Perfecting the Option Trade…and the Option Newsletter

Published August 11, 2017 - 7:30 AM

Happy Mailbag Day!

This week we have a couple of good questions about trading, and there’s one subscriber who wishes I’d spend less time with my kids…

Jeff, please explain how you pick a particular strike price for an option. Also, once an option reaches a strike price, what is the expected price movement in relation to the price movement in the stock?

Charlie

Thanks for the question, Charlie.

I prefer to trade options where the strike price is near the current price of the stock. If I’m right on the price, and if I get the timing right, then the at-the-money options tend to provide the best risk/reward setups. Out-of-the-money options usually require too large of a move on the stock to offer a good reward potential. And the higher premium you have to pay for in-the-money options creates too much risk.

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The expected option price movement relative to the stock is called the “delta.” It tells you how much an option will move for a $1 move in the stock. Most brokerage firms make delta figures available on their option trading platforms. But as a general rule of thumb, an at-the-money option will often move about $0.50 for a $1 move in the underlying stock.

I'm finding your analysis incredibly helpful the last few months that I've been a member of Delta Report, thank you. Staying calm and lightly positioned with gold and short high-yield bonds just might reap some rewards yet. I've managed to make a bit with DAL, CCJ, and XOM in recent weeks which I consider great going in these tedious market conditions.

Do you use OBV as an analytical tool, and if so, what would you say about using it well? For me, I like looking at OBV because it seems to match the price patterns and I get some confidence knowing there's money going with the trend rather than against it, which I can't see from looking at volume itself.

Thanks again.

Mike

I’m glad your subscription to the Delta Report is working out well for you, Mike.

On-Balance Volume (OBV) is a technical indicator that measures buying and selling pressure. It’s a cumulative figure that adds the volume number on up days, and subtracts it on down days.

Technical analysts then look for divergences between OBV and price to help determine the strength of a trend or the potential for a reversal.

For me, OBV is a secondary indicator. I’ve found that other indicators like the MACD (moving average convergence divergence) and the RSI (Relative Strength Index) tend to be more accurate. But, when the MACD and the RSI are telling different stories, I will often turn to other indicators like OBV to settle the argument.

I guess Jeff does not see this as a full time job? He enjoys traveling around watching his kids play ball on our dime .He should quit calling his letter the *market minute* and call it the when I am* not busy minute *, I doubt I will sign up again for this *market minute* news letter that is only around part of the trading day. I need someone that is at WORK everyday. not just when they feel like it .

Robert

What can I say, Bob? My kids are selfish. They expect some attention from their father.

They don’t realize how much of a burden it puts on folks like you who want 20 fresh Market Minute essays every month instead of the 18 I wrote in July while I was traveling with my sons. I’ll try to do better in August.

That might be tough, though. You see, my wife is selfish, too. She’s planned a trip for a couple of days in the middle of the month. I tried to tell her how much this upsets you, Bob. But sometimes there’s just no reasoning with her. She insists that I spend some time with her. So, I might only publish 18 essays this month, too.

I know this will upset you. You feel like you’re not getting your money’s worth for this FREE service. So, I won’t blame you one bit if you go ahead and cancel your free subscription to the Market Minute. That way you won’t have to deal with my family’s selfishness around the holidays when I’m likely to publish a few more “classic” essays.

Best regards and good trading,

Jeff Clark

P.S. My inbox is always open. If you have a question about option trading, technical indicators, or my thoughts about the current market environment, send me an email right here.

Jeff’s intuitive feel for short term market swings and his strong protective discipline have allowed me to lock in thousands of dollars in gains where I might otherwise have just ridden the markets up and down.” -Chris, a reader and “seasoned investment advisor” from Seattle

Jeff -- your picks and analysis have been nothing short of amazing. I have traded the market for many years but I must admit, I have NEVER seen something this good.” - Mike H.

In only 2 weeks of using the service I’ve booked over $10K in profits. Needless to say I’ve paid for my membership.” - Tony J.

I started following Jeff Clark Direct about 3 weeks ago… I bought a small investment from one afternoon to the next morning. About 11AM I got out and made 8K in less than 24 hours.” – D. Tilghman

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