Last week, we showed you how to set up a watch list to find potential Yellow Zone Option Trades. This week, we’ll show you how to monitor these trades within TradeStops. We’ll start by looking at the Berkshire Hathaway stock price.
Berkshire Hathaway (BRK.B) entered the Stock State Indicator (SSI) Yellow Zone as of market close on 4/21/2017. This is how the position shows up in our Positions and Alerts tab.
And here is a look at the 1–year historical TradeStops chart for BRK.B.
BRK.B triggered a new SSI Entry signal on 5/25/2016. This recent move into the SSI Yellow Zone is the first time it has hit the Yellow Zone in 11 months. This is a perfect candidate for our Yellow Zone Option trade.
Note: The following example is based on actual historical pricing, but the example is only used for the purpose of showing how this trade would be set up and monitored in TradeStops. It is not an actual trade, and there is no recommendation being made.
The Yellow Zone Option trade rules require that the option trade be exactly 8 months in length and the option that we choose must have at least 10 months until expiration. This limits us to one option series. We’ll use the LEAP options that expire in January, 2019.
BRK.B closed at $163.41 on 4/21/2017. We could buy either the $160 call or the $165 call. For this example, let’s use the $160 call. Here is how the trade will be entered into the TradeStops portfolio.
And here is how the position is displayed in TradeStops.
Now let’s set up the Alerts we want for both the option and the underlying stock. We’ll start with the stock. In this case, we want to use a complete SSI Alert. Just click on the symbol BRK.B, then click on the “Alerts” tab, and finally click on “Add Alert.” After this is set up, then be sure to click on the “Add Alert” button on this page.
Now we’re going to set up an alert for the option trade…Remember, the trade should be closed at the end of 8 months. This puts the exit date as 12/21/2017. Let’s set up a “Time” alert that will notify us the day before the trade is to be closed.
And here’s how the alert shows up on the “Positions and Alerts” page, under the “Alerts” tab.
The “Time” Alert is the most important alert in managing this particular option trade. The option premium itself is the entire amount of risk in the trade. That’s why we’re not setting up any additional downside or upside exit alerts. Of course, like every investment, you’ll monitor the price of the trade on an ongoing basis, but the exit strategy for the Yellow Zone Option Trades, once triggered, is based solely on the ending date.
If you have any further questions, please don’t hesitate to send an email to [email protected], and our Customer Success team will be able to help you.
Here’s hoping that you can turn yellow into green,
Education Director, TradeStops