Trading Call Options on Momentum Stocks

Good afternoon everyone and uh guess what the fed is done with their meeting they'regoing to make some announcements what else are they going to say we'llsee and then they're going to have a a little bit of a meeting afterwards sowe'll see what they do but but that's not necessarily the agendatoday the agenda today is going to be scanning for and looking for momentumtrades post earnings have you ever wonderedhow do i find a stock post earnings that seems to beworking in the right direction we're going to take a look at thatso stick around good afternoon everyone welcome totechnically speaking technical analysis and options i am patmalali we have mr michael fairborne uh in the chat taking over thechat master today uh you can follow me at pimalally underscore tda and you canfollow michael fairborne at m fairborneunderscore tda he can put his twitter handle in there that'd be greatagain like

 i said today we've got fed news it's anyou know we'll see how the market's reacting to that i want to talkvery briefly about how the market acts uh on these kinds of newsuh this kind of news announcement and that so that people can just kind of sitand hold tight to see what happens uh but then we're goingto get into you know finding momentum stocks and then puttingon longer-term options uh to uh tohopefully benefit from that and we also will do some other thingsbefore we do anything though let's get into theimportant information remember uh we're doing this for educational purposes onlynot for recommendation options are not suitable for alluh people as well as futures are not suitable for everyoneremember that you have transaction fees with options so spreadstraddles other multi-leg option strategiescan entail those extra transaction fees they may impairtrades with minimal potential benefit we're going to look at actual symbolsthat does not mean that we're making thoseuh the td ameritrade is not making any kind of recommendation about the]suitability of the security or any strategypast performance not indicative of future performanceand zero commissions on stocks as long as they're u.s exchanges thestocks and etfs and 65 contract fee on optionsdelta gamma vega theta time price and volatility the three amigos three themost important things you need to take pay attention to as you learn aboutoptions all right let's get to the agenda we'regoing to find some post earning option tradesthat have some momentum behind that and how we're going to do that is we'regoing to use a a method a scan that we talked aboutin or not earlier in the week but last last week so we're going to utilize thatscan but they're also going to then look for options that have tight bid-askspreads we're going to close the previous tradewe'll probably want to do that first i want to make sure you understand whathappened there and why we did that trade and then we'll at the end we'll put onsome trades so let's get out there and get rollingfirst things first though 

let's see what the market's doinguh the market is uh let's see fed notes economic activity employment picked upsomewhat in recent months but still remainswell below levels uh so we're not getting a heck of a lot of news out ofthe uh out of uh the s p 500 uh or we're not seeing a lot ofaction out of the s p 500 not a lot of uh comments so far fromthe fed and uh but the market is still holdingup now that being said oftentimes what typically happens i'mgoing to put in forward slash es just the futures market herei'm going to go down uh into the five minute chartand i'm going to put on a uh the overnightaction here uh so you can kind of delineatewhere things are and we'll zoom in okay so here's the fedannouncement right and so the thing i just want people tounderstand is there's oftentimes this spike up or down and then back andforth until it finds some equilibrium ifyou've ever seen the movie trading placesum you know with when that towards the end when they'vethey've got the crop report and they go in and and there's it's pretty busythere's some trading going on people are talking yelling screaming passing backpapers and forth and then the crop report starts to comeout and then it all becomes very silent that basically is what you're seeingwhat you see in um this the last 20 30 minutes or sopeople waiting to see what happens and then once it comes out 

if you thinkabout that movie if you've had that chance to see that movie you know therewas a lot of uh there was a lot of uh buying going onand then there was a lot of selling going on until we find some equilibriummarket decides what direction it wants to take so don'tget if you if you get tick fever looking at thesemovements uh just know that it's just bids dry up nobody's buying nobody'sselling and it needs to find some equilibrium that's what's happeningright now well that's your uh that's yourdiscussion for the uh oh wow uh oh wow segment uhuh today okay so let's take a look back here at uhspx real quick here spx really not going anywhere it is up alleight almost nine tenths of a percent we're seeing some goodstrong buying so far today with two hours left in the tradingday okay now on for the momentum with the rsithe fact that it was above its 200-day moving average uh and uhin breaking out on this day so let me get adrawing tool here so it broke out on this day we bought thatnot in anticipation to see if what we if what we surmised mighthappen and that is that volatility will pick upand enhance the trade also one of the things we wediscussed is oftentimes 

