ers. The problem is that you could be successful at itfor months, picking up modest income over and over again, and then whooomph,one big loss will wipe out years worth of gains. It’s not worth it.Each leg of the trade has uncapped downside. If the stock starts going ballistic ineither direction, then your position is precarious to say the least. If the stock remainsrangebound, then we’ll make a limited profit. But it’s not enough for me to getexcited. If the stock gaps in either direction, we’re history!As such, this module will be largely academic (I hope) to your practical tradingexperience; however, it’s worth studying so you can compare it to the other rangebound strategies in this chapter. One thing to note is that you would never trade thisstrategy right before a news event like an earnings report. You certainly wouldn’twant any nasty surprises to be lurking around the corner.
Sell ATM put
Sell ATM call
Short Straddle
Steps to Trading a Short Straddle1. Sell ATM strike puts, preferably with one month or less to expiration.2. Sell ATM strike calls with the same expiration.Steps In■
Try to ensure that the trend is rangebound and identify clear areas ofsupport and resistance.
■
Try to ensure that no news is coming out soon for the stock.
Steps Out■
Manage your position according to the rules defined in your Trading Plan.
■
Close the losing side by buying back the relevant option if the stock breakssupport or resistance.
■
Buy back both options if the position is profitable but you think news mayemerge about the underlying stock.
5.1.2 ContextOutlook■
With Short Straddles, your outlook is direction neutral—you are looking forno movement in the stock.
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Rationale■
To execute a direction-neutral income strategy for a net credit while expectinga future decline in volatility. Ideally you are looking for a scenario where theimmediate Implied Volatility has been high, giving you above average optionspremiums, but where you anticipate the stock to consolidate (become lessvolatile) and remain rangebound for the duration of your trade.
Net Position■
This is a net credit trade because you have sold calls and puts.
■
Your maximum risk on the trade itself is unlimited, whereas your maximumreward is limited to the net credit you receive for selling the calls and puts.
Effect of Time Decay■
Time decay is helpful to short straddles. Because you are short in options, andbecause you are exposed to unlimited downside, you want to be exposed tothis position for as little time as possible.
Appropriate Time Period to Trade■
One month or less.
Selecting the Stock■
Choose from stocks with adequate liquidity, preferably over 500,000 AverageDaily Volume (ADV).
■
Try to ensure that the trend is rangebound and identify clear areas of supportand resistance.
■
Try to ensure that no news is coming out soon for the stock.
Selecting the Options■
Choose options with adequate liquidity; open interest should be at least 100,preferably 500.
■
Strike—ATM for the put and call.
■
Expiration—Preferably one month or less. Use the same expiration for both legs.
5.1.3 Risk Profile■
Maximum Risk
[Uncapped]
■
Maximum Reward
[Net credit received]
■
Breakeven Down
[Strike  net credit]
■
Breakeven Up
[Strike  net credit]
Sideways Strategies
5.1.4 GreeksKey:ExpirationToday – 1 monthTime(t) – 5 daysRisk ProfileIf the stock priceremains around thestrike price, we makeour maximum profit.If it moves explosivelyin either direction, wemake uncappedlosses.DeltaDelta (speed) is at itsgreatest when theposition is losingmoney in eitherdirection.
GammaGamma (acceleration)peaks inverselyaround the strikeprice, illustrating theposition’s turningpoint and the fastestrate of change.
Risk Profile
Theta
ThetaTime decay is mosthelpful when theposition is profitable.
Delta
Vega
VegaVolatility is unhelpfulwhen the position isprofitable and viceversa.
Gamma
Rho
RhoHigher interest ratesare generally unhelpful to the positionwhen the stock risesand vice versa.
5.1.5 Advantages and DisadvantagesAdvantages■
Profit from a rangebound stock.
■
Comparatively high-yielding income strategy.
Disadvantages■
Uncapped risk if the stock moves in either direction.
■
Capped reward.
■
Almost certain exercise at expiration.
■
Bid/Ask Spread can adversely affect the quality of the trade.
■
High-risk strategy; not for novices or intermediates.
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5.1.6 Exiting the TradeExiting the Position■
With this strategy, you can simply unravel the spread by buying back yourcalls and puts.
Mitigating a Loss■
Buy back your sold options.
■
Advanced traders may consider buying further OTM calls and puts on eitherside in order to create a Long Iron Butterfly, which is more conservative.
5.1.7 ExampleABCD is trading at $25.37 on May 17, 2004.Sell the June 2004 25 strike put for $1.20.Sell the June 2004 25 strike call for $1.50.Net Credit
Premiums sold$1.20  $1.50  $2.70
Maximum Risk
Uncapped
Maximum Reward
Net credit$2.70
Breakeven Down
Strike  net credit$25.00  $2.70  $22.30
Breakeven Up
Strike  net credit$25.00  $2.70  $27.70
The major problem with this strategy is the uncapped risk position. Any surpriseconcerning the stock could leave you with a serious problem, and frankly, it simplyisn’t worth the risk unless you have a lot of experience.
