Candlestick Secrets for Profiting in Options Seminar The Foundation of Options

Size: px

Start display at page:

Download "Candlestick Secrets for Profiting in Options Seminar The Foundation of Options"

Owen Spencer
6 years ago
Views:

Option Spreads 45 Bull Vertical Spreads Bull call (debit) & Bull put (credit) 46 Bull Call Spreads Buy lower

more? So will be buying the more expensive lower strike call- and selling the cheaper call: Result is net cost to

But give up profit potential Buy 1 XYZ 30-day 95 Call @ 3.50 Sell 1 XYZ 30-day 100 Call @ 1.50 Net Debit (2.

1 Option Spreads 45 Bull Vertical Spreads Bull call (debit) & Bull put (credit) 46 Bull Call Spreads Buy lower strike (95) call Sell higher strike (100) call (same expiration) Which of these two strikes will be more worth more? So will be buying the more expensive lower strike call- and selling the cheaper call: Result is net cost to you - hence a debit call spread Concept: less costly way to buy call. But give up profit potential Buy 1 XYZ 30-day Sell 1 XYZ 30-day Net Debit (2.00) At expiration: Maximum Profit = Difference in Strike Prices (5) - Net Debit (2) = 3 Max Risk is net debit = 2 Breakeven = Lower Strike (95) + Net Debit (2) = 97 47

2 Bull Call Spread - P & L Graph 6 Buy 1 XYZ 30-day 95 Call (3.50) Sell 1 XYZ 30-day 100 Call Profit & Loss Stock Price at Expiration 48 Considerations for choosing strike prices for bull call spread Think of bull debit spread as a long call trade and lessening cost of trade with short call. So market at support 45, target 50 Buy 45 call Sell 50 call (to lessen cost of trade) Using resistance: Higher strike should be resistance area. Rationale: Max profit (at expiration) when higher strike price (short) of spread is reached. 49 Bull Call Spread Strategies Good to use if worried about high IV Lessens time decay issues involved with buying outright call. Selling call lessens cost of trade. More important for market to rally than with bull put spread (bullish to neutral) Can be a good alternative to an outright buy when there is a target move of 5% to 10% so premium on short call is worth selling and you don t expect to give up too much upside potential. Can also leg into this spread after a favorable move. 50

3 Bull Call Spread Cautions Selling a call helps lessen cost of outright trade, but trade has capped upside potential Spreads reach max profit at expiration If expected to move more than 7% or more the short option may not be worth selling. Two legs so extra commissions and two bid ask spreads to deal with. Can be harder to close in a hurry. 51 Bull Put Spreads Buy lower strike (33) put Sell higher strike (37) put (same expiration) Which of these two strikes will be more worth more? So will be buying the lower price cheaper put- and selling the more expensive put: Result is payment received - hence a credit put spread Concept: Buying a put to protect against high risk of naked short put. But gives lower net credit. Buy 1 XYZ 30-day 33 Sell 1 XYZ 30-day Net Credit 1.10 At expiration: Maximum Profit = Net Credit = 1.10 Max Risk is difference in strikes (4.00) less credit= 2.90 Breakeven = Higher Strike (37) less credit (1.10) = Bull Put Spread - P & L Graph Buy 1 WXY 30-day 33 (0.57) Sell 1 WXY 30-day Profit & Loss Stock Price at Expiration 53