when we see a stock popbefore earnings oftentimes it continues on wellit kind of did and and didn't and then itdid day before yesterday and today so let's take a look at uh and the purposeof this trade was to see what volatility did remember time pricevolatility delta gamma vega theta so the vega portionuh this price sensitivity to implied volatilitylet's see what has happened so i'm going to come over to the monitor tab hereand pop that down and here is ups and we can see the lion's share of thegains came today okay uh and that's the pointis is it's still moving we're still aboveuh where where we purchased this at so let's pop over here to the trade tabwe've got ups up in here over here if you're new to this website thesegreen flags here and and you'll see red flags as wellthat's a position uh if it's if it's in order it'll say uhit'll it'll say buy or sell this is a position pos uhand that's what that stands for so what we're going to dois we're going to click on that so you can see something here because i'vemanipulated this somewhat we bought this for four dollarsand fifty cents it's now worth six dollars and twenty centsthe question becomes how much of that six dollars and twenty centsis fluff how much of that is extra air that's pumped into these optionsvia people's expectations implied volatilityso let's let's go in the wayback machine and what i'm gonna do is i'm gonna comeup to the analyze tab right here andthen i'm going to go once i'm there i'm going to go to the sub tabsub tab 

what is it think back sub tab think back and here we are and i'vepre-loaded this so with the think back what this is ifyou're new to this this is looking for options you're looking at optionsyou can adjust the time and then you can look at implied volatilities you canlook at delta gamma vega you can look at all different types of thingsthat have taken place with this option so back on the 15th two weeks ago uhwhen we when we purchased the call on ups inanticipation that ahead of earnings volatility has atendency to rise uh and and let's see how what effectthat has on those options and can we buy long options beforeearnings and if we do should we hold them overearnings and let's take a look at a possible method that some people mightlook at so on that day the 15th at the close of that day the impliedvolatility if you look up here so remember we're inanalyze tab sub tab think back change the date tothe to the back date that you're looking forand then change whatever data you're looking forand here i just put in implied volatilityin probabilities of out of the money in delta so we have a 46implied volatility now let's do some comparisonlet's go back to our trade tab and put in uh implied volatility so wehad 46 percent back then uh it is now 68 percent okay so it'sjumped about 22 percent in implied volatilitywe know we paid four dollars and 50 cents for these the mark the midpoint isnow six dollars and 15 cents the midpoint between the bid and the asklet's see

 how much of that how much what if the implied volatilityhas not changed how much that option would have beenworth without that so what i'm going to dois up here where it says imply in the layoutclicking on making everybody blink i'm going to come to theo price and marki'm going to pop that in and so now we have the theoretical pricethat's in this column over here okay now what i did is i manipulatedthis earlier the volatility was a little bit higher at 70 percentuh so 24 we can move that to 22 to to manipulate this for the volatilityout there right now and let's see if we pop this downthe option uh the midpoint between the bid and the ask is six dollars and tencents without that extra implied volatilitywithout the extra implied volatility we havea stock uh we have an option excuse me that would be worth 6.40so we have about 60 or 60 cents 60 cents of air extra air pumped intothis uh into this option and when we look attake a look at the deltathe delta of this option is now uh 75 right and so there's still alittle bit of time in there plus volatility so the questionis do you if you think you know what shouldyou do okay should you hang on to this throughearnings earnings are uh tomorrow morning should you hang onto this through earnings or should you sell it 

