Online Financial Tips

Archive for February 28th, 2010

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I have been trading options online buying the Qs (QQQQ) for sometime and here is my trade plan. Trading the Qs is a good way to increase your portfolio without a large outlay of capital and can be traded as a day trade (1 day) or swing trade (2-5 days). You can make longer trades but you need to be careful due to market volatility.

Entry

o Determine the direction of the trend. Is it up or is it down?
o Buy calls if trending up, or buy puts if trending down.
o Best time to enter is after a 1-2 day pull back.
o Try to buy at least 20 contracts. (10 or less will work, but your return is much less.)
o If the Nasdaq has had a big pull back after initial entry, I will add to my position. Wait until the momentum has returned to the original trend direction before adding any more. You do not want to be caught in a market reversal.

Exit

o On entry I always set my limit to 50 cents. After I am profitable by 15 cents, if the market is not moving or is pulling back, I will consider exiting.
o I will use a stop of 50% of entry price. Try to get out much sooner though, watch the charts. They will usually tell you.

Which Option

o Expiration–I used to trade with at least 20 days till expiration. I now trade current month + 1. Other words, if you are in the month of June, the earliest month I would take for expiration would be July.
o Delta–I want to see a delta between 70 and 95 cents. Anything higher than 95 and you are just throwing money away. Lower than.70 and the Qs have to make a bigger movement before your limit is reached. You can also lower the limit or go for a longer duration.
o Price–I want my ask price to be under $5.00.
o Open Interest–I look for an option that has the highest open interest under 5.00.

I have been buying options online trading the Qs and it has been one of my biggest money makers. I started off buying much smaller positions until the account grew big enough to support the larger trades. Overtime I found the above seemed to work best for me. One word of caution, if a trade starts going against you, GET OUT OF IT. Last year I didn’t, and took a big hit. Even with the hit I took last year (lost my discipline) I still trade the Qs every day and expect to continue.