SIMPLE STOCK OPTION TRADING TECHNIQUES FOR SUCCESSFUL TRADING

By Billy Williams

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Having been a student of the stock and option markets for 17 years and seeing new traders enter the market each year seeking there fortune only to see them wind up broke and bitter a year later I find myself wondering why this is with all the advances in trading. At the beginning of the 21st century I see more computer models, software programs, news commentary, new trading methods, etc. come into the marketplace than ever before being promoted to helping traders make millions yet aspiring online stock and option traders struggle even more than when I started out. After giving this much thought I believe now more than ever that trading success doesn't come wrapped in a pretty box with bows on it but from implementing effective methods that stand the test of time.

For example, for spotting trend reversals, I'll look at a stock that has been moving in a given direction, let's say upwards, and graph that stock's price action with a 2 period Relative Strength Index Indicator also called an RSI. I'll draw an upward trendline on the stock and watch for distribution on higher volume in the general market. If distribution days begin to add up to more than 4 or 5 then I'll watch the RSI on this stock for divergence and once spotted will watch for a break of that upward trendline. As soon as I have my trigger I use my method of entering the position for a short. Downward moves are twice as fast to the downside as they are to the upside so when the market sells off I am in a position to catch a rapid decline in price with a put position while limiting my risk.

Using a pullback method, I first make a list of stocks that are both strong fundamentally and technically which to me suggests that they have the potential to move higher or the opposite for short candidates. I'll use a variety of stock option strategies to trade them but for long candidates the stocks must be above there 200 day simple moving average or 200 day SMA and must also have a Relative Strength (RS) of 90 or higher. I also watch to see if there price range has been range bound for at least 2 months in a flat price base pattern. If the stock moves up and out of that price base I will then watch its relation to it's 10 and 20 day SMA. Once price pulls back evenly to its 10 day SMA without violating its 20 day SMA(which acts as a stop for a position once entered) I wait for price to trade over the high of the previous day's price high to enter. This allows me to trade high-flying stocks at the beginning of a big rally with stock options while controlling my risk with an adjustable stop in place (the 20 day SMA).

Seasonal patterns in the general market help me determine which strategy to use at different times of the year. Many funds will begin to run the market up starting around September in order to improve there funds year end returns. This gives me the potential to make huge gains with stock option trading and taking positions in the strongest momentum stocks all the way into the end of December. It also shows me that the market tends to cool off and sell down near the beginning of the year so I know to sell my longs and look for short candidates to use with put option trades.

Explosions in price that cause huge gaps between trading days can also present incredibly profitable trading opportunties. A price gap explosion is when a stock closes down in price one day but the following day gaps in price in the opposite direction often completely out of the price range for the previous day. This occurs because of a unexpected announcement that shifts the dynamic in the price action of the stock. This can signify the beginning of a new trend which I seek to exploit and get in early on a new price trend with stock option plays or investment positions. I have made huge gains in Goldman Sachs, Apple Computer, Chicago Mercantile Exchange, and others using a combination of stock investing and option trading with this technique.

After 17 years as a veteran stock option trader, I have come to the conclusion that while indicators, computer programs, and trading systems have there place in the marketplace I have also come to the conclusion that it does more harm than good for many traders. The reason is that many apiring traders miss the point as to what actually effects trading success in the markets. And, in my opinion, having a strong sense of the markets and stock option trading combined with the disciplined implementation of effective trading techniques will do more to produce successful trading results and consistent profits than the latest fads in the marketplace.

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