Trade in the Moment...
Wednesday, November 8, 2006 at 03:42PM Is that moment at the open, mid-day, or close? I saw a great comment 
roll in yesterday about this question. Not to mention one of the most active contributors to this blog, "Brett" wrote a piece around this a couple weeks ago. If you have not read this, click here.
roll in yesterday about this question. Not to mention one of the most active contributors to this blog, "Brett" wrote a piece around this a couple weeks ago. If you have not read this, click here.In my own personal trading I primarily trade two different "classifications" of trades. I love to trade breakouts and I like to trade support/resistance bounces. Depending on which of the two set-ups I am trading depends on when I take the trade.
As "OptionAddicts" we need to understand the reality that is amateur hour. I love the term amateur hour. In fact, I normally use this phrase about a dozen times here in the office throughout the course of the day. But what are the implications from buying options in the first hour or two of trading?
I'll tell you the problem. Generally, (on stocks of interest) options are over-priced in the mornings, and relatively fairly valued towards the end of the day. Under most circumstances, volatility in hyper active in the mornings, and settles down by the end of the session. All things being equal, this means that you would get a better deal on the option by waiting for the end of the day...
BUT...
The problem is that prices move throughout the day. The longer you wait to take the trade, the more price action you miss. This is the dilemma most traders debate. Should I trade in the morning, or towards the close of the day.
Let me ask a question to illustrate some further reasoning. Do you place more weight on closing prices or intra-day price movements. For instance...if I have a stock trading at $49, with monster resistance at $50...The stock reaches a high of the day of $52, but closes at $50...would you call this a breakout?
No you wouldn't. When it was all said and done, the price did not exceed resistance. It tried to, but couldn't sustain itself. What if you had bought calls in the morning when the stock was up at $51 or so. Did you really have proof it was a breakout? Could you really know for sure it would sustain this price move? Could you tell that volume would be huge on the day?
You can't. Bottom line is that since I can't make this distinction, I wait for better confirmation. Plus (on a typical bullish day) prices typically spike in the mornings, retrace in the afternoons, and advance at the close. I try and wait for that last advance, which is normally 1-2 hours before the close, and enter the trades here. This way I can see where price is, check volume, and have a much better idea on how things will close.
Like I said, this strategy is what I use for my breakout trades. What if I am trading a support bounce? I will trade those whenever. Since I don't need volume on these, and my exits are well defined (a close beyond support/resistance), I enter these at any given time in the day. I basically trade them as I find them.
I hope this helps to clarify what my reasoning is behind this strategy, and provide you insights as you choose your path in options trading. I will post a follow up to yesterdays trade in a few minutes.
Reader Comments (5)
Thanks!
Mike
I'm no trader (I have a lot of respect for that term and I feel you need to earn it), but I'm on my way. There's no substitute for experience. It's easy to read the books and take the classes, but it's just like Mike Tyson said, "Everybody has a plan until they get punched in the face." You have to take your lumps to really understand how to survive in this game. I nearly quit twice but forced myself to make it happen. It takes hard work and a certain obsessiveness I believe.
I owe everything to Jeff. Investools is a great primer, but Jeff takes it to another level. Listen to him and soak up all the information you can.
Thanks Brett for all your imput, I read every thread on this blog to make sure I'm not missing anything.
Each day is one more item I add to my trading rules and notes outside of the Masters Program.
Sorry to say I haven't paid for that portion with profits yet. As soon as I do, I will go PhD and get your price pattern class, Jeff.
Please, keep the good stuff coming.
Brian K
John M.