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Trading Price Action Reversals: Technical Analysis of Price Charts Bar by Bar for the Serious Trader by Al Brooks

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CHAPTER 23

Options

I once talked with a woman trader who was a small business owner and managed a stock portfolio for herself and her husband. One day, she awoke to find her portfolio was down $500,000 since the day before. On that day she became a day trader, deciding to never again carry trades home overnight. She was a good chart reader, but was no longer willing to have any overnight exposure that could result in a huge loss. As an alternative, she could have switched to option trading for trades that she wanted to hold for several days to several weeks. She was a strong trader and could have continued to trade a substantial part of her portfolio with options instead of restricting herself to day trading. I haven't talked with her in years, but I am confident that she is doing well whether or not she strictly day trades, but she might be doing better if she incorporated options into her strategies.

Because the bid-ask spread is often wide for options, traders should usually only consider option trades on higher time frame charts. Any setup with a significantly positive trader's equation is reasonable. Here are some examples of situations when traders should can consider call or put purchases based on 60 minute or daily charts:

  • Buying calls on a pullback to the moving average in a bull trend.
  • Buying puts on a rally to the moving average in a bear trend.
  • Buying calls at the bottom of a trading range.
  • Buying puts at the top of a trading range.
  • Buying calls at a new low in a ...

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