This past April we introduced you to an incredible option trading strategy that relies on finding stocks that have just entered the Stock State Indicator (SSI) Yellow Zone. Here’s another example that just popped up.
This is not a trade recommendation. It’s just illustrative of the Yellow Zone strategy and how to use it in TradeStops.
The exact rules and an example are available here and here.
Yellow Zone Option trading rules summarized
- 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 option that expires at least 10 months out.
- If the underlying stock hits its SSI Stop signal, do not exit the trade.
Yellow Zone Option trading in action
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.
Let’s revisit the first trade that we entered in April. Berkshire Hathaway (BRK.B) had just recently entered the SSI Yellow Zone. We bought the BRK.B $160 calls that expire in January 2019. We are only holding the trade through December 20 of this year and then we’ll exit the trade.
So far, it’s been a good trade. Here’s how the trade shows up in our TradeStops portfolio page. We’re up almost $10 in the option which equates to a profit of almost $1000.
Now, let’s look at Dish Network (DISH). DISH just entered the SSI Yellow Zone on August 17th.
DISH originally triggered an SSI Entry signal in June 2016 and has been in the SSI Green Zone ever since.
For this trade, according to our rules, the option itself must be at least 10 months out before expiration. In this case, as in the case for BRK.B, we are going to look at the options that expire in January 2019.
With the stock trading around $56.60, let’s buy the option with a $55 strike that is trading at an asking price of $10.00. That means we’ll pay a total of $1000 for this option.
Here’s how we enter that trade into our portfolio.
Next, we’ll add a Time alert to the position. Remember, we want to exit the trade exactly 8 months from entering the trade. That would make the exit date April 27, 2018.
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 want to monitor the price of the trade on an ongoing basis, but the exit strategy for the Yellow Zone Option Trades 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 continue to turn yellow into green,
Education Director, TradeStops