By Sell Puts
Chart is of the VIX, intra day April 30.
The past two weeks we have had Financial's, specifically Goldman in play. Goldman has pending civil charges as well as a criminal probe, this is never good for a stock but is always good for a trader. Not good for a buy and hold long investor, but anyone buying Goldman up here probably doesn't quite know what they are doing and might need a lesson in over bought/oversold and tape reading. I guess this is where i come in, but that is another post. The focus of this post is being ready for anything and being in your seat and able to trade with bullets ready to fire at a moments notice.
The biggest moves do in fact happen when you least expect them, the best current example i have for you is DNDN. FDA approval is a phrase i listen for, when i hear it i get my hard hat on and focus. DNDN, or as traders call it DIN DIN, i knew she was a loose goose because of her past price action. Same with GS, she is a loose goes when her egg gets cooked. When the egg is frying the markets are the most liquid in the options, thus you can get better prices because traders are scrambling. Scrambling traders = more liquidity especially in a down market.
A few of you were asking about how one can gauge the direction of the underlying by watching what the options are doing. The best was to gauge this is when trading in a very liquid market like i described above, you need to have a ATM call and put up so you can watch what is being bid and offered in both lines simultaneously. In DNDN for instance i was scalping the 55 calls and the 45 puts, when the calls became offered large size, meaning 200 contracts or more all of a sudden, take a look at the puts and see if they have a corresponding bid. If they do watch the underlying because you can bet it will probably be moving down at that point. Even if the move is small, there are traders out there who scalp 200-500 lots for dimes and nickels, the traders who do this are very keyed into the micro movements of a stock. When DNDN looked like it was going to move up, the 45 puts became offered very quickly with large size, and the was a corresponding bid in the calls. The stock moved higher as the bids came in, you almost must realize when traders buy calls they might be shorting stock as a hedge, or possibly buying puts so everything is correlated so nothing is perfectly cut and dry.
Experience sitting in front of a screen watching options trade is the best way to hone your scalping skills, though if you are looking to scalp the underlying you can use options as a foretelling mechanism, you just must realize there are so many different ways to skin a cat. Market feel comes from experience combined with scenario recognition.
