My Current Option Trading Strategy and Rules for Individual Stocks

As noted on my last blog post, I indicated that I would share with you my current option trading strategy and rules for individual stocks. I must emphasize that I am only an amateur trader. This trading strategy and rules for individual stocks is based on my on my own trading style and goals at this moment in my life. These will change in the future. I do not recommend that you use or implement this strategy or trading rules. My only recommendation is that before implementing any strategy, you must conduct your own careful research and obtain advice from experienced financial and trading processionals. I am not a financial or trading professional. The information in this blog is worth as much as you paid for it… ABSOLUTELY NOTHING!

Now for the fun stuff, my current option trading strategy and rules for individual stocks. Since the market appears to be in a declining trend, I have been concentrating on put options, so will outline my strategy and rules for those. Note that my strategy and rules for calls are roughly the opposite. In general, I only want to be in an option trade for up to 3 weeks.

Put Options

We can assume that I have a bearish outlook on the market at the time of the analysis :-)

1. The basic parameters for my stock screen are those that show a declining trend, lower lows and lower highs (supported by a declining industry group trend), trading under its 30 day moving Average line (DMA). Preferably I look for stocks that are coming back up to the 30DMA to make a lower high on peaking MACD and Stochastic and bounces down or tips over at the 30DMA on increasing volume. I also look for declining ROC and negative divergence, partially when looking at stocks showing market top formations.
   
   
2. Unless the chart provides evidence to the contrary, I establish the lower high as my near-term resistance level and the lower low as my support level.
   
   
3. For stocks that a making new lows, I identify my profit target by measuring the price move each time the stock price bounces off the 30DMA and returns back and take the average. I use the average number of days for each price move to estimation of how long I expect the next price move to take and the most appropriate expiration month to use. If I cannot use this method to identify my price target, I look at the char for evidence of previous support.
   
   
4. My entry point is based on the stock closing below the 20DMA. My stop is set just above resistance, and 1st target set at the support level. If the stock breaks down at the support level, I measure the distance between previous support levels to establish a 2nd price target.
   
   
5. My exit point is when my profit target is reached or if the stock is stopped out. If the stock is showing signs of continual weakness, breaks-down further and surpasses my first profit target, I will establish the 2nd target and lower my stop to the new resistance level to lock in profits. In extreme cases when there is a strong price movement against my favor, I may exit the trade prematurely. I have no desire to be in trades that are going to keep me up at night.
   
   

Thanks - Dave