Silicon Investor (SI) -- The First Internet Community

STOCKTALK

We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor. We ask that you disable ad blocking while on Silicon Investor in the best interests of our community. If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.

Strategies & Market Trends : Buying In the Money Options -- Ignore unavailable to you. Want to Upgrade?

To: the options strategist who wrote (10)	10/14/2000 1:16:01 PM
From: High Grader	Read Replies (1) \| Respond to of 21

JJ here is an example of "Spread Zone" trading that you can follow. Not one of the better ones, but should still be interesting. Have a look at the Apple chart. Apple has had a tremendous drop and is now beginning a bounce. My Elliott Wave count identifies the drop as a wave three. A wave three usually corrects back to the 38% Fibonacci level, which in this case is $29.87. It can also correct to the 24% level at $ 25.19 or the 50% level at $ 34.28. Note that sometimes the Fibonacci levels are right on, other times they are ball park. You can make them more accurate by analyzing intra-day data with ElWave. You must always use an indicator such as a short term RSI to verify the price action around the Fibonacci levels. Price penetration of one level, often means it will go on to challenge the next one. With Apple at $22.06 and the indicators confirming that it has begun a rally (RSI bullish divergence) the next step is to see if there are any possible spread positions that are worth looking at, between the present price and the 38% level of $29.87. This is the "Spread Zone." Next, go to the options data at edreyfus.com See what is available on the Apple calls. We want something that has a bit of time ahead of it, so look at the November prices and look for two strike prices in the zone. The November 25 and the November 27.50 calls are priced at 1 5/8 and 1 1/16. The spread being 9/16. By selling the 27.50 call at 1 1/16 and buying the 25 call at 1 5/8, a spread will cost you 9/16. There are 281 and 57 options open in the respective strike prices, so you can put in an order to buy 10 spreads for 9/16 with these two strike prices and see if you get lucky. If you expect a dip in Apple prices you could even place an order to try and get this spread at a lower price, maybe at a price of 1/2, which would be a $500 commitment. Of course you may be able to pick up more than 10 spreads, especially if the stock is heavily traded and has lots of options on it. Now, as Apple rallies we watch the indicators and the Fibonacci target levels at 24% and 38%. If the indicators get decidedly bearish around the 24% level of $25.19 sell and get out. You will have made some money. If Apple moves up to the 38% level at $29.87, you will have passed the upper value of 27.50 and the spread will have increased in value, possibly to the maximum value of $2.50. At any rate, the indicators will likely be turning bearish and there is no point hanging around as the zone is now fulfilled. In this way a spread purchased at 1/2 can move to a maximum value of $2.50, for a nice profit of 500% minus commissions. Even at the lower 24% target, a profit of 100% or more is likely. Risk in the position is never greater than the original price of the spread and if the stock price drops below the low of $19 .125 you immediately get out. At this point the Elliott Wave count was incorrect and you need to salvage the position before you lose it all. Incidentally, sometimes the value of the spread actually increases for a short time as a drop through the bottom occurs and you can exit a losing position with a profit. Spreads can be perverse. This strategy relies on two things: First is the correct Elliott Wave count and identification of Fibonacci Targets that are far enough out for a significant Spread Zone to form. I use ElWave software for the wave counts, and confirm the correct wave count with technical indicators. Second is the availability of the spreads, with a cheap price, a potential profit, and a broker who won't take them for his own trades. I have been able to locate spreads like this in various circumstances, where for as little as 1/8 you can sometimes get a $5 spread and have a potential for a return of 40 times what you invest. Even if you pay 1/4 for these spreads which practically guarantees fills, you still have a potential 20X return. There are other factors that are a bit more complex and help in this strategy. For example, Fibonacci Time ratios often give you dates for the next top. These can be included in terms of which month's options you look for the spreads in. In this case, 10/27 and 11/13 are two time clusters to be aware of.