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Trading Weekly Options to Capture Technical & Flow Triggers

by | Jan 1, 2021 | Strategy

It was a fun last week for trading, I was ahead of scheduled on completing my annual outlook report and we were closed for live market coverage for the week. It allowed some of the few days I get in a year to just solely focus on the tape and trading my personal account, and every time I do this I see just how incredible the opportunity is to make a lot of fast money.

On a typical day I spend the majority on my focus of providing fast, accurate and value-added alerts & insights to members in the Trading Hub. It is a ton of work covering the markets in a fully comprehensive fashion that we do and particularly in 2020 and likely moving forward as the options market has overtake the equity market as the preferred method of trading causing a ton of activity in both the retail & institutional sides, though my filtering/scanning only focused on the latter. I often get so overwhelmed with the amount of work each day that I pass up some excellent trading opportunities daily simply because I know the attention required to monitor short-term option positions would take away from my ability to handle my responsibilities to the OptionsHawk business. Our members tend to be capitalizing on the opportunities more often than I can which is the goal, they come first.

I thought it would be a helpful exercise to review my process on how I trade these signals when I do have the time to devote to the trades, as well as continue to learning process on areas for improvement, there are plenty. It is also helpful in general for traders to review trades to enhance their process and continuously improve both win rates and capture rates, the latter I define as the percentage of a move you capture for your pre-set timeframe.

On December 30th, 2020 an early alert triggered on Baidu (BIDU) for a technical breakout. When I say this, it is an alert that I had previously sent at a defined price-level and I am utilizing volume profiles, typically on OpEx cycles, targeting names coming out of consolidation patterns or value zones. The most important part of trading is the preparation, so setting these kinds of alerts and reviewing set-ups nightly is the key to success, and I set alerts all through the week whenever I see a chart of interest, both intraday and after-hours. To simplify and make this more efficient you can narrow the tradable universe down to highly liquid optionable names with weeklies and focus on high ATR (average true range) and most actively option traded stocks.

An added and important step is also knowing prior options positioning in the given stock which we at OptionsHawk keep a database of all notable positions that updates daily with current price and open interest. I also just have a steel trap of a mind that remembers thousands of option trades. In this case I immediately knew BIDU had seen weeks of bullish options action accumulate into the early December run and now with shares coiled, a time these positions could see further upward moves.

The 65-minute chart below shows the nice flag pattern that shares gapped above and triggered on clearing the 12/29 reversal high so I acted immediately at 9:35am. One other step was a quick check of the current options tape and I saw a flood of call action come into both 12/31 and 1/8 weekly calls, so I knew it was a hot money trade of the day, which we tend to see a few in the opening thirty minutes. I decided to take the January 8th (W) $205 calls with the idea this move could run a few days to hit my target. My target was $217 which expanding out to a daily chart there was a volume pocket to fill on the volume profile from October 2018. I grabbed 10 calls for $6.60, a small position, and shares worked immediately higher. Shares then paused intraday and I got impatient, as I often do, and closed the calls for $8.60, a $2000 profit in thirty minutes. BIDU shares continued to run and traded above $225 with these call options reaching $18, so a piss-poor capture rate on my part leaving over $9000 on the table. Looking back now, for one I should have stuck to my original target of $217, and second an extension line off early November and mid-December highs targeted resistance right at the $225 level that was the high. It was also the exact 2.236 Fibonacci extension of the consolidation range, something I will keep in mind and test further in the future.

The other part of the equation is having an exit plan, so what would that be here? Some prefer setting pre-defined nominal or percentage stops, and in this case the trade really never even went red at any point so very easy to manage. Other techniques would include VWAPs on a shorter-time frame and I had an anchored VWAP level off the recent range reversal low as a stop to trail the move. Another style would be using 15 or 30 minute charts and following the intraday chart to ensure there is no violation of a key low, or in simpler terms, upward momentum. Another way to ensure momentum is intact is to utilize moving average crossovers on short time-frames, sticking with the key numbers (8,13,21,34, 55) but on the 15, 30, or 65 minute timeframes, the combination dependent on how tightly you want to manage the position but 8/21, 13/34, and 21/55 the three combinations I tend to focus on. Chandelier Exits are another approach to consider studying as it utilizes an ATR approach and is effective across multiple timeframes.

