|
In the third part of this series, we will be expanding on our options trade construction in OptionGear, for our “Hot stock in a Hot sector”. Part 2 focused on the overall scanning process throughout the ProfitSource suite, using ValueGain and OptionGear. This week we will dive deeper into OptionGear and explore some of its fantastic trade scanning capabilities and go through the steps needed to find the trade we did in Part 2.
I would strongly suggest you read parts 1 and 2 of the series so you can learn how we chose this stock for our case study.
The stock is DO (Diamond Offshore Drilling). Let’s look at a current stock chart of DO as at May 5th 2008, within the new version of ProfitSource. Since the previous article, DO has retraced down to a Wave 4 point, and has almost given a potential entry signal into the Wave 5 run. You can see that in the last 2 days, the stock has started to move up. There are 2 main factors potentially holding back an entry. The first is that the Oscillator hasn’t begun to slope upwards, and the second is that the stock has closed almost right on $130. This has been a previous resistance point (look back along the horizontal line at 130) and the stock also made a Doji yesterday, meaning the stock opened and closed at almost the same price. If the next trading day is bullish and closes above 130, this will probably turn the Oscillator up as well.
Chart 1
click chart for more detail
Lets continue our search and set up a trade. The next step after we’ve formed a view on the stock would be to check the volatility of the options. Here is an IV (Implied Volatility) chart of the stock, as viewed in OptionGear.
Chart 2
click chart for more detail
The IV here is low to medium, relative to where it’s been in the last year. The next step is to move into the Trade Scanner within OptionGear. Inside the scanner, we will go directly to the Parameters tab.
Chart 3
click chart for more detail
In the left hand section Outlook, I selected Bullish next to Market, and Low next to Volatility. This automatically brought up strategies that work well in a bullish and low volatility environment. I selected the Call Vertical Spread (Bull Call Spread actually) because volatility was not extremely low, and the spread would reduce the trade cost as well. Now click on the Filters tab at the top.
Chart 4
click chart for more detail
There were 2 modifications I made here. The first was in the section Money. I clicked OTM (out of the money), and selected less than 20%. This will filter out any spreads that are too far OTM. The second modification was in the section Time to Expiry. Here I clicked less than, and chose 90 days, to find spreads that expire in less than 90 days. The following chart highlights the results of running the scan, exactly as described above.
Chart 5
click chart for more detail
One invaluable feature of OptionGear is the ability to compare up to six different option trades, overlaid together on the one Risk Graph. I selected three of the spreads: June 135 / 145, June 140 / 145 and June 140 / 150, by double clicking on each one in the results here. Once they’re overlaid, you can switch each spread on and off, and view the cost, max risk, max profit, % to double, Greeks and much more, for each spread.
Chart 6
click chart for more detail
That’s it! After you’ve chosen the spread that best fits your risk profile, and best matches your time, direction and IV prognosis, delete the other spreads and you have your trade!
Manage your risk!
Matt Baker
|