John,
Jack Rains has an excellent reply in #6405.
But, let me give you an example of what I look for. As Intel soared at the beginning of the week, the volume was huge.
Finally on Thursday, Intel opened up over $4 at the 141 range creating a pretty large gap on a trading basis. 99% of the time stocks tend to fill their gaps. In addition to that the dec 125 and dec 130 calls have large open positions. These two events give me the signal to buy puts on Thursday morning at the market with the intent to get out of them within a day or two. I sold the puts Friday morning for a +200% gain.
Since it seems that the 125 to 130 area will probably be revisited, buying calls in stages is a good strategy, i.e., my first order at 130 and then more if we get to 125-127.
Now, one caveat about filling the gap. Sometimes this doesn't happen in the short term. When Intel announced that the 4th quarter was going to be stellar, it created a gap between ~88 and ~92, never filling it. In other words, if you see that you made a wrong trade, get out of it - take the loss.
Paulo
P.S. The above strategy should work unless the entire market tanks. |