On December 31st, 2020 Western Digital (WDC) showed relative strength in an early red-tape and it triggered one of my preset level breakouts. Similar to Baidu, WDC had been seeing enormous call buying of late out in February and April but also had over 9000 January 8th (W) $52.50 calls in open interest from buys we tracked in our database that were originally bought $2.35+. I decided to scoop up 100 of these at $0.80 and the stock started ramping almost immediately. There was a clear catalyst here with the pre-market Citigroup note on the Memory names after the Samsung CAPEX revision though the note went under the radar of most.

WDC was a bit different style of a set-up as it was a name that had been pulling back and the trigger came on a move out of the pullback trend and also out of a recent basing pattern near its 21-day moving average and right above the rising 34-day moving average. I executed the buy at 9:37am and sold ½ at 9:45am at $1.30 and the other ½ at 10:24am at $1.56, so $1.43 average, or just over $6000 in under an hour. WDC decided to again make my capture rate pitiful as these calls ran to $3.70 intraday which could have been an exit at $37,000 in an ideal World and a 360% move in the calls in a day. Looking back now the peak in shares did come right near the extension off an early and mid-December high and if was patient and moved up the stop or used an adaptive stop like VWAPs and moving averages discussed earlier I would have stayed in the trade longer and made a better profit. The high also aligned with a 123.6% Fibonacci extension of the pullback move, which is a different extension than the prior case and makes sense for a move taking out a past high to extend one level higher as opposed to the BIDU situation that triggered immediately on taking out a key resistance high.

In closing, trading is a continuous learning cycle and it is very helpful to look back and assess you trades consistently and also keep a journal, well an Excel sheet in this age, and start to recognize patterns to your trades and what the most effective approach is for targets, stops and identifying the best trade candidates, the latter is very important as being selective is critical.

I would be remiss if I did not mention a key factor to all of this, and that is the broader market environment. You want to be trading on trend-days and sitting out on trendless, or chop, sessions. This works in both directions and the majority of the time you want to be riding the trend of the market, so on a trend-down day identify support breaks and target put options while on trend-up days focus on upward breakout triggers and target call options. It can be tough to identify this in the opening thirty minutes but as the market day develops it can quickly alter a morning trade if the market environment is moving against your early read and cause for tighter risk management or a faster exit. Relative Strength is a key factor on trendless chop sessions as there generally are segments of the market that can still work well in those environments. I would focus on Relative Strength names on trendless sessions when the market itself is in a bull trend, which it was on these days with all rising moving averages and no signs of price-weakness. On the contrary, in a trendless session during an overall market downtrend we want to focus on names showing early relative weakness as the odds are the market itself resumes the broader trend.

There are a lot of things I did not cover here that can also be part of a trader’s arsenal such as adjusting trades or piecing out of positions. Both are areas I could use improvement as I generally just choose to redeploy the capital to a new opportunity and keep less active positions going that each need monitoring with my limited time and screen real estate becomes an issue. In the trade examples above I easily could have cashed out of part of the position to cover the initial outlay and let some ride, and then closed some more and even adjusted some other parts of the position out in timeframe and up in strikes. All of these methods can further enhance returns and minimize risk of a winning position turning into a losing one.

