Pivot Points 1151
I would like to use pivot points to select stocks to be held for one month. I sell out of the money puts and call options with about 1 month to go till expiration. Can anyone suggest how I can use pivot points to get good stock candidates in this one month timeframe? For example, if a stock were near S1, that might be a good candidate to sell a put.
I have been mainly trading currency, and don't have experience trading options, but if a stock is nearing S1 wouldn't it be better to purchase a call on the first retracement to S1 since this would be a strong area of support, and purchase a put on the first or second failure of R1.
I have been interested in trading stock options, but at or in the money calls only. If you are trying to sell a call a week before expiry date, is it hard to sell. If you sell the options at market do you usually get a fair price?
I have been interested in trading stock options, but at or in the money calls only. If you are trying to sell a call a week before expiry date, is it hard to sell. If you sell the options at market do you usually get a fair price?
That's an interesting use of pivots that I have not heard of before Chipmunk. Which days and how many of them do you use in the calculation of the pivots?
dollar_john: I think that chipmunk is talking about writing (selling) a put at S1 in anticipation of the market bouncing and the put devaluing and/or becoming worthless at expiration. So the same strategy as you but writing a put instead of buying a call.
His (Chipmunk's) advantage is that he will gain from the time decay of the option and your advantage is that your upside is unlimited.
dollar_john: I think that chipmunk is talking about writing (selling) a put at S1 in anticipation of the market bouncing and the put devaluing and/or becoming worthless at expiration. So the same strategy as you but writing a put instead of buying a call.
His (Chipmunk's) advantage is that he will gain from the time decay of the option and your advantage is that your upside is unlimited.
Very smart strategy!
Could you clarify the strategy for me. Say a stock just hit R1 $50 and price is dropping. S1 is $40, what strike price would you use for the put, and when would you sell it?
Could you clarify the strategy for me. Say a stock just hit R1 $50 and price is dropping. S1 is $40, what strike price would you use for the put, and when would you sell it?
quote:
Originally posted by dollar_john
Could you clarify the strategy for me. Say a stock just hit R1 $50 and price is dropping. S1 is $40, what strike price would you use for the put, and when would you sell it?
Well if I remember correctly the premium (which is the amount that will disappear from time value decay) is greatest when the option is at the money. So you would be looking at the $40 strike price and would want to write the put when the stock price was right there at S1 which is also the area you are expecting it (the stock) to bounce from.
It's been a while since I last traded options so I apologize if the terminology above isn't spot on. If my memory serves me correctly there option price is comprised of 2 parts; intrinsic value and premium. The intrinsic value is the difference between the stock price and strike price when the option is in-the-money and the premium is the difference between the option price and the intrinsic value. If the option is not in-the-money then there is obviously only premium and no intrinsic value.
If you wish to avoid a 100% probability of loosing all your money, DON'T BUY OPTIONS. The odds are on your side when you SELL options. If you expect the stock price to increase, stay the same or fall a little, you would want to sell (out of the money) puts. When the option expires, you get to keep all the money you took in on the sale if the final price > than the strike price. There is a very good chance you'll make money but you got to know what you are doing.
I have found that selling options with about 1 month to expiration can be a profitable strategy. As time begins to expire, the options quickly lose value - that is a good thing cause you sold them.
To help me select equity candidates that have a good chance of increasing in the intermediate term, I would like to learn if anyone has experience or an opinion on how to use pivot points to select stocks that are due for an increase - in a 2-4 week timeframe. For example, has anyone done work using weekly or monthly pivot points? You might think of taking action when the price gets in the S1 level. If so, were there other technical indicators used like candlesticks or MACDs use to trigger a position? Blue sky thinking is OK here. Let me know what you think.
To Dollar John: You could purchase calls at S1, but in the end you will make more money if you sell puts. I know of no one who has survived buying options - they are overpriced, that's why you want to sell them.
If the price dropped to an S1 level around $40, I would sell puts say with a 36 point strike price (out of the money)
Have you, Dollar John, any experience using pivot points to trade currencies? If so, could you enlighten me here, please. John Persons (the self annoited pivot point maven) simply gushes about pivot points and currencies.
