Special Webinar Notes May 24, 2011

Agenda Call Options and responsibilities Swing trading and using the 3 bar reversals for swing trading How to read Support & Resistance A quick way to create a watchlist

Call Options Call option defined: A call option gives the holder the right, but not the obligation, to buy a specified number of shares of the underlying stock on or before the expiration date of the option. A call option is a contract. Call option consists of a strike price, an expiration date and a price. Each option represents 100 shares

Call Option Players There are 2 parties to the purchase and sale of a call option, the seller and the buyer … The Seller’s obligation is to deliver the stock at the agreed selling price, which is the strike price, if the call is assigned. The Buyer has the right to purchase the stock at the strike price, up until expiration … but not the OBLIGATION to exercise the option. (This is important because most option buyers are speculating on stock price movement.)

Call Option Seller There are 2 types of Call Option Seller and they are distinguished by whether they own the underlying stock … – 1) If you own the stock and sell a call option against that stock, you are considered ‘covered’. If the call is assigned, your stock is delivered. – 2) If you Do NOT own the stock and sell a call option, you are considered selling a ‘Naked’ Call. This is considered riskier than selling a covered call. Most likely your Broker will need to approve.

How to Enter Call Trades If you want buy a call option, you initiate the position by “Buying to Open” the transaction When you go to liquidate or sell the option, you do so by “Selling to Close” the position If you want to Sell a covered call or a naked call option, you open the position by “Selling to Open” the position If you sold a call option and want to close the position, you purchase it by a “Buy to Close” order

What happens on assignment? A call option can be assigned by the owner of the call option up until 5:30 est on the day of expiration. A call option will get assigned if it is “in the money”. In the money means it is trading above the strike price. If you want to exercise a call option that you own, you tell your broker and they will handle the rest. If you own the stock & sold a call against the stock and it is assigned, your broker will handle the sale.

Strike Price Increments Options usually trade in $2.50 increments up until $25. Then the strike prices will be every $5. The exception to this are stocks that trade with options in $1 strike increments. Such as.. AMAT, NVDA, BRCD, EMC, DNR, JDSU, JNPR, MU, JNPR, ORCL, SIRI, XRX, TWX, WDC, SUNW, STX, MMR, & SFD

Option Expiration All options expire on the 3 rd Friday of the month. The exception to this are those stocks that trade with weekly options. If a stock is approved for weekly options, they will have options that expire every week. They are the same contracts as a monthly option with the exception being that they expire on the Friday of the current week.

Weekly Options New Weekly options for the next week come out on Thursday evening. The exception to this is when the next week expiration coincides with the expiration of the monthly option. – In this case, the monthly option becomes the weekly option. Examples are … CAT, FCX, MSFT, GOOG, GE, FFIV

For more information… Go to …. – This is the Chicago Board of Options Exchange website. They have excellent information. They even have free online tutorials and course. I highly recommend you visit their site. – This is the Options Industry website. They have complete details on virtually every option strategy.

Swing Trading What Does Swing Trading Mean? A style of trading that attempts to capture gains in a stock within one to four days. Swing traders use technical analysis to look for stocks with short-term price momentum. These traders aren't interested in the fundamental or intrinsic value of stocks, but rather in their price trends and patterns. Source:

Swing Trading My interpretation … Trades can last longer that 4 days You don’t necessarily need technical analysis, but it can help Usually, you are looking to exit at a predefined profit objective I believe your profit objective is based on the timeframe you are trading. A general rule of thumb is the longer the timeframe, the larger the profit objective.

Swing Trading The most common form of swing trading is to look for swing high and then wait for a 3 to 5 day pullback to enter the market. You want to enter above the High of the Low Day on the pullback. (Opposite for Selling Short.) Look to take profits at the prior swing high. Or Sell ½ the position just below the high and move the balance of the position to a break even stop loss. Then trail the stop up if price continues.

Swing Trading Let’s look at a few examples …

Enter a position using a Stop Limit. Buy on a stop above the High of the Low Day in the Swing, with a limit of $.12 As an example, if the high of the Day (Bar) is $17.66, you enter a Buy stop at $17.76, with a limit of $17.88

Swing Trading Using the 3 Bar Reversals.

3 Bar Reversals So, if I see a bullish weekly 3 bar reversal, I ideally want to see the weekly chart in an uptrend. Likewise, if I am going short using a bearish 3 bar reversal, I want to see the weekly chart with the 50 ema < 200 ema or least the 21 ema < 50 ema.

3 Bar Reversals Price Expectations with Bullish 3 Bar Reversals … The expectation is that the high of the bar will be violated before the low. I also expect the price bar to offer support. Oftentimes, the support will hold for weeks. (Just the opposite for Bearish 3 Bar Reversals)

3 Bar Reversals - Comments The more closes a price bar reverses, the stronger that bar is. If the price bar has more Volume than the prior bar, it usually adds to the credibility of the bar. I also prefer that the price bar closes > 75% of the range of the bar.

Chart Examples … First example, HANS picked up on 3 bar reversal scan on March 25, 2011 Second example ONNN picked up on 3 bar reversal scan on April 21, 2011

ONNN Example … Picked up on 4/21/11 Scan

Reading Support & Resistance Key concept is that support once violated becomes resistance. And once resistance is violated, it becomes support.

Reading Support & Resistance Areas of support & resistance on A chart include the following: Open Gaps Prior highs / lows Exponential Moving Averages Significant price bars … Dojis, Long range bars, 3 bar reversals Areas of heavy volume

How to Read the VIX Numbers The VIX can offer a way to time Short term reversals in The major equity markets. The VIX runs opposite the S & P, DOW and NASD. VIX Tops = Market Bottom VIX Bottom = Market Top

VIX Readings If the VIX is moving up  S & P moves Down If the VIX is moving down  S & P moves Up

The VIX is for short term timing. For Longer Term timing, I use the % of stocks above their 200 day moving average, and Bullish %

% of stocks above their 200 day MA is $NYA200R Extreme reading over 80% usually suggests the market is overbought.

Bullish Sentiment - $BPSPX Extreme readings over 80% indicate that the participants are overly bullish and it is time for caution.

Short term Timing with the VIX I look for a clear violation or resistance at a VIX support/ resistance number. If a price level is violated, I Look for a retest of the number and trade accordingly.

The key VIX S & R numbers taken from the 5/23/11 weekly update are: “ Those lines are 18.75, 17.20, and A key resistance line on the VIX on the upside at the moment is If the VIX does get through that level, then I expect further downside erosian in the major markets.”

Combine with the S & R numbers on the S & P 500 from weekly update. “As I mentioned last week, the key on the S & P 500 was to see if it could close above 1,343. It closed on Thursday at 1,343.60, just slightly above and then promptly failed. The support levels on the S & P 500 are 1,312 and then down to 1,296. “ – taken from 5/23/11 Weekly update

Let’s look at the a 60 minute chart of the VIX …

How to Create a Quick Watchlist My suggestion is to monitor … 1)Inside Buying – Go to 2) Monitor most active stocks Use yahoo during the day. (Especially stocks that run Contrary to the markets.)

Watchlist Creation 3) New 52 week highs – monitor At 4) High Volume Gainers / Losers At 5) Pre-announcements – Go to … ment.aspx?Node=B7

Thanks for watching! Speed Retirement System