4 Considerations for choosing strikes for bull put spread Think of bear credit spread as short put trade- and protecting with long put. So market at support 45: Sell 45 put Buy 40 put (to protect short put) Using support : Higher strike should be support area. Rationale- Max profit (at expiration) when underlying price is over higher strike (short) since both puts expiration worthless and you keep entire credit Good rule of thumb is buying the next lower strike (depends on your risk preferences). Note with credit spread: don t need to reach a target like bull call- just needs to hold at, or over, support at 45 at expiration 54 Bull Put Spread Strategies Good to use when near support. Outlook neutral to slightly bullish. More of support will hold trade than market will rally trade. This is because credit spread is more like selling options it is less important for market to rally than is the case with bull call spread. Time decay works in your favor. Buying a cheaper put for protection against more expensive short put. Gives flexibility to convert to bear trade by legging out of short put. More OTM when the spread is entered the greater the probability of success (but lower the credit) 55 Bull Put Spread Cautions Max profit is capped at amount of credit Spreads reach max profit at expiration Because the chances of this trade usually has good odds, the max risk is often more than the reward Two legs so extra commissions and two bid ask spreads to deal with. Can be harder to close in a hurry. Compared to bull debit not good risk-reward, but higher probability of success since market can stay flat or decline slightly and still be profitable 56

Bear Vertical Spreads Bear put (debit) & Bear call (credit) 57 Bear put (debit) spreads Buy higher strike (290) put Sell lower strike (270) put (same expiration) Which of these two strikes will be

5 Bear Vertical Spreads Bear put (debit) & Bear call (credit) 57 Bear put (debit) spreads Buy higher strike (290) put Sell lower strike (270) put (same expiration) Which of these two strikes will be more worth more? So buying the more expensive higher strike put - and selling the cheaper put: Result is net cost to you - hence a debit put spread Concept: less costly way to buy puts. But give up profit potential Buy 1 XYZ 10-day Sell 1 XYZ 10-day Net Debit (4.70) At expiration: Maximum Profit = Difference in Strike Prices (20 - Net Debit (4.70) = Max Risk is net debit = 4.70 Breakeven = Higher Strike (290) - Net Debit (4.70) = Bear Put Spread - P & L Graph Buy 1 LMN 10-day 290 (5.75) Sell 1 LMN 10-day Profit & Loss Stock Price at Expiration 59

6 Considerations for choosing strike prices for bear put spread Think of bull put (debit) spread as a long put trade and lessening cost of trade with short put. So 45, target 40 Buy 45 put Sell 40 put (to lessen cost of trade) Using support: Lower strike should be support. Rationale: Max profit when underlying price at lower strike price 60 Bear put strategies Good to use when options are expensive in terms of IV Selling put to lessen cost of trade. More important for a decline than with bear call spread (bearish to neutral) Can be a good alternative to a long put when there is a target move of 5% to 10%. Can also leg into this spread after a favorable bear move. Max profit when market at lower strike price or lower. So lower strike (short) should be resistance. Max loss when underlying price gets over higher strike (long) since both puts expiration OTM. 61 Bear put spread cautions Selling a put lessens cost of outright trade, but this limits profit potential Spreads reach max profit at expiration If expected to move more than 7-10% the short option may not be worth selling Two legs, so extra commissions and two bid ask spreads to deal with. Can be harder to close in a hurry. 62

7 Bear call (credit) spreads Buy higher strike (130) call Sell lower strike (125) call (same expiration) Which of these two strikes will be more worth more? So will be buying the higher strike cheaper call - and selling the more expensive call: Result is payment received - hence a credit call spread Concept: buying a call to protect against high risk of naked short call. But lower credit received. Buy 1 XYZ 17-day 130 Sell 1 XYZ 17-day Net Credit 1.90 At expiration: Maximum Profit = Credit = 1.90 Max Risk is difference in strikes (4.00) less credit= 3.10 Breakeven = Short call strike (125) plus credit (1.90) = Bear call spread - P & L graph Buy 1 IJK 17-day 130 (2.45) Sell 1 IJK 17-day Profit & Loss Stock Price at Expiration 64 Considerations for choosing strike prices for bear call spread Think of bear call (credit) spread as short call trade and protecting with long call. So market at resistance 45: Sell 45 call Buy 50 call (to protect short call) Using resistance: Lower strike should be resistance. Rationale: Max profit (at expiration) when underlying price is under lower strike (short) since both calls expiration worthless and keep entire credit Note with credit spread don t need a target to reach target like bear put - just needs to holds at, or under, resistance at 45 at expiration 65

