45. |
The fact that the
market has not reacted, in the short-term, to the
accumulating amounts of selling volume to the
upside leads us to believe that there is now a
chance for there to be a mid-term correction,
not just a short-term correction. |
Buy Put #4
01/16/2004 |
Intraday, a large and
broad selling VMA surge to the upside was seen at
12:45. This surge was substantially bigger than any
seen in quite some time. |
The fact that the
market has not seen a pullback in this situation
leads us to believe that a more substantial
correction may be in the offing. |
The principles discussed above also
apply when trading the NASDAQ 100, the
S&P 100, the
Dow Jones, as well as other indexes.
Following
is a detailed list of the actual trades made by our
investor.
These are the trades which netted the returns shown
above:
Date |
Trade |
Strike |
Expiration |
Contracts |
Contract
Price |
Amount |
Profit |
|
01/08/2004 |
Buy Put #1 |
$38 |
March |
60 |
$1.4 |
-$8400 |
|
|
01/13/2004 |
Sell Put #1 |
$38 |
March |
60 |
$1.7 |
+$10200 |
+$1,800 |
|
01/9/2004 |
Buy Put #2 |
$38 |
March |
60 |
$1.3 |
-$7800 |
|
|
01/13/2004 |
Sell Put #2 |
$38 |
March |
60 |
$1.7 |
+$10200 |
+$2,400 |
|
01/15/2004 |
Buy Put #3 |
$38 |
March |
60 |
$1.25 |
-$7500 |
|
|
01/16/2004 |
Buy Put #4 |
$38 |
March |
60 |
$1.15 |
-$6900 |
|
|
Total: |
+$4,200 |
We welcome any questions or comments
you might have regarding this "best trade of the week".
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