the idea wasthat the the idea behind this particular method was to buy the optiontry to get that volatility premium and and upward movement because they startedbuying it ahead they're buying it up ahead of earningsback here back here and now we have a particulargain in there and you can certainly hold it through earnings if you wantbut what we're going to do is because we're looking to take advantage of thatincrease implied volatility and upward price movement for deltaso so uh price volatility okay we running out of time soprice time and volatility we are going to go ahead and create a closing orderand sell this option uh for a limit order of six dollars which we'refilled on okay so that is a pass trade uh so think aboututilizing and understanding the whole point ofthat was to understand implied volatilitynow but what happens after earnings for those that don't knowwhat happens after earnings is the implied volatility drains off rightand so that's why we closed that one out because we would lose that 60 centsof that 4.50 purchase price of that option that's a pretty good chunkof uh premium if if price went nowhere right and so uhwait until see what happens with the earnings and then we'll make somedecision and that's what we're going to do nowis now 

we're going to look for uh look for tradesout that out there that have happened thatearnings have already happened but we're going to utilize uma scan that we built last week and that scan is the rsiscan so uh to do that what i'm going to do is i'm going to popover here to the scan tab and and one thing you can donumber one if you're new to technical analysis and this what we're about to dois is foreign language to you or the options of foreign language to youget with cameron may 11 o'clock eastern time mondays for getting started withtechnical analysis and get with barb armstrong onfridays at 11 o'clock eastern time for getting started with optionsand and to understand how to use the the the boss man of think or swim isin the room in chat so on on thursdaysat uh 5 30 eastern time join mr mike fairborne with how to use thinkorswimand it's a it's a fast-paced incredible amount of knowledge thereso we're going to use this scan tab why because we're going tobuild an a we're going to build a scan that's going to look forwe're going to try to build a scan it's going to look for something there we golocking up on me a little bit okay so we're going to come up here to thescan tab and click on scan and so this is the scan uh and i'm gonnai'm gonna give you the script for this scan here in just a minute sohang around and watch for the script of the scan there's also going to be ascript for the rsi 60 604040 levels but this is the scan here what we did is we saidstocks above uh 20 and above right here okay and so into the scan tabstock hacker setup scan and 20 dollars and above minimum volume of250 000 we want an rsi uh normal rsithe default 14 greater than 55 okay and then we put in another rsiand you can go back and watch the archives from last fridayput in another rsi with the same length less than 65 

so greater than 55 less than 65 so we're trying to capture somethingthat's got has built up some momentum but perhapsmaybe just you know relaxing a little bit gettinggeared up to pop to the upside now today thoughum let's go back to the charts and uh what we want to try and do is findtight bid-ask spreads so if i pop over hereuh here's the scripts by the way you can write those down these uhthe numbers in these letters in here that's ano and uh so you know you can take a screenshot ofthat this is the script for the 60 uh 50 40. so here's ahere's anthem they're nice they're having a nice push to the upsidegood earnings uh up about six percent you're in ahead inverse head and shoulders kind of pattern in here more of aa phoenix rising from the ashes pattern as i like to call itmaybe a little bit of a cup starting to form on this handle or this rightshoulder over in here with the rsi very strong oh great let's go trade an optionon that and stocks trading now 283 dollarsso we put an antm and i'm going to go out not two daysif you're going to buy an option i suggest buying a lot of timeeven more than 51 days everybody's a little bit differentbut 

if this is starting to break to the upside we're probably going to look forsome bigger moves here's the issue is the bidask spread and that bid ask spread the bids 20 the ask is 23 dollars that'sthree that's three dollars in between getting in and getting out of this thinguh is going to cost a uh your bid-askspread the slippage between the two even if you get themiddle each time is probably going to be too it may very well be considered toobig of a percentage to give up uh to uh to this to thistrade now it's up to you it is an expensive stock 282 dollars uhin to some people to some people is cheapum but that bid ask spread is fairly wide sohow do we find tight bid ask spreads and what i'm going to do is we're goingto go back to the scan tab up here click onthat and stock hacker we've got ourparameters in here and take a screenshot of that if you areyou can just use the script i'm going to click on i'm going to clickon scan in okay and what we're going to do is i'mgoing to pop down here into the public list so you've got a bunch of personalwatch lists in here but we got public list in hereand i'm going to go to penny increment options whybecause in theory they have tight bit ass spreads that theyuh the they're they go in pennies you knowbetween the bid and the ask and to a pointokay so nothing's perfect so uh pen increment options and then i'm going toexclude 

