My friend has been trading options online buying the Qs (QQQQ) for sometime and here’s his trade plan. Trading the Qs is a long way to grow your portfolio without a large expense of capital and may be traded as a day trade (1 day) or swing trade (2-5 days). You can make longer trades but you need to be cautious thanks to market volatility.
Entry
Establish the direction of the trend. Is it up or is it down?
Buy calls if trending up, or buy puts if trending down.
Best time to enter is after a 1-2 day pull back.
Try to purchase at least 20 contracts. (10 or less will work against, but your return is much less.)
If the Nasdaq has had a big pull back after initial entry, he will add to his position. Delay until the momentum has returned to the original trend direction before adding any more. You don’t want to be caught in a market reversal.
Exit
On entry he always sets his limit to 50 cents. After he is profitable by 15 cents, if the market is not moving or is pulling back, he will consider exiting.
he will use a stop of 50% of entry price. Try to get out much sooner though, observe the charts. They will normally let you know.
Which Option
Expiration–he used to sell with at least 20 days till expiration. He now trades current month + 1. Other words, if your in the month of June, the earliest month he would take for expiration would be July. Delta– he must see a delta between 70 and 95 cents. Anything above 95 and you are just throwing money away. Under .70 and the Qs have to make a bigger movement before your limit is reached. You can likewise lower the limit or choose a longer duration.
Price–he is looking for the ask price to be under $5.00.
Open Interest–he searches for an option that has the highest open interest under 5.00.
He has been buying options online trading the Qs and it has been one of his biggest money makers. He started off buying much smaller positions until the account grew big enough to support the larger trades. Extra time I discovered the above used to work best for me. One word of caution, if a trade starts going against you, GET OUT OF IT. Last year he didn’t, and took a big hit. Even with the hit he took last year (lost his discipline) he still trade the Qs on a daily basis and expect to continue.
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This is a great strategy that I haven’t looked at before. Too often, traders look for getting the big profit potential, but this approach of taking smaller bites each day is really good. I have bookmarked this and will add it to my trading plan.
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