In my last post, I wrote a little about my technical analysis journey. This post I’ll write about how I use technical analysis to trade options.
First let me give you a bit of foundation on the way I trade. I no longer buy equities. I only use options. I do not trade earnings. I consider earnings a
technical, sentimental and fundamental reset. I will trade up to earnings, and I will trade after earnings using technicals while considering fundamentals
and sentiment. I feel everyone should start out using trades that involve equity ownership. I am just crazy enough to believe I no longer need to. It has
taken me almost six years to get to this point.
I use the leverage of options to risk less money to make a lot of money. It is VERY rare that my entire portfolio is involved in trades. In fact, in the
six years I’ve been trading options I have only had my entire portfolio involved in trades for about three months. I still had cash in reserve for
adjustments, but I could not put on new trades until I closed trades. Those are my rules.
Technical analysis can be very precise or very forgiving. You can use it to predict where a stock will be in a week, or you can use it to predict where a
stock will not be in 3 months, 6 months, a year…. I find that the trades I use to profit from a 1 week prediction are not as forgiving as the trades I use
when I predict where a stock will not be in 6 months. I have also found that I am right more often when I predict where a stock will not be in 6 months
than where it will be in a week. The amazing thing about options is that I can still make a lot of money. There are times when it is easy to predict the
short term movement of an equity, but I find it easier to predict where a stock will not be in 6 months for some equities.
When I first started trading options I was “retired” and had a great deal of time to trade. I could spend days studying an equity and indicators to see how
that equity moved and the best way to trade it. I traded a lot and did well. That type of technical analysis is what I think most people imagine when they
think of technical analysis; predicting the movement of a stock and where it will be at in a short period of time. When I came out of “retirement” I found
I just didn’t have the time to trade that way. I retained the technical analysis knowledge but needed to find a less time intensive way to trade.
During an OptionsANIMAL Weekly Market Report, a member pointed out that if a person had put on an iron condor at the beginning of 2012 they would have made
a lot of money at the end of the year. That got me thinking. The iron condor is a trade that makes money by predicting where an equity will not be at or
before option expiration. Combining that with the very wide space between the shorts that can be used way out in time and you have a low risk/high reward
trade with a probability that I like given the right equity. Of course, an iron condor placed at the beginning of 2013 for December expiry most likely
would have gotten killed. Unless you knew how to adjust! That, of course, is one of the many strengths of the OptionsANIMAL education. Since the space
between the shorts is so wide, you have plenty of time to confirm a move and adjust. However, this is not a strategy to be used on just any equity.
So how do you find the right equities for this strategy? Technical Analysis. I use technical analysis to see just how much an equity has moved for a given
time period and then check the option chains for trades that can work. Sometimes I use bull puts, sometimes bear calls and sometimes iron condors. The
technical analysis is very simple; support and resistance over a given time period. Since the probability is very high, I am willing to risk a great deal
more money and, therefore, need to trade much less. The three months when I had my entire portfolio involved in a trade was when I put on LOTS of bull
puts. All of the trades hit maximum profit without any adjustments. So all I used was support from the past 5 years to determine how and when to place the
trades. The analysis I did can be used over and over again so I save lots of time.
When time allows I still do shorter term trades. I use technical analysis to determine periods of highly predictable movement. I use more aggressive trades
but risk less money. In less than a year, I’ll be “retired” again so I’ll have a great deal more time. I doubt I will return to trading as much as I did in
my previous “retirement.” I will only trade aggressive trades during periods that technical analysis has shown to be very high probability times for
success. The rest of the year I’ll stick to the very forgiving trades.
Want to know more? Ask me in my live open forum coaching sessions and/or read my next blog.
Ken
Ken Bailey
OptionsANIMAL Instructor