Day Trading: I have not used pivots when selling options. I suspect that they might be useful in this timeframe. I WOULD LIKE TO LEARN IF ANYONE HAS USED THEM OR HAS AN OPINION O/N HOW THEY (weekly and/or monthly pivots)may be used for longer term 2-4 week investments.
I have found that selling options with about 1 month to expiration can be a profitable strategy. As time begins to expire, the options quickly lose value - that is a good thing cause you sold them.
To help me select equity candidates that have a good chance of increasing in the intermediate term, I would like to learn if anyone has experience or an opinion on how to use pivot points to select stocks that are due for an increase - in a 2-4 week timeframe. For example, has anyone done work using weekly or monthly pivot points? You might think of taking action when the price gets in the S1 level. If so, were there other technical indicators used like candlesticks or MACDs use to trigger a position? Blue sky thinking is OK here. Let me know what you think.
To Dollar John: You could purchase calls at S1, but in the end you will make more money if you sell puts. I know of no one who has survived buying options - they are overpriced, that's why you want to sell them.
If the price dropped to an S1 level around $40, I would sell puts say with a 36 point strike price (out of the money)
Have you, Dollar John, any experience using pivot points to trade currencies? If so, could you enlighten me here, please. John Persons (the self annoited pivot point maven) simply gushes about pivot points and currencies.
Day Trading: I have not used pivots when selling options. I suspect that they might be useful in this timeframe. I WOULD LIKE TO LEARN IF ANYONE HAS USED THEM OR HAS AN OPINION O/N HOW THEY (weekly and/or monthly pivots)may be used for longer term 2-4 week investments.
quote:
Originally posted by chipmunk
...For example, has anyone done work using weekly or monthly pivot points? You might think of taking action when the price gets in the S1 level. If so, were there other technical indicators used like candlesticks or MACDs use to trigger a position?
I have not done any work with this (yet) but I may incorporate some of this type of information in an update to the Weekly Pivots that I am currently working on. I'll post more when I've finished the software. It will expand the stocks and pivot types that can be seen.
quote:
If the price dropped to an S1 level around $40, I would sell puts say with a 36 point strike price (out of the money)
Why out-the-money and not at-the-money. I was under the impression that the premium was highest at-the-money and with 1 month to go the accelerated decay at this price would be most acute.
quote:
Day Trading: I have not used pivots when selling options. I suspect that they might be useful in this timeframe. I WOULD LIKE TO LEARN IF ANYONE HAS USED THEM OR HAS AN OPINION O/N HOW THEY (weekly and/or monthly pivots)may be used for longer term 2-4 week investments.
The most important questions to ask here is how are you going to measure the success of any arbitrary pivot set that you pick. Say you are going to test 2, 3, and 4 week pivots. What factors are you going to look for in the subsequent days to determine success? For example, just look at the extremes (highs and lows) and see if the stop loss have blow out?
I look forward to seeing this work in your weekly pivots. How would you compare the effectiveness of weekly pivot levels vs. daily levels? Are weekly pivot levels in the same ballpark with daily pivots? You may not have a strict mathematical answer but I would still like to know your feeling. Can you say that monthly pivot levels are of any value? Do they appear to act as areas of support and resistance? Please consdier publishing them, too.
The advantage of out of the money options is that you can be somewhat wrong with the direction of the market and still collect the full premium. Yes, you would collect more money with an in the money option, but if the price moved against you, you likely would loose money. For exaample, say the price of a stock was 100 and you sold an 90 put. If the price dropped down to 95 at expiration, you still get to keep the full premium you took in. It is true this is not a "homerun" strategy, but if you can pick up 4% in a month with a high probability of picking up tht 4%, you did well. If you sold a 105 put and took in $2 and the price went up to 102 at expiration, you would have lost $1.
You pose a good question regarding measuring results. I am not sure I have a good answer for it. However, say your stock was 100 when you sold the put. If after you took your position, the stock was never more than, say 2%, below 100, then you likely made money. If during that time the S&P 500 fell by more than 5% and your stock fell less than 2%, that would be a good indication that you were on to something good.
