Last week, we introduced new options trading tools, using the TradeStops Stock State Indicator (SSI) Yellow Zone as the trigger. Here is how you can find those trades.
Let’s review the rules of the Yellow Zone Option trading.
- A trade is triggered when the stock first moves down into the SSI Yellow Zone.
- A bullish option trade is chosen (long call, short put, bullish spreads, etc.).
- The trade will last exactly 8 months.
- The trade will be made with an expiration of at least 10 months out.
- If the underlying stock hits its SSI Stop signal, do not exit the trade.
Our testing, which goes back to 1996 and includes over 10,000 trades, shows this strategy was profitable 65% of the time with an average profit of 1.1–1.5 Volatility Quotient (VQ) units.
The first thing we’re going to want to do is to set up a Watchlist in order to find the stocks we want to trade. We’ll set this up the same way we’ve set up other watch lists.
We’ll now add a few stocks to this portfolio to begin building our watch list. But we’re going to do things a little differently this time. Rather than automatically set the positions up with a complete SSI stop, we’re going to set them up for “No Alerts” and then add a special SSI Alert later.
Here’s how we’re going to add Apple Inc (AAPL) to the Watch portfolio. Remember, we don’t need to add actual shares to the Watch portfolios.
Here are a few stocks that we’ve set up in our Yellow Zone Options Watch portfolio. Over the next several weeks, we can expand this list to include maybe 50 stocks or even more that have good option liquidity.
We purposely didn’t add any alerts as we want to customize the alerts for this portfolio to only notify us when a stock moves into the Yellow Zone. Here’s how we do that.
Go to the Alert tab that is next to the Position tab and click on “Add Alert.” That will take us to the Position Card and we can add the alert from here. You’ll notice that we’re setting up an SSI alert, but we’re customizing it so that we’ll be notified only when a stock hits the Yellow Zone. That’s the trigger we’re waiting for to make the Yellow Zone option trades.
For this customization, we’re unchecking the SSI Green Zone and SSI Red Zone boxes. Now, we’ll get only the Yellow Zone alerts that we want to receive.
Each of these special alerts has to be added manually unless you set up a template with this alert to make bulk editing of the alerts possible. If you have any questions about setting up these templates, our Help Center can walk you through the process.
Next week, we’ll show you how to manage these trades using TradeStops.
Here’s hoping that you can take yellow and turn it into green.
Tom Meyer
Education Director, TradeStops
