[10.3] Buy put option – DOW

In the previous article (ref: 10.2), one of the 3 examples therein was DOW. This stock shows signs of weakness and is still trading below the cloud. If it can retreat and drop further next week, there is a good opportunity to buy put option on it.

DOW -  15 min chart extract from TOS

From the chart above, the support is about $24.00

If the price trades below $23.95, it will be below the cloud and out of the box (yellow).

For put option, we pick the following criteria:-

Period: Jan 2012 (over 100 days)

Strike: 24.00 (will be in-the-money and above trade price of 23.95)

DOW – put option chart of DOW Jan’12 @ strike 24

Volatility: < 60% acceptable (in the current volatile market)

Open interest: 151? Too low?

Agree that the present open interest is low. However, compare to the next strike of 25.00 (O/I = 9259), it will be interesting to see more O/I when market begins to trade lower prices.

Notice that the premium shot up from 2.40 to close at 2.72 with a theoretical level of 3.06

For those who like to do auto-trade, you may like to do this:

We place order to buy the put option with a possible LIMIT till 3.10 premium with a condition that share price trades below $24.00

Stop loss will be about $24.75 (top of the cloud) to $25.25 (top of the yellow box) depending on your risk adversity.

 

Disclaimer: This article is for education only and not a proposal, invitation or advice to buy or sell shares.

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