for this for purposes in here in this class wehave to exclude something and that is going to be so you can useit this exclude for lots of different thingsand uh where is it right there okay and then i'm going to scan forpenny increment options that have that meet these parameters in hereokay once we've done that we can either go back and forth between here or we canbuild this watch list we're going to pop over here and we'regoing to build a watch list we're going to call itum let's see there's uh it's showing 50 of 56 that's okayi've already chosen some um so let's say you want to save thisyou would click on this menu right here and thispops up and you would say uh say rsi 55 65 andpenny increment or something like that and then you would say save and it'sgoing to say it exists that's okay boom okay let'sget out of this and then what we're going to do is we'regoing to come back over here to the chartsand i'm going to open up this side view over here and this is one way you can dothis to uh to toview these charts and see what works for you soover here in the watch list over in here 

i'm gonna pop this down and we have nowwhat we've just made is a personal watch listand so we're going to come down in here we're going to look for what we're goingto look for rsi 55 60 pennyand somewhere in here our penny increment boom there it is andthen we have a list of these options now you can uh you can thencreate a uh a percentage gain over in here okay sothat's how you do that that's that script uh be very aware ofuh the bid ask spread even though anthem's in the penny increment optionsit's getting exp the stock is going up in valueand you'll see that with a lot of stocks they're you know 300 400 500those bid ask spreads are going to widen so you need to make some decisions thereperhaps uh figure out a different way sometimesit just means you just go out there and buy the stock right just go buythe proper shares of stock especially if the cost of the optionpremium is too much if you could only risk a thousand dollarsand that pr option is is thirty four hundred dollars wellthat's a pretty tight that's pretty tight you're going to either buy thewhole thing and lose the whole thing which is always apossibility with an option or you try to only lose a thousand dollarswhich 

is in some cases maybe only a third or a quarter of what theoption premium is so that some some things mightmean you need to just go out and buy 10 15 20 shares of stockperhaps depending on the size of your uh of your account let's go forward hereand let's move over into the uhmedtronic so medtronic 98.72 cents uh it is trading below its 200-daymoving average so depending on what your strategy isif you think that well we've got some price resistance up in herethe 200-day moving average is at 102. it's about a three dollar run you couldcertainly go out and buy some medtronic right nowit is it is acting fairly strong we have a hundred and uh we were we'reseeing volume better than the last one twothree four five six seven uh probably eightuh in uh nine or ten days it's looking to mike it might go above his 50-daymoving average of volume we've got momentum picking up but if ithere's the issue it could run and break through that 200-day moving average orit could fall back so you need to make decisions there butwith medtronic for purposes of examples what we're going todo is we're going to come over here we're going to come out to 114 days onmedtronic and if we consider what the market'sdoing right now the market's still bullishwho knows 

what's going to happen once the fed starts to talkuh we're up uh a point or two since uh we startedso uh on the futures so here if you're still bullish you look atthe bid ask spread here about 25 cents or so on the bid askspread at the money you can go in the money uh you knowdepending on what uh you know what your strategy is longerterm sometimes we go in the money uh so this in the moneyoption the 92 and a half is uh we're gonna buy this for abouta thousand dollars i'm going to left click there and buy this for ten dollarsper share times a hundred shares uh which is thismultiplier right here where this where that my cursor is a hundred sharesthat's one thousand dollars which means if we could only risk a thousand dollarswe're going to to use this as our maximum risk rightyou could buy two and try to get away with a stop loss uhhalf halfway uh you know of a thousanddollars in other words if the option loses 500you're out remember that you still have a twothat you have twice that much risk if the stock gaps downand goes to zero overnight right so you will loseboth all two thousand dollars if you bought two somoney management might say let's keep it at one thousandand just as simply as that i'm gonna click buyone mdt going out 114 days for ten dollars to openand we're filled okay that's simple so think aboutyour risk oftentimes you can use options and in place yourrisk is the total price of the option if you want to put leverage get a littleextra leverage then you might buy two and try to use a stop but remember stoplosses are no guarantee of getting filledat those areas all right let's go back to the chart hereand take a look at unp and one of the reasons we might look atunp if i come over here to um the sectors pop in the sectors andlet this load up in here and 

