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The Opportunity in Options at Demand
This is potent information for any options speculator. During the dramatic decline in price to demand C, three things are happening: 1) volatility is increasing; 2) calls are becoming cheap; and 3) puts are becoming expensive. The calls are cheapest and about to become expensive at the exact time rules tell you to buy calls, at the demand level C.

Quantify Supply Objectively
In Figure 2, area A again represents temporary price stability, which gives the appearance of supply and demand equilibrium. The price drop (B) tells you that area A was really a price level where supply greatly exceeded demand. B can only happen because of a supply and demand imbalance at price level A. Therefore, when price revisits level A for the first time at C, price is revisiting a level where supply greatly exceeds demand. In any market, when price is at a level where supply exceeds demand, prices decline. Notice in this example, the initial decline (B) is dramatic. This tells you that there is a great imbalance at A, which means you would expect a similar decline at C.

The Opportunity in Options at Supply
During the dramatic rally in price to supply C, three things are happening: 1) volatility is increasing; 2) calls are becoming expensive; and 3) puts are becoming cheap. The puts are cheapest and about to become expensive at the exact time rules tell you to buy puts at the supply level C.

If you were interested in selling (writing) options and taking advantage of inflated premium, you would be selling overpriced calls at supply level C. As the price advances to that supply level, the call premium just above and at the supply level is highly expensive and volatility is sky high but that is all about to change. Why? Objective supply and demand analysis tells traders that price is reaching an area where supply exceeds demand. While most are scurrying to buy calls after an advance in price and at a level where supply exceeds demand, the low risk-high reward anticipatory analysis would have you selling calls to them, at or near the supply level C.

The Illusion Trap
Let s take a look at a market example. On March 26, 2007, Walgreen's announced earnings before the open of trading and, as you can see in Figure 3, its earnings were better than expected. Price gapped higher on the earnings report seen at C. Just prior to this, price had been in a steady uptrend with upward sloping moving averages, seen at B. Volume during this period of rising prices was strong, suggesting that a sustainable uptrend was underway. All these factors are positive and invite the masses to buy Walgreen s stock and also buy the call options on the stock.

(click to enlarge)