Using Options to Buy the Dip Keith Harwood

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Keith Harwood, MBA Keith started his career in the options pits of the CBOE. As the markets changed, he successfully transitioned to off-floor trading and constructing directional portfolios using options and futures as a market-maker, proprietary trader, and hedge fund trader. Keith founded Trade Academy in 2017 and started his partnership with Option Hotline last year to share his expertise in Options, Equities, Fixed Income, Blockchain, and Commodity trading. For Educational and Informational Purposes Only

What We’ll Discuss Today § What’s a Swing Trade? § What Dips Are Worthy of Being Bought? § Two Amazingly Simple Technical Setups For Buying Dips § Price Targets § Why I Use Options to Buy the Dip § How I Use Options to Buy the Dip For Educational and Informational Purposes Only

What’s a Swing Trade? § From Investopedia: § “Swing trading attempts to capture gains in a stock (or any financial instrument) within an overnight hold to several weeks. Swing traders use technical analysis to look for stocks with short -term price momentum. These traders may utilize fundamental or intrinsic value of stocks in addition to analyzing the price trends and patterns. ” For Educational and Informational Purposes Only

Buy The Dip? For Educational and Informational Purposes Only

What Dips Are Worth Being Bought? § I prefer to buy a dip in a stock that is in a short-term up-trend. § I don’t want to catch a falling knife! For Educational and Informational Purposes Only

2 Technical Setups – Flags and Pennants FLAGS AND PENNANTS § There will be resistance (support) on the initial breakout (break down) of a flag or pennant pattern. § I am looking for a bounce back to prior highs with a stall at or near prior highs (or fade back to prior lows with a stall at or near prior lows). This is particularly good if there was a period of consolidation (ie, a rectangle), prior to the flag set -up. From Chartpatterns. com For Educational and Informational Purposes Only

Support and Resistance § Support: Support is the price that the stock has difficulty going below. This indicates a price where the stock has more aggressive buyers than sellers. § Resistance: Resistance is the price that the stock has difficulty going above. This indicates a price where the stock has more aggressive sellers than buyers. For Educational and Informational Purposes Only

Price Targets § Stop-Losses: This is based upon support levels if I am long (resistance if short) – if a support area is breached, it means that the bullish thesis is nullified. From Chartpatterns. com For Educational and Informational Purposes Only

Price Targets § Stop-Losses: I also often use short-term moving averages to define my stop-loss. § Simple Moving Averages: The n-day simple moving average is the average closing price over a period of n-days. § For example, the 10 -Day Simple Moving Average is the average closing price over the prior 10 trading days. For Educational and Informational Purposes Only

Simple Moving Averages For Educational and Informational Purposes Only

Price Targets (cont. ) § Profit Targets: If the stock is a clear break out, where’s resistance? If the stock is breaking down, where is support? From Chartpatterns. com For Educational and Informational Purposes Only

Why I Use Options § What if I have a $100 stock with a $120 price target in the next month, and my stop-loss is if the stock goes below $90? Let’s assume my risk tolerance is $1, 000 for this exercise. For Educational and Informational Purposes Only

Why I Use Options (cont. ) § And what if the $100 strike price calls that expire in one month are $5. 00? Let’s still assume my risk tolerance is $1, 000 for this exercise. For Educational and Informational Purposes Only

Why I Use Options (cont. ) § Do I want to be long 100 shares of stock or 2 call options? For Educational and Informational Purposes Only

Why I Use Options (cont. ) § But if I am willing to spend $10, 000 on stock, then I can buy 20 calls for $10, 000. Why am I only willing to buy 2 calls? For Educational and Informational Purposes Only

How I Use Options § If I am predicting not just the direction, but also where the stock will find new resistance and could stall, I can pinpoint my trade! § In options, I always want the stock price to go THROUGH my long strike and stop AT my short strike. This is the goal of any debit spread. § A debit call spread takes a simultaneous long position in one strike call and a short position in a higher strike call with the same expiration date. For Educational and Informational Purposes Only

How I Use Options(cont. ) § Now let’s compare the Risk/Reward profile of a call vs. that of a call spread: For Educational and Informational Purposes Only

How I Use Options(cont. ) § What if I have a target price of $106 and I compare the returns from investing an equal dollar amount into $100 calls vs. into $100/$106 call spreads? For Educational and Informational Purposes Only

A Recap of My Trade Idea § I look for a setup with a stock in an uptrend that is falling lightly. § I wait for the stock to trade with a higher-high and higher-low from the prior day, and for the stock to take out the downward sloping resistance level. § Then, I can structure my trade: § 1 -month-to-expiration (or less) § Debit Call Spread: § Long Strike is a 30 - to 50 -Delta Call Option § Short Strike is 10 - to 20 -Delta Call Option and at or above the prior high For Educational and Informational Purposes Only

But What About Term Structure? § Can I get a better edge by adding some term structure exposure to my trade? For Educational and Informational Purposes Only

But What About Term Structure? § Normal VIX curve: For Educational and Informational Purposes Only

But What About Term Structure? § What I often see in individual equity curves: For Educational and Informational Purposes Only

My Alternate Trade Implementation § I can have a better Theta payout, and increase my Vega exposure by selling shorter-term options against my longer-dated calls. § In this way, I am still using leverage (both options are out-of-themoney), but if I expect the stock to stall near highs, I am set up for the short-strike to expire sooner. § Then, if my short-strike expires, I am left with a long call, and I can turn that into a greater leverage position if the stock takes out prior highs and creates a clean breakout. For Educational and Informational Purposes Only

A Recap of My Alternate Trade Idea § I look for a setup with a stock in an uptrend that is falling lightly. § I wait for the stock to trade with a higher-high and higher-low from the prior day, and for the stock to take out the downward sloping resistance level. § I want a flat or inverted term structure of volatility. § Then, I can structure my trade: § 1 -month-to-expiration (or less) § Debit Call Diagonal Spread: § Long Strike is a 30 - to 50 -Delta Call Option § Short Strike is 10 - to 20 -Delta Call Option, 1 -2 weeks shorter time to expiration, and at or above the prior high For Educational and Informational Purposes Only

Other Options Nuances § Other factors that we simply don’t have time to discuss, but I’m happy to talk about later: § Skew § Money Flow § Open Interest § If you want to learn more about how I trade and how I use these and other market inputs, contact me! For Educational and Informational Purposes Only

Get Keith’s Trade Checklist! § Go to optionhotline. com/keithschecklist to get my 9 -Step Trading Checklist for FREE! For Educational and Informational Purposes Only

Contact Me! § https: //www. Option. Hotline. com § https: //www. Trade. Academy. co § Keith. Harwood@Option. Hotline. com § Keith@Trade. Academy. co § 312 -600 -8004 optionhotline. com/keithschecklist For Educational and Informational Purposes Only

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