we look at the top sector of the daythat's transportation so we saw ups that's part of transportationunp is railroad they're industrials their transportation they'realso in the top 20 i think for transp in the transportation indexfor the last few weeks andas far as the railroad industry goes but you could come in here and you couldsay well i want to buy some semiconductors i want to buy someindustrials so on and so forth and then build from the top downso let's go back to the chart that's one of the reasons you might consider thisthe other technical reasons are it's above its 200-day movingaverage and held along that so it's made thisnice uh run a nice strong rally off of the off of the lowsit's since drawn a uh found some uh consolidation and now it's popping andbouncing up above that 20 period moving average up abovethe 50-day moving average the 50-day movingaverage crossed above the 200-day moving average backover in here so the just juxtaposition of uhmoving averages are such that the shorter one is closer to price priceis bouncing right off of that uh the nextthe middle one is above the furthest one so we're getting the rightuh juxtaposition for uh for moving averages to say that

 theseare are bullish it is from a cohol from aprice above the low days high we're going to useyesterday as this has been really coiling up in aflag and if i draw that flag we can see we'reabove the downward slope of that flag andwe've got the momentum the rsi bouncing up off of that 50 area it's anarea that has shown support the zone of that50 area has been showing support and now it's trending higherso we'll come over here go to unp scroll down hmm a little more expensive178 dollar stock you you know if you'regoing to break a rule and you can bend themyou know i don't know that i'd worry about 35 but this is going to cost aboutthe same as the previous one so 180 dollarthe 180 dollar strike at the money okay so if we're at the moneyand price runs we'll in theory what's going to happen isyou'll get a bigger uh percentage gain on your money risk the money risk isgoing to be eleven hundred and thirty five eleven hundred forty dollarsyou can certainly put that lower and let it see if it comes back downand get priced in that way but if we go back and look at all of the thingsit had good earnings we had strong volumeuh moving into the last push to the upsidein that flag volume drifting lower in that flin that flag meaning that people will not we're not really willingto throw a lot of shares out there at the same time that was happeningit's holding the support area as well as on price and it's holding moving averagesupport and we have a pickup in momentum so alot of things positive things remember there'snegative things as well you got to watch that market you gottawatch a lot of different things out there so just because you know don'tbe blinded by what you wanna see so we'll hit confirmand send on that and get loaded up there sobend your rules don't break them 

 you can't affordthat extra 135 dollar loss don't do it rightuh you can put in a stop uh and hopefully that will get you outuh at a at a better price without losing too much money right in realitya couple of mistakes a year can have a hugeeffect on your a p l by the end of the year so be veryaware of that and better to trade small then take those big riskspepsi okay so pepsi long sideways action we're seeing uhpushes up into resistance on bigger volumevolume drying up as it came down volume up today but it's still strugglingaround this these highs over here of1 38 139 so what we'll do with this one is wewill come over here to the trade tab after wedo a little bit of searching making surethis meets all the parameters sostaples stocks this falls in the staple area as well askind of discretionary but it's been in the food area reallyand that's a bit that industry group or sector has been doing wellthis has been holding up pretty well it's a long sideways actionwhat do

