Step 4 - Choosing the strike prices

OK now you now the technical aspects of trading. More study can be done with a book by Michael Saul - Charting: An Introduction to Technical Analysis and Its Concepts

To review - the reason for noting support and resistance is that we want our trade to be above resistance in a Bear Call Spread or below support in a Bull Put Spread.

Once you have decided on the possible direction of a trade and you know what the stock price is above or below the support/resistance, you need to go to an option chain list found usually at your brokers site in real time or you can find delayed quotes at the CBOE for practice. The option chain will tell you the prices of the options at their respective strike prices for the specific expiration month.

What you will be looking for is an expiration month that is set to expire no sooner than 2 weeks and no later than 6 weeks. This will give you the best time values for the spread.

Next you want out of the money options above/below the resistance/support that will give you a credit of .50 or above on a spread of $5 or .25 or above on a spread of $2.5. Here is an example -

Notice that this expires in 22 days or 3 weeks good choice in expiration months.
With this example lets say we are doing a Bear Call Spread and the resistance is at $32. We need to sell an out of the money call option and buy the next strike price higher.

So we have the 32.50 strike bid at .85 and ask at .95 for ease of use lets go between and say we sell the strike for .90. The bought strike needs to provide us with a minimum of .25 for a $2.50 spread and .5 for a $5 spread. Well the $35 strike has an average price of .35 making for a credit of .55 on a $2.50 spread which is excellent. The $37.50 strike has a price of .15 making for a credit of .75 on a $5 spread, which is also excellent.

Now lets say We are doing a Bull Put Spread and support is at $29. We need to sell an out of the money put option and buy the next strike price lower. Lets take a look at what we have to choose -
The $27.50 would be the sold put for around .35 and the $25 would be the bought put for .15 leaving us a credit of only .20 which is only 8% and not an acceptable risk/reward so we would pass on this option chain and either pass on the trade or look into the next month expiration if it is less than 6 weeks.

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Investment Podcasting

Investment Podcasts are coming soon. Learn the basics of investing through my podcasts. Option Trading is just one aspect of investing learn what else is important.

Also a few more posts are needed to cover the credit spread technique I am teaching here and soon it will be available in ebook format. Look for it.

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Trades are looking good

The market has been doing interesting things the past few days. Up in the morning and crashing down in the afternoon. Today it did manage to squeak out a little gain after dropping early this afternoon.

Taking a look at the trades -

ESRX & MOT have dropped well.

MTH has dropped and now after today looks like it might rebound. It had some news today that was somewhat positive. The stock will have to gain almost 20% in the next couple of weeks to hurt the trade. Possible but unlikely especially with several layers of resistance to go through.

AMD - after the scare from this week this trade decided to fall back below the resistance lines. It did attempt a run at the 50 dma this morning and fell short of breaking through and then fell again in price. the technicals are now starting to show more of a decrease in price; however the 200dma is there as a good support and as was commented by Easy this stock does have good fundamentals. However it seems as if the Big Boys are selling this sector not buying.

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Difficult to find trades

Everything is bottoming out and near or at their next support level, so it has been difficult to find trades.

Here are two possibles -

MOT Bear Call Spread - Calls 22.50/25 for a .30 credit in JULY! That’s right a 60 day trade on this one. MOT is below the 200dma, 50dma and 30 dma which is all below 22.50, barely. June calls do not provide enough credit to play so we can go out to July for a longer term trade.

ESRX Bear Call Spread - June Calls 80/85 for around a .65 credit in June. Probability of 78.4% successful trade.

Depending on what the rest of the week brings us, Bull or Bear, there are several trades waiting to be chosen.

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