Jeff Kohler the Option Addict | Stock and Options Trading

Is that moment at the open, mid-day, or close? I saw a great comment

roll in yesterday about this question. Not to mention one of the most active contributors to this blog, "Brett" wrote a piece around this a couple weeks ago. If you have not read this, click here.

In my own personal trading I primarily trade two different "classifications" of trades. I love to trade breakouts and I like to trade support/resistance bounces. Depending on which of the two set-ups I am trading depends on when I take the trade.

As "OptionAddicts" we need to understand the reality that is amateur hour. I love the term amateur hour. In fact, I normally use this phrase about a dozen times here in the office throughout the course of the day. But what are the implications from buying options in the first hour or two of trading?

I'll tell you the problem. Generally, (on stocks of interest) options are over-priced in the mornings, and relatively fairly valued towards the end of the day. Under most circumstances, volatility in hyper active in the mornings, and settles down by the end of the session. All things being equal, this means that you would get a better deal on the option by waiting for the end of the day...

BUT...

The problem is that prices move throughout the day. The longer you wait to take the trade, the more price action you miss. This is the dilemma most traders debate. Should I trade in the morning, or towards the close of the day.

Let me ask a question to illustrate some further reasoning. Do you place more weight on closing prices or intra-day price movements. For instance...if I have a stock trading at $49, with monster resistance at $50...The stock reaches a high of the day of $52, but closes at $50...would you call this a breakout?

No you wouldn't. When it was all said and done, the price did not exceed resistance. It tried to, but couldn't sustain itself. What if you had bought calls in the morning when the stock was up at $51 or so. Did you really have proof it was a breakout? Could you really know for sure it would sustain this price move? Could you tell that volume would be huge on the day?

You can't. Bottom line is that since I can't make this distinction, I wait for better confirmation. Plus (on a typical bullish day) prices typically spike in the mornings, retrace in the afternoons, and advance at the close. I try and wait for that last advance, which is normally 1-2 hours before the close, and enter the trades here. This way I can see where price is, check volume, and have a much better idea on how things will close.

Like I said, this strategy is what I use for my breakout trades. What if I am trading a support bounce? I will trade those whenever. Since I don't need volume on these, and my exits are well defined (a close beyond support/resistance), I enter these at any given time in the day. I basically trade them as I find them.

I hope this helps to clarify what my reasoning is behind this strategy, and provide you insights as you choose your path in options trading. I will post a follow up to yesterdays trade in a few minutes.

Posted by Option Addict on 11/08/2006 at 3:42 PM | Permalink

Archives

That provides some good context for my thinking on when to trade.

Thanks!

Mike

Posted by Anonymous | 11/08/2006 05:28:00 PM

First, thanks to Brett for the posting, and Jeff for the fantastic blog. I can't pretend to be nearly the trader that Brett or Jeff are but...(maybe I'm too logical) if (a) price action goes on throughout the day and the next day and the next, and... (b) if the price action is predictable ("prices peak in the morning", etc.) day trading would be the answer. I suspect the answer is about ensuring that confirmation is real based on the price pattern and support/resistance. That should be doable any time of the day!

Posted by Anonymous | 11/08/2006 06:38:00 PM

You can pretend to be the trader I am very easily. Just lose a lot of money and spend several nights wide awake!

I'm no trader (I have a lot of respect for that term and I feel you need to earn it), but I'm on my way. There's no substitute for experience. It's easy to read the books and take the classes, but it's just like Mike Tyson said, "Everybody has a plan until they get punched in the face." You have to take your lumps to really understand how to survive in this game. I nearly quit twice but forced myself to make it happen. It takes hard work and a certain obsessiveness I believe.

I owe everything to Jeff. Investools is a great primer, but Jeff takes it to another level. Listen to him and soak up all the information you can.

Posted by Anonymous | 11/08/2006 06:51:00 PM

Thanks Jeff, this thread was huge. I didn't know bounce trades could be done that way. Duh. I mean, I knew it but didn't really know it.

Thanks Brett for all your imput, I read every thread on this blog to make sure I'm not missing anything.

Each day is one more item I add to my trading rules and notes outside of the Masters Program.

Sorry to say I haven't paid for that portion with profits yet. As soon as I do, I will go PhD and get your price pattern class, Jeff.

Please, keep the good stuff coming.

Brian K

Posted by Anonymous | 11/09/2006 09:16:00 PM

Just discovered Jeff's blog today and have read most of what is currently up. Great stuff! Brett - thanks for posting on your experiences so far - very helpful to someone who is very new at all this.

John M.

Posted by Anonymous | 11/14/2006 04:24:00 PM