Entires - Example part 1

Here we have an example of a stock where we have the set up we're looking for.  Notice the higher highs and higher lows - i.e. the stock is in an uptrend.

In the green circle you will see that we have a close above the high of the low day - now is the time to enter a bullish trade.  

Look back a little further, we need to come up with a target for our trade.  We can't just enter without knowing when to get out.  That's kinda like just driving with no destination, you have to have a target on when to take your profits.

Look at this chart:

Notice the horizontal purple line.  That is our target based on past support/resistance, which is 36.  Currently our price is approx 32, so we're looking for just over a 10% move in the stock price.

Now that we have our set up and target,we will go to our broker's website/software to look for the exact option to trade.  We are looking to buy a Call Option since we are bullish on this stock.  This screen shot is from the broker I use which is ThinkOrSwim.

This screen shot is from 4/8/09, which is the date we got our entry set up.  Look at the yellow line on the left side of the screen about half way down.  

So let's go through our specific parameters of what we are looking for in an option to buy:

1)  Stock volume - toward the top middle of the screen you'll see the volume is over 126 million, which is just a tad above our 500,000 volume minimum.  Check, so keep on going through the list.

2)  Delta of the option - look at the yellow highlighted line, then look up at the columns.  The 3rd column from the left is the Delta, for the highlighted line we see the Delta is .71, which is .70 or higher which is what we want.  Check, so go onto the next parameter on our list.

3)  Open Interest - look at the yellow highlighted line, then look up at the columns.  The 1st column  on the left is the Open Interest, for the highlighted line we see the Open Interest is over 53,000 and we want 500 minimum.  Got that one covered, check, onto the next parameter.

4)  Bid/Ask Spread - again, looking at the yellow highlighted line and up at the columns you will see the Bid and Ask are the last 2 columns on the right.  Take the Ask (which is 4.10) and subtract the Bid (which is 4.02) and you get .08, which is well below our max spread of .30.  Now onto the last parameter.

5)  Expiration Month - we want 90 - 120 days ideally.  However, look at the screen shot below.  

Look at the listed months listed on the left.  After the month, you will see a number inside parenthesis.  This number represents the number of days left until the option expires.  Remember, we IDEALLY want 90 - 120.  However, we don't have that on this screen shot.  

We have June with 72 days left and September with 163 days left - do not pay any attention to the months with red lettering.  72 is closer to the 90 -120 range than 163 is, so our choice is June for the Expiration Month.

This date we are looking at for the entry is April 8th.  So, June is still plenty of time away for this trade to work out like we want it.

So, knowing we want June for the Expiration Month, and knowing we want all the other parameters we now know what option to buy (hint: the yellow highlighted one - but when you do this live, unfortunately the right one won't be highlighted for you!).

To enter this trade you would buy the June 29 Call Option, which would cost you $4.10

The next entry will show you how the trade is managed and the outcome.