The advantage of out of the money options is that you can be somewhat wrong with the direction of the market and still collect the full premium. Yes, you would collect more money with an in the money option, but if the price moved against you, you likely would loose money. For exaample, say the price of a stock was 100 and you sold an 90 put. If the price dropped down to 95 at expiration, you still get to keep the full premium you took in. It is true this is not a "homerun" strategy, but if you can pick up 4% in a month with a high probability of picking up tht 4%, you did well. If you sold a 105 put and took in $2 and the price went up to 102 at expiration, you would have lost $1.
You pose a good question regarding measuring results. I am not sure I have a good answer for it. However, say your stock was 100 when you sold the put. If after you took your position, the stock was never more than, say 2%, below 100, then you likely made money. If during that time the S&P 500 fell by more than 5% and your stock fell less than 2%, that would be a good indication that you were on to something good.
quote:
Originally posted by chipmunk
How would you compare the effectiveness of weekly pivot levels vs. daily levels? ... Can you say that monthly pivot levels are of any value? Do they appear to act as areas of support and resistance?
I'm always a bit dubious of calendar based pivot numbers, for example by week or month. I don't see any reason why they should be of value - i.e. no logical reason. I would lean towards a simulated trailing month or week. So for example have a trailing/rolling 5 trading day pivot calculation to replace a weekly one or 20 trading day for a monthly pivot.
quote:
The advantage of out of the money options is that you can be somewhat wrong with the direction of the market and still collect the full premium.
But is the premium not best value (for the option writer) for the at-the-money option?
quote:
You pose a good question regarding measuring results....the S&P 500 fell by more than 5% and your stock fell less than 2%, that would be a good indication that you were on to something good.
Where would your stop be?
I would like to add a few comments about the selling options strategy especially for (futures options) :
Yes i agree that selling is much more tempting than buying but people should/must be aware of few things :
-By selling you know the maximum profit you can get BUT you theorically don't know the maximum loss ... well until you decide to cut/buy back your options SO the stop/cut condition is VERY VERY essential with that selling method - believe me.
-But when selling the theta (time decay) works with you and on sideways (flat) or slow paced market you (generally) wins.
Well basically a seller will/should win on most market's trend EXCEPT on high/strong trend AGAINST him (by that i mean on crash or big rally weeks etc ...) , yes even on slow paced trend against him the seller can manage to win $ or at least to cut & close at near even if he is wise enough.
That is excactly opposite for buyers who badly need strong trend markets in order to gain some $. They basically win ONLY on trendy/strong markets running on their side and should lose on EVERY other situation ...
Yes that makes the odds very favorable for sellers.
I must add that these remarks are for options out of the money since on the money the theta is often weaker than the volatility (gamma or vega i don't remember)
So maybe people who wish to buy options should look towards trading directly on futures since there is no theta; well unless they have problem cutting their loss.
I have never used pivot strategy for selling options since 10/20 days bolg bands were my main/favourite tools.
I will surely take a look at that method.
A little sidenotes for conclusion :
When selling options, if, hopefully you are right and are preparing to buy back with a nice margin, take a few minutes to think of buying back another strike (instead of buying the same strike you have sold) even if your are eating some of your margin, that will grant you owning a spread which can lead to very worthy strategies like strangles, butterflies ...
One last remark for option buyers : they might take a look at buying spreads since they lessen the malus of theta and still have the safety of the buy strategy. (they can push further that strategy with ratio spreads but in that case the lesser premium you have to paid is at the cost of a lower safety)
Yes i agree that selling is much more tempting than buying but people should/must be aware of few things :
-By selling you know the maximum profit you can get BUT you theorically don't know the maximum loss ... well until you decide to cut/buy back your options SO the stop/cut condition is VERY VERY essential with that selling method - believe me.
-But when selling the theta (time decay) works with you and on sideways (flat) or slow paced market you (generally) wins.
