Strong 1 Strategy GOAL To find the closest-to-the-money option we can afford on the first day that a particular market s Trend Seeker Trend on US Charts Online s Trend Seeker feature changes to either up or down. SUMMARY The Trend column in Trend Seeker indicates the trend of a market. It is used by traders who are attempting to capitalize on the current trading environment. These trades should fall into a time frame of three to six months (or less). To find an option for this strategy, we refer to the Days in Trend column in Trend Seeker, which indicates the number of consecutive days a market has been in a particular Trend Rating classification. We look for a market that has the number 1 listed in this column and an Up or Down ranking in the Trend Seeker Trend column. Once we find a market that fits these criteria, we re ready to go shopping for options to purchase for the next trading day. Remember - for examples of current trades using this strategy see Jim s Chart Book as well as our Premium Alert Service Videos. CHAPTER ONE STEP-BY-STEP INSTRUCTIONS 1 We need three pieces of information for this strategy: a A Market b The Trend Seeker Trend c The Days in Trend Using the Trend Seeker table, find a market that is listed as either Up or Down in the Trend Seeker Trend column, and has the number 1 in the Days in Trend column. This particular combination does not appear every day. You may have to wait a few days, or even a few weeks for both
criteria to be met. Here we see that the US Dollar Index market fits our criteria. We will use this as our example in the remaining steps. [Trend Seeker table on July 2, 2007 featuring US Dollar Index] 2 Observe the Trend column to see what kind of option to purchase. In the case of this US Dollar Index trade, Down is indicated, so you d be purchasing a put option. Once you select your market and type of option, it s time to begin your option search. 3 To find a put option for this trade, go to the Option Quotes page of US Charts Online and select the market and month you wish to trade. Remember, the more time you buy the more expensive your option will be, so find one that fits within your budget. Typically we like to choose an option that has 60 to 90 days remaining before its expiration. For our example, suppose we choose an option in the September contract. We re looking at the chart in early July, and if September options are affordable, they give us roughly 60 days before expiring on September 7, 2007. The screen shot below shows a sampling of available options in the September US Dollar Index market on July 3, 2007, the morning after the trigger of the prior trading day (July 2). Purchase a put option that is as close to being in the money as you can afford. In this example, let s say we decide to purchase the 8100 put for.575 points ($575). We enter the trade into Trade Tracker to follow its progress.
[Table of September US Dollar Index options on July 3, 2007]
[Trade Tracker folder] CHAPTER TWO POSSIBLE EXIT STRATEGIES In a Market Moving in Our Favor One exit strategy is based on using points of support and resistance as they naturally develop and/ or a break in the trend line on the daily futures chart. We watch our charts each day. In the case of a call option in a rising market, each day futures prices will rise and possibly fall, but overall the direction will be up, with falling prices hitting a floor that they can t seem to break below. This floor is support. When this support level is broken by a price that does fall below it, we liquidate the option. In the case of a put option, futures prices generally fall, and even when they rise, seem unable to rise above a ceiling, which is resistance. When this resistance level is broken by prices rising above it, we liquidate the option. Another way to select an exit point is to continue to follow Trend Seeker. When Trend Seeker indicates that the trend has changed direction, we might consider liquidating our option. Note: Selecting exit points is a highly individual process. Traders may use daily, weekly, or monthly charts to find exit points, and they may read their charts differently. The best way to determine the approach you prefer is to paper trade as many trades as possible. In a Market Moving Against Us A simple exit strategy is simply to decide upon a dollar amount that we re willing to risk, and if the premium of our option falls to that amount, liquidate it.
Another strategy to consider is to exit the option if futures prices break a level of support or resistance. In other words, let s say we buy a call option but the market moves down. We d exit the position if a predetermined level of support on the price chart were broken. CHAPTER THREE SAMPLE TRADE Let s look at our hypothetical September US Dollar Index trade for the particulars. Looking at the September US Dollar Index chart, you can see that on July 2, prices spiked down. This action triggered an entry based on the steps outlined above. Prior to entry we must determine a profit taking exit point as well as a stop-loss exit point. Once you begin using this strategy in your paper trading you ll need to identify these points ahead of time based on your own trading plan. That said, let s take a look at one approach... [Chart: September 2007 US Dollar Index thru July 20, 2007] Using our second exit strategy above (involving price charts) for this trade, we could select a point of support on the monthly chart as our profit taking exit target. The low at the end of 2004 presents a possible downside target. If this level is broken it could be used as a signal for possible trade liquidation. Again, the profit and stop loss targets used are up to you and your trading business plan. In our sample trade, our target was hit on July 20, 2007. On that day we might have liquidated the 8100 put for 1.075 points ($1,075), for a profit of $500 and an ROI of 87% in 13 trading days (not including exchange fees and commissions).
[Monthly chart of the US Dollar Index] Notice: Hypothetical or simulated performance results have certain inherent limitations. Unlike an actual performance record, simulated results do not represent actual trading. Also, since the trades have not actually been executed, the results may have under- or over-compensated for the impact, if any, of certain market factors, such as lack of liquidity. Hypothetical trading results are also subject to the fact that they are designed with the benefit of hindsight. No representation is being made that any account will or is likely to achieve profits or losses similar to those shown. CHAPTER FOUR POSSIBLE ADVANTAGES OF THIS STRATEGY 1 The Days In Trend rating indicates that the market has just entered a new trend and there is great potential for buying/selling at the beginning of a new trend. 2 You may discover that trades initiated with this strategy will last a few days to several weeks. In addition, there will be those rare occurrences when you will get on board the beginning of a longterm trend with this strategy (i.e., as with the early 2006 advances in Gold and Silver or the Spring 2007 rally of the Canadian Dollar). Doing so can provide tremendous potential. (Some traders will plan for this possibility in addition to taking relatively quick profits by purchasing multiple options.) However, always remember that there are NO guarantees using this (or any other) strategy. 3 This is a simple but powerful strategy.
CHAPTER FIVE POSSIBLE DRAWBACKS 1 Because of possible short-term reversals, you must have patience to wait through these moves against you. Fortunately, your option gives you staying power. 2 If a reversal is too extreme, you may have to liquidate your option at a loss. Watching closely, however, and having a good exit strategy can minimize these losses. 3 We don t find markets every day that are in the first day of their Trend Seeker Trend. This means that you may have to wait several days (or even a few weeks) to find a market that meets the criteria of this strategy. 4 Some markets may not offer options that fit your budget, especially since these options will be closeto-the-money. Remember - for examples of current trades using this strategy see Jim s Chart Book as well as our Premium Alert Service Videos.