 we know about these long sideways consolidations when we put some i'mgoing to put a colored bar in herefor emphasis this one we saw price push belowand rally back out push below rally back out so wesaw people come in and absorb uh shares and buy on at the support area nowthey've put recently they've hit that resistanceagain but what do we notice it's differentthis time let me remove that what we notice that'sdifferent this time is prices pulled back but not as farand then started to rally on really over the lastthree two weeks more buying volume three weeks even more buyersthan there were sellers so we're seeing possible accumulationbut do we really want to go in at resistance or do we want to go in whenprice moves above say 139 right to getto make sure that momentum is going we can see with the rsithe momentum is strong right it's pushing above the 60 areaand so what we'll do here is we'll come over to the trade taband put in pepsi in this case you can go out 79 days youcan go out 142 days one of the mistakes people make when they'rebuying options is they try to find things that are cheap so theyshorten their time just to find something cheap well if you shorten yourtime it has less time to make the move if it has less time to make the move youmight be putting yourself at uh at peril okay so139 uh is the price but you know we if we don't do we reallywant to go in and buy the 135 strike at the money stock trading 138almost the out of the money 140 as well youcould possibly get away with two of those so we'll do we've done one in themoney we've done one at the money we're going to do one out of the moneyand we're going to buy two of these 

 risk about eleven hundred dollars sowe're going to change this to 2 but we don't want to go out there and do itright now why because price is at resistance price isat resistance we want to probably wait until it pushesand gives us some indication that it's going to move butremember when stocks break out they often times have somethey digest right you ups if you look at ups they break outof resistance and then they digest right so you've got to give youremember price time and volatility you need price to work for you but youalso time is going to work against you and uhso you can you can mitigate that by buying more timewhere time decays slower and uh vega decays slower your volatility isbut implied volatility is going to have a a a positive impact if it goes upon your option all right and so but we don't want to buy this nowbecause we want to buy it when it goes above 139so what i'm going to do is you can't see this over here butthis little empty box right there i'm going to put my cursor over that andyou're going to see a gear maybe there you goi'm going to click on that gear and it's going to give us some options herethere are some choices some things to do to buy 

we're going to tell it to buythis option these out of the money optionwhen price moves is above 139 and so this is going to have to be amarket order why we don't know how much that option is going to be worthon that day and we're going to make this a good till cancelorder and you'll notice down here under the descriptionit's going to start telling us what we're doing and when it come to symboland pop down just put your cursor right below symbol make sure it saysthe stock that you want to buy the option onthe method we're just going to leave it at the mark the midpoint the triggergreater than or equal to what 39 dollars we'll make this 39 10 for today'sexample 39.10 cents for today's example we lookdown in here and good till cancel and then we save itand then we hit confirm and send over in hereand buy two pepsi 140 strike callswhen the stock pepsi mark at or above 39 dollars and 10 cents which is totallywrong so we have to edit this why because it's139 dollars and 10 cents that's why we look at the umlook at the confirm and send okay so now we save that again we hitconfirm and send we read through this 140 striketwo pepsi's pepsi to mark at above 139.10and then we send that and then that will come over into the monitor tab hereand it'll sit in working orders until it's filledokay quick look back let's see do i have any more here uhthis watch gold

 see what dollar does i washad that one in the wings in case uh the uh the market went kaplooey withsome fed talk and the dollar dropped throughthe floor gold moved higher or something whichgold has done so you might consider some goldcompanies out there as the dollar apparently is weakening on some of thefed speak right now so that's it for today and uh let's remember as welluh that coming up next if i can get my get control of myself here coming upnext is short verticals with mr ken rose after that is uh james boydwith callers infant synthetics i'll be doing the chat for thatand then ask a coach with uh john mcnichol coming up and then cameronor somebody's sitting in for cameron today uh michael fairborn is in forcameron today i do believe on what can i do about this market todaytoday's market and what can you do about itand then the workshop tonight with john mcnicholso register for that workshop get in there uh it's a lot of funand if you could please um if you think uh you could uh if youthink you whoops uh learned something today