Hi Ralph,
No problem on explanations.
Yes I entered on 10/16 for an expiration on 10/20. On SPY you can pick almost any date for expiration. Most stocks are weekly, and some are monthly, but SPY is essentially daily for close-in expirations. There are plusses and minuses on the expiration date that you pick. If you pick a date that is further away then the options are more expensive. Yes, they give you more time for things to happen, but the more time that goes by the less they are worth so that even if the prices do not change (or go back to exactly the same price), your options will be worth less. The more time that goes by, the less your options are worth. So all of this needs to be kept in mind when you pick your date.
Now, the benefit of picking close-in dates is that you get more bang for your buck. If I pick a quick date like tomorrow, then a relatively small move in the stock can give you a bigger profit (or loss). The quicker your expiration date, the higher your “leverage” as they say. Now, the thing to keep in mind is that if you are trading out of the money like I almost always do, your options value will drop to zero by the expiration date so if you buy an options contract with 2 days to expiration, then you better get the move you want and get out fast because you really don’t have a whole day to mess around. If you hold overnight, your option will be worth a lot less in the morning.
Now, I usually like to split the difference. On most of my options plays I will give it between 1 week or maybe 2 weeks. I generally pick Friday so if I buy on Monday, I might go the whole week to Friday. But if I enter mid-week, like Wednesday, then I might have an expiration on the following Friday. Giving myself at least a little time allows me to let things play out.
Now, there are also other times when I will give my options a lot longer time to play. This happens when I am playing an event, or the market’s eventual reactions to an event. So for instance, if I think that a company is preparing to break out and go significantly higher, but I’m not sure how long it will take for the breakout, then I might buy a cheaper out of the money call that has months to play out. Or like I have a long term put right now on NVDA. Way back before their last earnings, I decided that they might have a huge move up like they did the last time, but I was skeptical. I didn’t really think that they would fail to hit their profits and revenue (which would have caused a huge crash), but I was skeptical about the market’s reaction to their earnings. AAPL recently had a positive earnings surprise but they still got hammered due to feared iPhone sales slowdown. My thinking was that if NVDA had positive numbers like everyone (and I mean EVERYONE) expected but the stock price didn’t move as expected then this would be viewed as negative overall. They are still doing great and it wouldn’t cause an immediate crash, but the price should trend down over time. So I bought some cheap near-expiring calls in case they rocket upward, but some long-expiring puts (December) to profit if they trend downward. So this was a strangle of sorts, but oriented towards the puts. On the first day after earnings, they gapped up then traded down all the way to unchanged. They did not move up nearly enough for me to profit on the calls which I held in case they popped up, but they kept going down and expired worthless. I still have the puts which were looking really good most of September, then were looking not so good, but are looking better again now. I believe they may actually challenge their 5/25 gap so I’m still holding.
A negative divergence is when the stock price is trending upward, while the oscillator (I’ve always used RSI, but lately have been watching Chande as well…the “Pretty Good Oscillator” is my favorite on Yahoo Finance) is trending downward. If the two (price and oscillator) are not agreeing then this is a “divergence” because they are diverging from each other. So if the stocks trend is upward but you reach a point where the oscillator trends downward while the price makes a higher high, then this tells you that the buyers are running out of steam and a reversal to the downside is more likely. Now, this is not perfect. Often you will have a 2-point divergence telling you that it could go down, then it it’ll make another higher high while the oscillator makes another lower high. This is now a 3-point divergence which is even more likely to come true, but not always. Sometimes you’ll see a 4-point divergence which means the reversal is even more likely. But remember, this is just likely, not certain. Sometime the prices will just ignore all your divergences and just do whatever it wants. All you can do is try to find ways to increase the probability of success as much as you can. There is no such thing as a perfect indicator. Like I always say, if I found one then I would keep it a secret and become a billionaire.
A positive divergence is the opposite of negative. It is when the prices are trending downward, but the oscillator begins to trend upward. This tells you that the sellers are losing steam and we are more likely to have a reversal to the upside.
One thing that I will say about these reversals that you may be trying to predict with oscillator divergences. Even if they prove to be accurate, you cannot really say how long the reversal will last. The point here is that you are using oscillator divergences just to help you with entries and exits. If I’m watching a 5-minute chart and gain a successful call entry because there is a positive divergence in my chart, then that’s great. But really I have no idea how long the recent reversal is going to last. Will it be the start of a new uptrend that lasts for hours? Days? I have no idea. An hour later it could be over and coming down. Generally, the longer the time interval of your chart, the longer the potential move. I like to think my 5-min chart can predict a move of about an hour (12 bars) give or take. It might turn out to be many hours, or many days, but not likely. It could also turn out to be 2 minutes. You just have to be careful and use stops.
Longer time frames will give you longer moves. So an hourly chart will give you moves that last for hours, or a daily chart will give you moves that last for days. I never use a 1-min chart because anything that comes from a 1-min chart would last for so short that it’s almost worthless.
) this “negative” divergence?
