Quote from Spydertrader:
I have no doubt many will find your insights on Hershey Options helpful. As a result, feel free to post here any details you feel might provide assistance, and thank you in advance for your contribution.
- Spydertrader
Thanks, I had a feeling you'd say that.
Basically, the modifications I've been making are quite simple. First, for the initial stocktables.com sort I set the "Options" setting to "only" and perform the sort as normal. Usually I have to loosen the RS and EPS settings a bit to accomodate for all the stocks that don't have options. Interestingly though, I usually don't have to go below 80/80 for the settings.
The real trick is getting over the bid/ask. Most of these options are only traded by MM's, and they are not going to take your limit orders, as they don't need to make the trade. Most of the time you're looking at a 20 - 30 cent spread, so once I recieve the short signal (with the method you've outlined in the past) I wait for the stock to move in the direction I expect it to go, and try to catch the last couple of offers at that price. If you can time it well, the bid/ask will move up to bracket your entry price, so if the trade turns against you, you can hit the bid and get out for (usually) half of the spread as a loss. Because I consider this trade higher risk than normal, I don't usually wait for a stop to be hit, or anything like that. If it doesn't go my way immediately, I get out.
The other thing I watch for is the general trend. For example, after looking at a chart of the SP500 last night, I came to the conclusion that a continuation down was more likely than a reversal for today. I know that the Hershey method doesn't usually care about market direction, but I feel in this case (because we're techincally shorting) any statistical advantage will help.
Once I'm in I look for simple S/R to give a guide of where to get out. Basically, on a 30 min chart if the candle plows through the support I watch very carefully for confirmation. If the next candle is small, lower, or bumps up against the resistance, I stay in. If it moves back above it, or up hard I get out. If it drifts up, but the general trend is still down, I'll stay in and watch how it hits it again. If it bounces off it a second time, I'm out. I'm pretty sure this is all standard S/R stuff for most of you.
Here is a chart of NTRI to show the trade from today. Only one contract, as I'm still very much in the testing phase of this plan.
Also, it's important to note the strength of your belief in the trend. I took this short even though the Stoch was above 20 (ideally we'd like it to be below 20, but it was at 26 when I took it). My rationalization was the general weakness in the market, and gap from a couple of weeks back that never filled.
I've attached a chart with some notes on it. Here are the notes:
1. Trade signalled right in the midde of that tiny candle. I waited for the price to drop through the resistence of where it bounced after the gap from a while ago, and once it did I initiated the trade. It's important to note that the ask price that I hit was no different from when the trade was signalled to when it blew through that support. But once it went through that support you have to be very quick to catch the MM moving.
2. I was watching it very closely at this point, but the support there didn't really stop it at all. Once the candle closed that went through my line and the next one opened up below it I breathed a sigh of relief and left it alone for a bit.
3. Again I was watching very closely here, and for good reason. Once the second candle started above that support, I was heading for the door. Also, it was close to the end of the day, and I really didn't want to hold this overnight anyway.
It's also important to note that those S/R lines were drawn right at the start of the day, and should be pretty obvious to most people here. I'm sure you know I'm not doing anything fancy there at all....
Again, I'd like to stress this is a strategy in the VERY early stages, and one trade does not confirm it's validity. I have lost on quite a few of these so far, and I'm not convinced that the bid/ask spread is going to be overcome by the win/loss rate we can achieve.
Please feel free to ask for clarification or point out the folly of my ways!
Thanks,
- The New Guy