Well basically a seller will/should win on most market's trend EXCEPT on high/strong trend AGAINST him (by that i mean on crash or big rally weeks etc ...) , yes even on slow paced trend against him the seller can manage to win $ or at least to cut & close at near even if he is wise enough.
That is excactly opposite for buyers who badly need strong trend markets in order to gain some $. They basically win ONLY on trendy/strong markets running on their side and should lose on EVERY other situation ...
Yes that makes the odds very favorable for sellers.
I must add that these remarks are for options out of the money since on the money the theta is often weaker than the volatility (gamma or vega i don't remember)
So maybe people who wish to buy options should look towards trading directly on futures since there is no theta; well unless they have problem cutting their loss.
I have never used pivot strategy for selling options since 10/20 days bolg bands were my main/favourite tools.
I will surely take a look at that method.
A little sidenotes for conclusion :
When selling options, if, hopefully you are right and are preparing to buy back with a nice margin, take a few minutes to think of buying back another strike (instead of buying the same strike you have sold) even if your are eating some of your margin, that will grant you owning a spread which can lead to very worthy strategies like strangles, butterflies ...
One last remark for option buyers : they might take a look at buying spreads since they lessen the malus of theta and still have the safety of the buy strategy. (they can push further that strategy with ratio spreads but in that case the lesser premium you have to paid is at the cost of a lower safety)
Some valuable info there - thanks ikodu!
quote:
Originally posted by chipmunk
If you wish to avoid a 100% probability of loosing all your money, DON'T BUY OPTIONS. The odds are on your side when you SELL options. If you expect the stock price to increase, stay the same or fall a little, you would want to sell (out of the money) puts. When the option expires, you get to keep all the money you took in on the sale if the final price > than the strike price. There is a very good chance you'll make money but you got to know what you are doing.
I have found that selling options with about 1 month to expiration can be a profitable strategy. As time begins to expire, the options quickly lose value - that is a good thing cause you sold them.
To help me select equity candidates that have a good chance of increasing in the intermediate term, I would like to learn if anyone has experience or an opinion on how to use pivot points to select stocks that are due for an increase - in a 2-4 week timeframe. For example, has anyone done work using weekly or monthly pivot points? You might think of taking action when the price gets in the S1 level. If so, were there other technical indicators used like candlesticks or MACDs use to trigger a position? Blue sky thinking is OK here. Let me know what you think.
To Dollar John: You could purchase calls at S1, but in the end you will make more money if you sell puts. I know of no one who has survived buying options - they are overpriced, that's why you want to sell them.
If the price dropped to an S1 level around $40, I would sell puts say with a 36 point strike price (out of the money)
Have you, Dollar John, any experience using pivot points to trade currencies? If so, could you enlighten me here, please. John Persons (the self annoited pivot point maven) simply gushes about pivot points and currencies.
Day Trading: I have not used pivots when selling options. I suspect that they might be useful in this timeframe. I WOULD LIKE TO LEARN IF ANYONE HAS USED THEM OR HAS AN OPINION O/N HOW THEY (weekly and/or monthly pivots)may be used for longer term 2-4 week investments.
I am glad you joined the forum. I was thinking about buying call options for the Royal Bank (Canada) for long term. What do you think of the following: Current stock price $49, option strike price $40, expiry Jan 2009, option price $11. Stock is trending up, some think will be $100 in a few years.
As for the pivot points, I think they are the best leading indicator. I was amazed at how accurate they were for the month of Sept. for the Euro. The monthly points seem to be the most accurate.
Using the daily figures, I have had mixed results using New York close and 23:00 GMT close. I don't recommend day trading currency.
I think pivot points seem to work best on stocks. For example todays pivot points for the Royal Bank were S3 $48.66, todays actual low, was $48.61. R3 was $49.18, guess what todays high was? $49.18!
As for selecting stocks due for an increase I usually look for divergence in RSI, momentum, MACD, slow stochastic, also trend line breaks in RSI, momentum. I don't like indicators but they seem to work in showing divergence. If there is divergence and it is near S1 or midpoint to S2 for the month for example.
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