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Using Support and Resistance
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Trading Options using Support and Resistance
If options are your trading vehicle of choice, then you’re in luck, because like almost all markets they will tend to “obey” support and resistance areas - just as the underlying stock or index does. In fact, some nice percentage gains (or losses if you aren’t disciplined enough to get out when wrong) can be made in a short amount of time, if the trade is timed right.
I personally trade options this way in my own trading account. Option strategies can be simple or very complex. Options trading can be as speculative or as conservative as you want. This means you can do everything from protecting a position in a stock or index from a sell-off, to making an outright “bet” on a short term move of a market or index.
A recent example of an options trade using Support and Resistance for guides was a trade made on April 7th and 8th of 2010. When the ES was trading just 1 point below my 1186 resistance (after having reached and reversed from there about 10 minutes prior) on Wednesday April 7th. I bought the SPY April 119 Puts for .99, or $99 per contract. This was a directional play for a short term sell-off. On Thursday morning the ES dropped to 1171.00, which was just above my 1170.50-1170.00 support. The Put option made a high at 1.85. I covered the Put options at 1.75 ($175 per contract) when the ES was near 1173 or so.
That was a very nice percentage gain due to the leverage. This was a case where I got short near a good Resistance area (via buying Put options), and covered near a good Support area. Time to expiration on this option was just 7 ½ days, so the expected move and exit needed to happen soon in this case. Trading options that close to expiration are for day trades or very short term plays. The lines on this Put option chart were equivalent to the support/ resistance for the e-mini SP futures (ES) listed above.
I use support and resistance for entries and exits, as well as for clues about where the market is going. Markets change, rendering most back-tested systems obsolete after awhile. But support and resistance trading never becomes obsolete, because support and resistance levels are caused by human nature. They are a natural occurrence in all liquid markets, they always have been and they always will be.
So, when you see the market or a stock you are trading struggle at a resistance area, and your strategy / system tells you its time to sell, consider a Put option strategy. If the market, or stock, is holding at support and your system says it’s time to buy, then Call option strategies can be employed. The example above is the most basic of option strategies. As stated, they can be very complex also. However, directional trades for the short term using support and resistance zones for entry/ exit can give very good percentage gains when they go right.
Keep your stops in place, and good trading.
Mike Reed
Mike Reed is author of TradeStalker's RBI Trader's Updates. Mike began trading the Market in 1982. When he got his start as a trader, Mike was plotting prices on paper tape as the internet had not yet been "born" as we know it today. Years of experience have really given him a feel for the Market action. His support and resistance numbers have been published on the internet since 1996. He has a wide readership that includes day traders, floor traders, locals and hedge fund managers. His nightly trading plan, along with his support and resistance zones, are specific and accurate. He offers an unlimited free trial of his nightly TradeStalker RBI Trader's Updates.- Copyright 2010 Mike Reed and TradeStalker.com
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Disclaimer:
The financial markets are risky. Investing is risky. Past performance does not guarantee future performance. The foregoing has been prepared solely for informational purposes and is not a solicitation, or an offer to buy or sell any security. Opinions are based on historical research and data believed reliable, but there is no guarantee that future results will be profitable.
We are not advocating trading futures. The prices and contracts in the TradeStalker's RBI Updates specify a manner in which you could trade. We occasionally mention the SP500 and Nasdaq futures markets because it is extremely liquid and tends to lead the other markets. This is not an endorsement or recommendation of the SP500 and Nasdaq futures markets. The risk of loss in futures is substantial. You can lose more than your original investment. We are not Registered Investment Advisors or Commodity Trading Advisors.
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