Many traders often ask the question "how much time should I be buying in my option contracts?" While the answer is never easy, here's a quick way to try and ascertain what month traders might want to buy. In order to use it you have to have a trading plan that involves a target. The example below would be for the Semiconductor Index (SOX.X), but it can be used on any security.
Semiconductor Index Chart - last five months.
Here's a bit of a different look of the SOX than I showed traders this morning on IndexSkybox.com, but is shows that the SOX.X has traded above the 700 level and looking strong. This morning on IndexSkybox.com we set up a call play in the index with a target of 800. We talked briefly about how much time to buy so lets take a look and see how this may have been derived. The chart below is the exact chart from above, but I'm going to shift the above chart to the left.
Semiconductor Index Chart (shifted) - last three months.
The above chart was simply "shifted" to the left and all trends were projected to the right. If we "believe" this index will ultimately achieve the 800 target where might that be? The above chart shows a "crossing of trends" near 800 where downward trend (A) intersects horizontal trend (D). This intersection occurs in mid-March. Now, before we all go running and buying the March calls, traders should take a moment and realize that this index could run right to 800 in the next several sessions (it might not run any further too). The above technique is not only useful in helping determine if we bought enough time in an option as it relates to the targets we've set, but it also helps us from getting "greedy" if we achieve our target in a short amount of time. If I'm realistic in my thinking that the SOX "might" reach 800, a realistic time frame as it relates to trend (A) would me mid-March. If I'm looking at a February expiration call and this index hits 800 in the next 10 sessions, then I'm NOT suddenly thinking "hey, this things going to the moon!" While I might be tempted to think "the moon", I'm actually very calm and rational IF the 800 level is achieved anytime soon. This rationality will keep you from letting big profits turn into losses.
VeriSign Chart - 60-minute interval.
Let's continue to monitor a bullish trade in VeriSign (NASDAQ:VRSN) that some traders may have initiated this morning at the opening of trading near $82.50. The opening tick was $82.18 so lets assume it took us awhile to get some stock at $82.50 and not the low of the day like some web sites I see are able to do. This morning, we put trend (A) in place and this becomes an aggressive traders stop. At the same time, as an aggressive trader myself, I don't like a trade to turn into a loss when I'm up more than $2, so I'd be moving my stop up to at least break-even. Let's look at some of the challenges we set for VRSN and see how the trade is progressing. Our first challenge was level (B) and that level has been broken to the upside. The next challenge was fractionally higher at the 200- period MA at $85 and this level was taken out also. I've also just recently added level (C) at $87.50 and this level was taken out to the upside in the past interval. Traders can continue to offer these types of challenges to VRSN with their ultimate target of trend (D) in the crosshairs. Traders will also like the action they're seeing in MACD on the 60-minute timeframe. Notice how MACD is turning higher, above the zero level and just about to cross. It took a day of waiting for this trade to come together, but we did say yesterday, that patient traders would be rewarded. It happens so often. Sure, we missed the "gap" this morning, but we didn't have capital at risk in the trade. We were still able to get long the stock at a price below the "Play of the Day" from yesterday's open. If you're starting to use some of the techniques we've been talking about the past couple of months, have you noticed how calm your trading? Hopefully so. Plan the trade, then trade the plan.