8 Bear call spread strategies Good to use when near resistance. Since credit spread is more like selling options, it is less important for market to sell off than is the case with bear put spread. Outlook neutral to slightly bearish. More a resistance will hold trade than market will sell off trade. So outlook is neutral to slightly bearish. Time decay works in your favor. Buying a cheaper call for protection of the more expensive short call. Gives flexibility to convert to bull trade by legging out of short call. More OTM when the spread is entered the greater the probability of success (but lower the credit) 66 Bear call spread cautions Max profit is capped at amount of credit Spreads reach max profit at expiration Two legs so extra commissions and two bid ask spreads to deal with. Can be harder to close in a hurry. Compared to bear debit not good risk-reward, but higher probability of success since market can stay flat or rally slightly and still be profitable 67 Types of bear spreads & implementation Strategy When to Use Implementation Bear Put Spread (Debit) Bear Call Spread (Credit) You have a downside target or are concerned about implied volatility Chart shows resistance, but not sure if it will break through Buy a put and sell a put with a lower strike - same expiration. Sell a call and buy a call with a higher strike - same expiration. 68

Types of Bull Spreads & Implementation Strategy When to Use Implementation Bull Call Spread (Debit) Bull Put Spread (Credit) You have a upside target or are concerned about implied volatility Chart

9 Types of Bull Spreads & Implementation Strategy When to Use Implementation Bull Call Spread (Debit) Bull Put Spread (Credit) You have a upside target or are concerned about implied volatility Chart shows support, but not sure if it will break through Buy a call and sell a call with a higher strike - same expiration. Sell a put and buy a put with a lower strike - same expiration. 69 Debit and Credit Vertical Spreads Overview CALL PUT BUY Bear call Higher Strike Credit Bull call Lower Strike Debit Bear put Higher Strike Debit Bull put Lower Strike Credit BUY Bull Spreads: buy lower strike options Bear spreads: buy higher strike options 70 Nison Chart Challenge 6 (1 of 2)- Read Steve s Mind My outlook: Long term trend up Resistance 97 to 98 1/2 (why?) At last candle why do you think I did a bear call spread? (IV okay, $2 ½ strikes, a few weeks to expire) 70a

spreads For outrights look for charts with (we are ignoring IV): Potential move that doesn t want to limit profit potential as with a spread.

10 Nison Chart Challenge 6 (2 of 2) - Read Steve s Mind Did spread here Closed spread here By doing the spread did I reach maximum profit when I exited? In hindsight what trade could I have done instead of a spread (assuming IV okay) 70b When to use outrights vs. spreads For outrights look for charts with (we are ignoring IV): Potential move that doesn t want to limit profit potential as with a spread. Higher confidence support (for calls) or resistance (puts) will hold (as compared to credit spreads where if I have less confidence may want to be able to leg out if I switch forecast or directional bias) For outright buys... any move works. If the expected move is low (1% to 2%) we would buy ITM and it you expect a big move (5-10% or more) use ATM or OTM options. 10% moves look for strikes that are OTM by 5% to start hoping to get to 5% ITM at expiration 71 High Confidence and Less Confidence for long call or puts 72

High Confidence Long Call or Put Outright buy of a call or put Expiration 7 to 15 days out Less cost per option if close to expiration more leverage If becomes in the money it moves one to one with

11 High Confidence Long Call or Put Outright buy of a call or put Expiration 7 to 15 days out Less cost per option if close to expiration more leverage If becomes in the money it moves one to one with underlying Strike Price ATM or Just OTM Out-of-the-money options are cheaper therefore provide more leverage, but have more risk. If the underlying doesn t reach the strike price and go beyond it you may loose entire investment. What type of forecast needed 5% or more beyond the strike over the time period 73 Less Confidence Long Call or Put Outright buy of a call or put Expiration 15 to 45 days out Must have a time frame forecast for the move to help in choosing the expiration. Further out in time is more cautious Strike Price ITM In-the-money options are more expensive, but have less risk then At or Out. You can t buy as many with the monies allocated to the trade, but is less susceptible to time decay and implied volatility fluctuations. ITM gets more of the stock price movement right away. What type of forecast needed 1% to 2% moves 74 How can we gauge the degree of confidence? 75

