TRADING STOCK OPTION - SINGLE DIRECTION METHOD
Picking
Some members been asking, "how to choose and pick stocks to buy their options?"
First, we need to check the chart and qualify a few basic criteria:-
1. Which direction is the trend? That will determine whether we buy Call option or buy Put option.
2. Is there adequate average daily trading volume? That will relate to good Open Interest for the strike we like to trade (say maybe about 2 million shares a day over a 2 to 3 months average).
3. What is the entry signal? Here, we can use some basic indicators and time our entry. There are quite a few good systems and methods that a beginner like us can adopt.
- use a 11 day moving average together with RSI of 11 day. For uptrend, a break above the 11 DMA line with a lower RSI heading towards the centre line is a good way.
- if the trend is clear (i.e both the stock and the sector is in the same direction) use a breakout above last 2 previous high as a signal to enter.
- candlestick reversal pattern is another method - like a hammer and morning star pattern for reversal to uptrend together with a direction indicator (like GMMA)
So whatever system adopted, stick to the same method for consistency otherwise one can get confused.
Option criteria
1. The expiration - which is the best? There is no straight answer as the stock movement is unsure so we choose at least over 60 days. That is base on the style we trade the options as we follow the trend and trade single direction.
2. Which strike to choose?
