We are make a simplified method which can provide a quick and dirty method, on very active stocks you can actually purchase much closer to "At-the-money" for better value because of increased volatility, but it takes additional analysis in order to do so. The closer an option is to expiration the less you will pay in premium which means that to get the best price we want to be holding an option that is at least one month away than the longest time we anticipate being in the position.
Remember, we are not going to hold till expiration anyway. Learn leverage with options for consistent income – We may sell it after ...3 minutes to 3 hours to 3 days … dollar rotation is the key as these are only short term traded options, with no appreciable loss of premium, but benefit from the gain of the stock as reflected in the price of the option. Please do not be greedy or over-leveraged. Beware of options.
All buy calls/puts must be at least 10 contracts and must also be ATM. Far OTM calls are speculative and 95% chance of loss. You need to be working with underlying symbols that have large open interest and a price range of $20-$50. Your pocket must be deep enough to trade more than 1 or 2 contracts at a time.
So what are we talking about here is day trading breakouts, there are only 2 to 3 hours per trading session, where you can make money easily, quickly, without much effort on an intraday basis. That’s right. The optimum times to day trade breakouts is between 9:50 am and 10:50 am and 2:00 pm – 3:15 pm. This offers a stock enough time to cultivate the range while providing you with enough facts to ascertain which direction it will breakout. Below are some basic rules that will help you identify winning breakout trades during these volatile time periods:
Only trade stocks that have a minimum of 2 dollar price range from the previous days high or low. Remember, the goal here is to day trade breakouts. The greater the recent trading range, the greater your odds are of being in a stock that has room to trend.
Avoid stocks that are up or down more than 5%.
We do watch futures but we really trade the market direction(s) of the day as a short-term trader. Buckle up! dollar up – stocks down or the dollar down – stocks up - hands down on the open!!
If playing the long side, is the Dow, S&P 500, and NASDAQ all in strong up trends? They must be. If playing the short side, the major indices need to be in a strong downtrend. Don't try swim against the current.
The price needs to show a prejudice towards one side or the other. The uptrend signifies a solid bias towards the high and raises the probability of a follow-through if the high is broken.
Volume ought to be high. One thing to make note of with any breakout trading play is the volume should increase on the breakout. The trades within the tape must be increasing in size and quantity as the level is broken. This suggests that the trade possesses the momentum to carry on to your goals without falling back into the opening range.
Exit Technique
To exit, I like to set a hard target of say 1.5% or even more and then take profit. Bulls make money, bears make money, but pigs get slaughtered. You shouldn't be a pig. Keep your profit target small and when you hit it, get out. Look out for the price as it approaches whole numbers. Many stock traders take profits at these crucial psychological levels. These sort of whole numbers and half numbers are $20, $21, and/or $20.50, $21.50 and so forth.
DELTA
SHORT TERM: Where we are looking at holding a position perhaps 90 days or less on average. Because the exit date has already been established for most of these trades you know how long you will be in this trade.
DELTA is the most important factor we analyze in our method of options selection. Delta is the return you can expect for a dollar of change in the underlying stock AT THE CURRENT PRICE RANGE FOR THE STOCK. As the stock increases in price its Delta will also increase. If we pick an option with a Delta of .6, we can expect that the option will go up about 60 cents for the next 1 dollar rise in price of the stock. After that price increase, the Delta of the option would be greater than .6 and if the stock continues to increase in price at some point the option will have a Delta of 1.0 which means it effectively increases on a dollar for dollar basis in parity with the stock.
We want to pick a Delta to match the length of time we believe the option will be in play to allow it to grow. Here are the ranges we look at:
SHORT TERM (30 to 90 days): Delta 50 to 80
VERY SHORT TERM (less than 30 days): Delta of 80 to 90
In Summary
The Opening Range Breakout is one of the most straightforward day trading set-ups to understand. The first hour of the trading day is considered the most volatile. Bears and bulls are battling against each other in the stock market, wanting to show you who is will be the superior group throughout the day. This volatility results in a price-range you are able to trade from. Like all breakout trading set-ups, it is a terrific set-up as it creates a very low risk entry. If there isn't any follow-through on the opening range breakout, you must exit the trade quickly. If you are day trading breakouts, you need things to happen quickly and precisely. You do not have time to wait around for the stock to act appropriately. Remember, there are times you can day trade breakouts throughout the entire day, but more times than others you will either breakeven, or make little money. Also, day trading breakouts should be easy money, not a fight, it is always easier to go with the trend.