12 The Multiplier Effect Where a Nison candle signal confirms a Western indicator 76 Bullish Engulfing Pattern at Support 77 resistance doji 78

13 Candles in Context: East + West Two doji, but. 79 How NOT to use candlesticks Oh my goodness! The market rallied after the shooting star! 80 Gauging Confidence Levels 1) East + West 2) Strict Criteria & Nison Nuances 3) Price Confirmation 81

Low of hammer as support Consider shorting under low of pattern.

Lower shadow at least 2x height real body A chance to buy at the bottom STRICT CRITERIA White real body No upper shadow PATTERN

14 Founder and President: Candlecharts.com 82 Gauging Confidence Levels 1) East + West 2) Strict Criteria & Nison Nuances 3) Price Confirmation 83 SUPPORT/MOMENTUM TRADING Low of hammer as support Consider shorting under low of pattern. BASIC CRITERIA Market in a downtrend Real Body White or Black Small real body at, or near, top of range. Lower shadow at least 2x height real body A chance to buy at the bottom STRICT CRITERIA White real body No upper shadow PATTERN PSYCHOLOGY After this last burst of selling, new buying has started. This rejection of lower prices is indicating a change in balance between bulls and bears. The net result: lessening of bears confidence of sustainability of lower price levels (and a reason for bulls to start getting more optimistic). 84

15 White real body hammer is called a Power Candle Can have small upper shadow (around 10% of lower shadow) The more oversold and the longer the shadow, the higher degree of confidence Often a retest of lower shadow Bullish counterpart of Shooting Star (not a Hanging Man). A hammer with a open/high/close at high is a Dragonfly doji As a single candle line it is same in FX as other markets 85 More Bullish Less Bullish/Bear Very Strong Sessions Strong Sessions Neutral Sessions Bearish Sessions # Name Characteristics Nison Notes 1 Tall white double crew cut No shadows High probability reversal 86 More Bullish Less Bullish/Bear Very Strong Sessions Strong Sessions Neutral Sessions Bearish Sessions # Name Characteristics Nison Notes 2 Tall white closing crew cut Small lower shadow Lower shadow shows market can break under opening price 87

More Bearish 1 2 3 4 5 6 7 Less Bearish/Bullish 9 10 8 # Name Characteristics Nison Notes 1 Long black double crew cut No shadows High probability reversal www.

com 88 Gauging Confidence Levels 1) East + West 2) Strict Criteria & Nison Nuances 3) Price Confirmation 89 Price Confirmation Using a move after the initial

16 More Bearish Less Bearish/Bullish # Name Characteristics Nison Notes 1 Long black double crew cut No shadows High probability reversal 88 Gauging Confidence Levels 1) East + West 2) Strict Criteria & Nison Nuances 3) Price Confirmation 89 Price Confirmation Using a move after the initial candle signal to validate signal Can be a close (or open) above (for bull candle signal) or below (for bear candle signal) the close of candle signal. Less important if have East/West confirmation Less important for momentum trades The more ideal the candle pattern the less important the candle confirmation 90

17 Which of these two scenarios is it more important to have bearish price confirmation of the doji? 91 Doji and Price Confirmation New high close and bull shadow. Bear confirmation thus more important confirmed 92 Candles and Price Confirmation Plus of price confirmation: Improve odds of hammer working, But 93

18 Candles and Price Confirmation Plus of price confirmation: Improve odds of hammer working, But at cost of higher entry price Price confirmation 94

An Introduction to Candlesticks for Options Using Nison Candlesticks as the Foundation to your option trading

An Introduction to Candlesticks for Options Using Nison Candlesticks as the Foundation to your option trading Using Nison Candlesticks as the Foundation to your option trading, CMT President: Candlecharts.com Candlestick Benefits Easy to Understand Early Reversals Safety First East + West All markets All Time