In the last article, I shown a technic named Darvas Box and
used 2 indicators – the GMMA and Momentum(10). These are useful tools to check entry
and exit signals but only for trending stocks. If the market is in a sideway
phase, or some called it the accumulation or distribution phases, then these
indicators may be difficult to confirm an affirmative signal.
Anyway, we will continue to use the same example – ALTR. But
first,
Disclaimer: This article is for education only and not a
proposal, invitation or advice to buy or sell shares.
Base on the chart of ALTR, there were 2 buy signals and the
momentum of the chart is still above the zero level. However, as the global market
is not in a strong bullish trend yet, this stock is still bouncing inside the
box.
Chart of ALTR
As long as it does not break below the box, there is no
worry to sell yet. So, say we decided to buy the call option instead of the
mother stock; we could have entered on 14th Sept.
The highest price below the top of the box was $37.50 (since
15th Aug.)
ALTR call option criteria:-
Period: about or > 90 days so we choose DEC’11
Strike: 37.00 (in the money)
Qualifying criteria:
(1) Open interest > 300. As the O/I in the range of
strikes 34 to 38 are all over 500, this option passes our test.
(2) implied volatility < 60% and all passed as the range
of strikes have I/V less than 50%
Chart of ALTR call Dec’11 @ 37.00
The premium to buy call was about 2.90 which went as high as
4.00 when mother share peak at 38.97 on 16 Sept.
For stop loss or sell order, we can place it about 2.10 or
2.20 (which is about 25% down from entry premium price of 2.90).
Note: the current strike is out of money as the mother share
price dropped to $35.58
However, for example purpose we can consider that if we had
chose to buy call at strike 35.00 on Sept.14
Chart of ALTR call Dec’11 @ 35.00
From the chart above, we could have entered and bought call
at 4.37and last closed was 4.87 as the strike 35 is in the money compared to
mother stock price close of 35.58
But then, if the stock has not dropped from 37.00 zone, we
can make more profits at strike 37.00 instead.
The above is a simple buy call option base on mother share
movement and use of a few easy to read indicators.
How to read the option chart?
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