Update 1/4/2021

Advanced Micro (AMD) was an early morning trigger on 1/4 as it cleared a trend-line and out of a small base I was monitoring. I bought 50 of the January $95 calls for $2.76 and sold them for $3.97 in 37 minutes (9:45am to 10:22am), an easy $6000. If we look below that was a case where my exiting quickly was the right move as it gave it all back later in the session, and points to one of the key factors highlighted in the original post, always having a feel for the daily tape. We opened at new highs but it was confusing after reading our Market Blitz morning report pointing to a Blue Wave for the next key market event, Georgia elections, as markets tend to favor gridlock. The weakness showed up early in the NYSE and we had all TICK selling pressure while the NASDAQ showed early relative strength, it was unable to hold up. Those calls hit a high today of $4.29, so a pretty solid capture rate, and a case where measured move targets are an important tool, the base breakout measured for a three-point move and it peaked right about at that move, and the high tick also was a retest of that 12/18 range breakdown which filled a volume pocket. Made some solid coin in Spotify (SPOT) puts and Square (SQ) calls as well today.

Update 1/12

It was another great day for trading with growth/momentum names on fire, caught a nice ride in Baidu (BIDU) calls early and took profits way too soon as usual, but wanted to focus on the Airbnb (ABNB) trade. ABNB was a set-up I was eyeing into the week and even posted on Twitter this morning, the 65-minute view showing a bottoming inverse head & shoulders forming with a bullish RSI divergence. I took the January 29th (W) $170 calls because I knew there was a large trade in open interest there from our database, so grabbed 20 at $3.50. The market was choppy all morning and these were down a bit so I sold them for $3.10 before I took lunch but put in an alert back at the $151 level. That triggered and I noticed IV’s were surging in it with a ton of Jan. 22nd (W) call action and felt certain this was the time it was going to run and clear that $153.50 level, so I bought back in around $3.75. The stock started running hard almost immediately after clearing an anchored VWAP level off its December high. I was impatient again and sold 1/2 for $4.80 and 1/2 for $5.50 for around a $4200 profit in 20 minutes, and these proceeded to reach as high as $9.50! It never violated any stop levels such as moving averages, ATR trailing, or VWAPs. I am thinking of working in Fibonacci retracement for the intraday range, and not letting a 38.2% level break. Also including a Renko chart I like, playing with buying when above two red blocks and selling if below two green blocks.

Update 1/13

Zoom (ZM) was the trade of the day today, triggering right on the open, though it abruptly then pulled back in during a volatile first fifteen minutes. You can see on the first chart, 65-minute, I was again targeting a volume pocket and it aligned nicely with an anchored VWAP break off the ugly December reversal candle, so $357 was my volume profile trigger, while $362 would be the VWAP break trigger. I took the Jan. 29th (W) $400 calls even though I planned on exiting as a day-trade, it normally makes sense not to pay the extra premium, but I like to have some cushion to minimize the faster decaying weeklies. I paid $9.20, and overpaid, a minute into the open, and these came back down to around $7 in the early volatile move before it really started moving. ZM shares ran all the way up to the next key volume node and retested its 12/23 breakdown, these calls making it up to $17. It closed the day pulling back right to the 38.2% retracement of its daily range, so interested to see what it does the rest of the week, though $376 ATR stop with the contracts around $13 was the stop-out for the daytrade. I also included the Renko chart again showing a green block overcoming two red blocks as a nice signal again.

Update 2/5/21

Been a bit slow on the updates, earnings season is crazy, but been a fantastic year, weekly option trades are around 33 wins and 5 losses.

I was back with Zoom (ZM) today, the trigger alerted early this morning and picked up Feb. 12th (W) $410 calls $7.50. It started moving immediately with these gaining 70% in about ten minutes and then my scans started to show significant call flow into Feb. 12th (W) options as well, and IV started to rip higher, the perfect combination! I was looking for a move to $418 and got it, calls up around $20 near day-end, but also has this great weekly wedge breakout so had to leave some on to run higher next week. Fibonacci extension targets at $421.50 and $432 now in play. The Renko reversal triggered near $382 well before my $395 volume profile trigger, but trickier to catch those until I program it to automate alerts.