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How I Trade Options - Finding A Stock - Step 2

Posted by Pete Stolcers on December 27, 2010

From my prior option trading blog you know that I have a proprietary scanner that searches for high probability trading set-ups. It took me years to develop and refine. During the programming process I learned that a fine balance exists and the searches can’t be too restrictive or too open. If they’re too restrictive, you get a handful of results and you miss the best trades. If they’re too open, you waste precious time.

I came up with the definitive solution. If my searches returned 300-400 symbols, I could quickly flip through the charts and use my pattern recognition skills to drill down. A trained eye is the most powerful trading tool you can own. It’s a skill that can be developed in a matter of months if you do it often.

To make the process easier, I created a hierarchy for the 70+ searches. When I’m “flipping”, I know what each page and column represents and my eyes know what to look for. The searches are classified in the following way: bullish/bearish, day/week, reversal/continuation, early/confirmed. If you define each of these four selections, you have a “Class”. For instance, BDRE (bullish, day, reversal, early) stocks are all shown on the same page. Now that the Class is established, I arranged the columns according to specific “tail-end” patterns. I referred to them in the last post (breakouts/breakdowns, gaps, greenline/redline, trends). Sound complicated? It’s not. Here is a screen shot to help you visualize the interface.

blog scanner.png

From the screen shot above, you will see that the whole page contains the BDRE (bullish, day, reversal, early) Class. The first column contains symbols that conform to that pattern and are “breaking-out”. By clicking on the CVS symbol, a chart pops-up. I can position the chart anywhere in the window so that it doesn’t obstruct my view. By default, I want to start with the one week (1W) chart. If it looks good, I will view the one month (1M) chart. If not, I will move on to the next symbol. I call this routine – “flipping”.

This posting has turned into a description of my scanner. I don’t want to sound too promotional so I will confine the remarks to this article. Here are a few finishing points.

If you want to learn more about the search hierarchy and the patterns, read through more than 60 illustrated pages in my Tutorials section.

My next blog will focus on pattern recognition. I will include charts and I’ll show you what to look for. No matter how you get the symbols, the techniques will be of use. With the OneOption Scanner, it takes me about 40 minutes to “flip” each day and the process yields about 20 solid stocks (10 bullish, 10 bearish).

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Posted in How I Trade Options!

Option Trading Comments

  • On 05/02, San Jose Options said:

    How do you find options trading?

  • On 08/15, Wendy Grimm said:

    Pete:

    Is there any kind of a workbook where one can test one’s skills at pattern recognition?? I want to make sure that when I think I recognize a chart pattern that it is correct otherwise it could be detrimental to success in the process.
    THANKS
    Wendy

  • On 09/09, Pete Stolcers said:

    Hi Wendy,

    I have the videos on my home page. I flip through candidates and I explain what I am looking for. You can click on the symbols in the Pre-open and Open table on the home page and try to identify strong/weak stocks. The new 5-day high and new 5-Day low results will provide some good trading opportunities.

  • On 01/05, Mike C said:

    Hi Pete,

    First, great blog!  I’ve learned a ton by simply reading all the archived posts.

    Question for you that I couldn’t find addressed.  I’m sure you are busy, but I hope you can find the time to answer this.  The question is on position sizing, especially credit trades such as bear call spreads, bull put spreads, and iron condors.

    Quick background.  I’ve got my long-term investment account, and my trading account where I do all my option trading.  The investment account is mostly value stock-picking mixed with diversified asset allocation.  The objective is long-term steady capital appreciation.  In my trading account, I am trying to substantially outperform the investment account (otherwise what would be the point) while accepting much greater month to month volatility.  I am trying to “shoot out the lights” so to speak.  I also have a stable monthly income from a 9-5 job.  That said, I do wonder if I am taking too large of position sizes on my premium selling trades.

    I’ve been trading credit spread strategies on and off for a good number of years, but I took some time off after getting just destroyed in October 2008.  I lost a ton that month because I basically took the max loss on every single bull put spread position sold.  Reading through your old posts, your recommendation to select the short strike either below a support level or above a resistance level, and then closing it out if the price exceeds the short strike is something I have been following religiously several months in a row.  That rule saved me a ton on a silver bear call spread a few months back.  So far (knock on wood), the last several months have been very good with a very high percentage of winning trades, and overall good ROI.  Like I said though, I am wondering if I am pushing the limit of prudent position sizing.

    My option trading account is mid 5 figures.  Right now, I have on 4 positions for January expiration, 2 bear call spreads and 2 iron condors.  The maintenance requirement on the 4 positions is about 85% of the overall account, and the current short option value is around 8300, and that is basically break-even on the 4 positions so far.  One of the bear call spreads (5 contracts on a roughly 180 stock) is basically 50% of that short option value, but it is on a high-flyer with a ridiculous valuation that I think the chart shows is breaking down so I wanted to be aggressive and used a short strike ITM instead of ATM or OTM.  I still have my stop-out point at where I think the resistance level is.

    Given this information and my trading objectives, do you think this is excessive size on these positions?  Beyond that, how do you personally go about determining the number of contracts to sell if you have predetermined exit points such that taking the maximum loss on the position is not possible (except I guess if the underlying massively gaps up or down past your stop-out point).

  • On 01/06, Pete Stolcers said:

    My sizing depends on my market opinion and the confidence I have in my forecast. When the market is in a strong trend, I increase my risk exposure. When the market is rangebound and there are many crosscurrents, I reduce my risk exposure.

    Market dynamics have changed in the last decade and I am not a believer of buy and hold. Your investments need to be fluid just like your option trading. You might only need to make adjustments once a year to your investments, but you need to know when to pull the plug.

    I also notice that you are only focusing on selling strategies. When option premiums are cheap, you need to be able to buy options as well. You are not being properly rewarded for the risk you are taking when premiums are cheap.

    With every passing month, we get closer to a credit crisis. You need to keep a close eye on conditions in Europe and know that another meltdown could come at anytime. You’ve learned your lesson once.

    If you feel confident in your forecast, spread your wings and always have a bailout. If you are uncertain, reduce your exposure.

    Your size is too big when you can’t stop thinking about your positions and they worry you. Scared money NEVER wins.

  • On 02/02, Mike C said:

    Hi Pete,

    I have a couple of questions on credit spreads I hope you’ll have the time to answer.

    1.  Do you have a certain specific profit target where when it is reached you take off ALL or PART of the spread regardless of the remaining time to expiration?  For example, you put on a bear call spread and receive a cash credit of $X.  One week later, the underlying has declined a good chunk, and you are sitting on profits of 70-80% of X.  There are still 2-3 weeks to expiration.  Do you close it out early?  Or sit on it for 2-3 weeks to hopefully collect the other 20-30%?

    2.  Do you try to maintain BOTH bullish and bearish spread positions at pretty much all times regardless of overall market view in case your market view is wrong.  If so, how do you establish the mix between the two.  Strength of conviction in your overall market view?

    Thanks in advance for any answers.

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