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options trading system

Options Trading System – 5 Steps To Better Options Trading

Options Trading System

Options Trading System

What is an Options Trading System?

 

Before sitting down to write this post, I thought I would search the Internet to see what information existed on options trading systems. I was shocked to find that there was barely anything posted on the subject. Seriously! There are hundreds of websites, brokerage firms, and trading services that want to sell you their system. The reality is that very few are able to describe what an options trading system actually is.

At its core, an options trading system is a method of generating buy and sell signals through a tested method of stock analysis. The system can be based on any type of option strategy and includes both fundamental and technical analysis. Options trading systems might focus on changes in underlying stock price, volatility, time decay, unusual buy/sell activity, or a combination of these elements. Essentially, it is a checklist of criteria that must be met before trades are entered. When all conditions are met, a signal to buy or sell is generated. The criteria are different for each type of option trading strategy. Whether it is long calls, covered calls, bear spreads, or selling naked index options, each has its own trading system model. An option trading system that is worth its salt will help you weed out false signals and build your confidence in entries and exits. Read More

Options Trading Case Study – Unusual Option Activity In AXL

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I just recently hosted a webinar, where I went over what is unusual option activity and why I feel every options trader should follow it. The quick answer to the why, is that to me this is as close to a “real time” trading indicator than anything else out there. Money being put at risk is different than someone coming on TV saying they “like” the stock. I go back to the school of thought of follow the money and I will show you why following the money paid of in American Axle Manufacturing Holdings (AXL).

On November 11, 2010 I noted unusual buyers coming into the November $11 calls, where 5472 contracts traded that day with an open interest of 1,394 contracts. Pretty obvious buyers where coming in with trades hitting the offer (indication of buyers) at 10 cents and implied volatility moving higher by 16%. Here are a few reasons why this is unusual.

1) Market was very bearish that day, with the S&P 500 closing down 1.56%

2) Shares of American Axle closed down 4.15% closing at $10.39

3) Call buyers coming into November calls with three days to expire

4) The options trading activity was 3x the normal amount of options traded during the last 22 days

If this does not make sense, I will break it down. The traders paid $10 for each option contract to control 100 shares of (AXL) stock at $11 before November expiration. The total amount of money put up yesterday was $54,000 for this trade. This is not to much money, but here’s the thing, they only had three days to be right so they were risking $54,000 for an all or nothing trade. With the market and shares that weak, what could they be possibly betting for, a bounce?

Well shares did bounce the next day, a good 7.31% with shares currently trading at $11.15 as I write this. The reason for the bounce? JPMorgan Chase (JPM) came out before the market open with an Upgrade on shares to an Overweight from Neutral, while raising their target price to $14.

Pretty interesting, that less than 24 hours before there were buyers of calls to own shares above $11. Currently the price of those November $11 calls are trading at $.30x$.35, a 200% gain on the trade. So do you think this was lucky or someone knew ahead of the rest of us? Leave a comment below.

Here is what I provided to my members in my live chat room: (click to enlarge)

 

If you are interested in learning how you can track this activity on your own, then you will want to check out our course on how to track unusual option activity and trade it. Click here to learn more about it.