Day Trading & Forex Forum

Is this the correct action to take? Well, this depends on whether your point of view is objective or clouded by illusion. The bullish factors just mentioned that invited people to buy the large gap up (C), fell for the illusion trap and ignored a reality that had been staring them in the face all along. C was a gap up in price into an objective supply level at A. At C, Walgreen s call premium is extremely high and about to become cheap. Put premium at C is cheap and about to become expensive. It is at C that the illusion-based options speculator buys calls and sells puts. The reality- based options speculator sells calls at C and buys puts. The key is to keep everything simple and objective. When price reaches an objective supply level, it must decline. Knowing this in advance for the options speculator offers a tremendous edge. The goal is not only to avoid the illusion trap for which so many options speculators fall. But just as important, you can take advantage of it and get paid considerably from those who do.

Time Decay
The issue of time decay tends to be a never- ending battle for the options buyer. Objective supply and demand analysis should be the options trader s first and most important decision-making tool, not subjective and flawed conventional options pricing models, especially when it comes to time decay. The way you quantify potential profit margin in market speculation is no different than how a corporation quantifies profit margins. The distance from a demand level to a supply level is the objective profit margin. Measuring potential profit margin objectively allows one to truly take advantage of option premium and to properly assess time decay.

Let the Trap Pay You
In Figure 4, you can see a weak premarket consumer spending index (CPI) number, ugly red candles and down-sloping moving averages that invite the illusion-based crowd to sell the Nasdaq futures. Nasdaq put options are being accumulated fast and furiously during the decline (B), and calls are being sold at nearly the same pace. At C, the astute trader knows that no matter what the news and lagging indicators suggest, price has reached a level where demand greatly exceeds supply (A). This novice action allows the astute options speculator to buy calls cheap and buy them just before they become expensive at or near C.

The Keys: Discipline and Rules
Objective rules are important. However, discipline to follow through and implement the rules is a necessary ingredient for trading success. To recap the key element's:

• As price nears demand (support): 1) Calls become cheap but are about to become pricey; and 2) puts become pricey but are about to become cheap.
• As price nears supply (resistance): 1) calls become pricey but are about to become cheap; and 2) puts become cheap but are about to become pricey.

The Rules

1. Identify the nearest demand level below current price that has not seen price revisit the demand level even once.
2. Identify the nearest supply level above current price that has not seen price revisit the supply level even once.
3. Measure the distance between the demand and supply level and determine whether there is a desirable profit margin.
4. If and when price revisits a demand level for the first time, the options buyer can look to buy at- or in-the-money calls. The options seller can look to sell (write) overpriced puts with a strike just below the demand level and take advantage of inflated put premium.
5. If and when price revisits a supply level for the first time, the options buyer can look to buy at- or in-the-money puts. The options seller can look to sell (write)overpriced calls with a strike just above the supply level and take advantage of inflated call premium.

Create a Path for Others to Follow
Instead of using conventional trend analysis to identify that a trend is well underway, use objective supply and demand analysis to anticipate the next trend. Rather than noticing high volatility after it is already high, use simple supply and demand analysis to anticipate when volatility is likely to increase. The key to any type of trading, especially options, is to take action just before everyone else does. Never forget, the only way you can derive a profit trading anything is if others are willing to pay more than you paid. Therefore, the key to low risk- high reward trading is to be first in line, at the right time.

It's Not Easy
The greatest flaw of the human mind is that it poses the ability to deceive itself through two filters: one is illusion and the other is emotion. In the options markets, identifying traders who take action based on illusion and emotion is simple if your analysis is reality based. Knowing where demand (support) and supply (resistance) levels are is the key to predicting future price movement. Predicting future price movement in underlying markets offers the options trader a tremendous edge.