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3. How to Trade Markets that are Trending
Here are a couple of different trading strategies to
consider for a market that's slowly trending:
1 (a) Initiate a bull call spread if the market is
trending up. Close the spread for a profit if the spread doubles in premium. If
the market instead declines, sell an additional call when you perceive the uptrend
has ceased. You then are positioned with a call ratio spread with little or no
loss on the downside but profit potential if the rally resumes later.
1 (b) Initiate a bear put spread if the market is
trending down, and close it for a profit if the spread doubles. If the market
rallies, sell an additional put when you think the downtrend is over. You then
have a put ratio spread with little or no loss on the upside but profit potential
if the downtrend later resumes.
2 (a) Initiate a put ratio spread for a credit if
the market is trending up and if implied volatility is average to high. Close
the spread for a profit if the market continues to trend up and the credit shrinks
to even money. If the market reverses direction and breaks lower, there are 3
alternatives to choose from:
(a) close the spread if it loses a predetermined amount (your trigger point),
(b) adjust the spread by buying one of your short puts and selling a further out
of the money put (executing a bear put spread), or
(c) adjust by buying an out of the money put and selling an out of the money call
(executing a synthetic short position).
2 (b) Initiate a call ratio spread for a credit
if the market is trending down and if implied volatility is average to high. Close
the spread for a profit if the market continues to trend down and the credit shrinks
to even money. If the market reverses direction and moves higher, there are 3
alternatives to choose from:
(a) close the spread if it loses a predetermined amount (your trigger point),
(b) adjust the spread by buying one of your short calls and selling a further
out of the money call (executing a bull call spread), or
(c) adjust by buying an out of the money call and selling an out of the money
put (executing a synthetic long position).
"Knowledge is power and all traders can benefit by continually
bolstering their knowledge base. I hope to contribute in that regard." Paul
Forchione
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