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Straddle trading is rapidly gaining popularity. It is affordable by most people. It is not complicate to follow and it brings fun and excitement to each transaction. Here are the highlights of the approach,
- Simple:Small number of trades per quarter.
- High and unlimited return: The return from long options plays is unlimited.
- Small Capital: Beginners that are unfamiliar with the system can start with as low as several thousand dollars.
- No Margin Required: By only long options, this system does not need to borrow any margins.
- Fast Turn Around: Normally open and close each trade within 1 to 3 trading days.
- Limited Loss: In rare case, the maximum amount of loss within a trade is the committed amount.
Basic Approach
The goal is pretty simple: to take advantage of the volatility of the stock market, regardless of the direction of the movement.
Take a look at the daily leading stock activities, there are always stocks moving more than 10%-20% in one day.
The traditional approach as to long or short a stock in a short term is like placing a bet. Not only it requires excellent skill and luck to bet on the correct direction, but also the stock needs to move in a big percentage to get a meaningful return in short term.
Optionslam.com Steps...
- Find stocks that usually moves.
- Wait for the next major news breakout.
- Establish positions to invest in both directions before the news.
- Close positions after the news within a short period of time.
There are 3 fundamental questions - When a stock will move, what kind of stocks will move and in which direction will they move.
Most of the time, a stock will be on the move after certain news has been released. Examples are,
- Company quarterly earnings
- Earnings pre-announcement
- Earning forecasts update
- Personnel changes or scandals within the Board of Directors and/or management team
- SEC investigation
- Analyst upgrade/downgrade
- Product updates such as FDA approval on drugs
- Merger, acquisition or bankruptcy filing activities
Since the position needs to be established before the news, one needs to know when the news will come out.
Unfortunately, only the stock earnings news release are confirmed ahead of time to public.
The earning news though, does not necessary move the stocks. Historical data are used to analyze which stocks are likely to move.
Recommended Rules
- Small to medium size Float
- Medium to high daily trading volume
- Medium to high PE
- Medium to high short interest
- Big gap between Analyst estimates
- Stock Price matches Strike Price
- Option Cost less than stock average movement
- Growth stock with no dividend
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Of course, a stock has moved significantly in the past does not mean it would move big again in future. This is when statistics theory applies. The odds of all the stocks we picked to stay flat after earning is very low. In contrast, one would see a big moving stock usually moves constantly after a consecutive of earnings release before the movement dies. Optionslam.com is the tool to identify those big moving stocks in the past.
Once we identify a list of candidates, straddles are used to take advantage of those big movements. If naked option would cost 5% of the price, to buy a straddle would cost 10%. Assume a stock to move 15% after its earning, that 5% difference between the cost is the profit.
Note that 5% of 10% is equal to 50% gain. And the 50% gain happens within one trading session.
What is the risk?
The loss will occur if the stock doesn't move at all or moves very little.
The bad news is that it happens very often. Even with stocks usually moves big in the past, it is very normal for it to stay flat. This can be resulted from lack of manipulation or Money Managers trying to make money from options buyers.
The good news is that the system does not trade just one stock. While it's common for ONE stock to stay flat, it's quite impossible for ALL stocks to stay flat. If that really happens, the market is just simply dead.
The importance of Indicators and Signals
Optionslam.com currently publishes two indicators, Optionslam Directional Index and Optionslam Average True Percentage. Directional Index tells about the trending and average true percentage tells about volatility. Please note that indicators are generated from past statistics and should not be used to predict the future alone.
What to do from here?
For a registered Optionslam.com member,
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