5.2 Short StrangleProficiency
Direction
Volatility
Asset Legs
Max Risk
Max Reward
Strategy Type
Uncapped
Capped
Income
Advanced
Neutral
Low
■ Short Put■ Short Call
5.2.1 DescriptionThe Short Strangle is a simple adjustment to the Short Straddle to improve the probability of a profitable trade by widening the strikes and therefore the breakeven
Sideways Strategies
points. Instead of selling ATM options, we sell OTM calls and puts, which means alower net credit but typically wider breakeven points.The Short Strangle is precisely the opposite of a (Long) Strangle. We short OTMputs and calls with a short time to expiration (one month or less) in order to pick upincome. Because we’re short options, time decay works for us, so we only selectshort-term expiration dates. Also we’re exposed to potentially unlimited risk, whichis another reason for making this a short-term strategy. Again, it’s not one I’d recommend to inexperienced traders. It’s worth reemphasizing that the problem is thatyou could be successful at it for months, picking up modest income over and overagain, and then wham, one big loss will wipe out years worth of gains.Each leg of the trade has uncapped downside. If the stock starts going ballistic ineither direction, then your position is precarious to say the least. If the stock remainsrangebound, then we’ll make a limited profit. But it’s not enough for me to getexcited. If the stock gaps in either direction, we’re history!You would never trade this strategy right before a news event like an earnings report.You certainly wouldn’t want any nasty surprises to be lurking around the corner.
Sell OTM put
Sell OTM call
Short Strangle
Steps to Trading a Short Strangle1. Sell OTM (lower) strike puts, preferably with one month or less to expiration.2. Sell OTM (higher) strike calls with the same expiration.Steps In■
Try to ensure that the trend is rangebound and identify clear areas of support and resistance.
■
Try to ensure that no news is coming out soon for the stock.
Steps Out■
Manage your position according to the rules defined in your Trading Plan.
■
Close the losing side by buying back the relevant option if the stock breakssupport or resistance.
■
Buy back both options if the position is profitable but you think news mayemerge about the underlying stock.
5.2.2 ContextOutlook■
With Short Strangles, your outlook is direction neutral—you are looking forno movement in the stock.
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Rationale■
To execute a direction-neutral income strategy for a net credit while expectinga future decline in volatility. Ideally you are looking for a scenario where theimmediate Implied Volatility has been high, giving you above average optionspremiums, but where you anticipate the stock to consolidate (become lessvolatile) and remain rangebound for the duration of your trade.
Net Position■
This is a net credit trade because you have sold calls and puts.
■
Your maximum risk on the trade itself is unlimited, whereas your maximumreward is limited to the net credit you receive for selling the calls and puts.
Effect of Time Decay■
Time decay is helpful to Short Strangles. Because you are short in options, andbecause you are exposed to unlimited downside, you want to be exposed tothis position for as little time as possible.
Appropriate Time Period to Trade■
One month or less.
Selecting the Stock■
Choose from stocks with adequate liquidity, preferably over 500,000 AverageDaily Volume (ADV).
■
Try to ensure that the trend is rangebound and identify clear areas of supportand resistance.
■
Try to ensure that no news is coming out soon for the stock.
Selecting the Options■
Choose options with adequate liquidity; open interest should be at least 100,preferably 500.
■
Put Strike—OTM—below the current stock price.
■
Call Strike—OTM—above the current stock price.
■
Expiration—Preferably one month or less. Use the same expiration for both legs.
5.2.3 Risk Profile■
Maximum Risk
■
Maximum Reward [Net credit received]
■
Breakeven Down
[Lower strike  net credit]
■
Breakeven Up
[Higher strike  net credit]
[Uncapped]
Sideways Strategies
5.2.4 GreeksKey:ExpirationToday – 1 monthTime(t) – 5 daysRisk ProfileIf the stock priceremains around thestrike price, we makeour maximum profit.If it moves explosivelyin either direction, wemake uncappedlosses.DeltaDelta (speed) is at itsgreatest when theposition is losingmoney in eitherdirection.
GammaGamma (acceleration)peaks inverselybetween the strikeprices, and falls tozero when the position is deep OTM oneither side.
Risk Profile
Theta
ThetaTime decay is mosthelpful when theposition is profitable.
Delta
Vega
VegaVolatility is unhelpfulwhen the position isprofitable and viceversa.
Gamma
Rho
RhoHigher interest ratesare generally unhelpful to the positionwhen the stock risesand vice versa.
5.2.5 Advantages and DisadvantagesAdvantages■
Profit from a rangebound stock.
■
Comparatively high-yielding income strategy.
Disadvantages■
Uncapped risk if the stock moves in either direction.
■
Capped reward.
■
Bid/Ask Spread can adversely affect the quality of the trade.
■
High-risk strategy; not for novices or intermediates.
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5.2.6 Exiting the TradeExiting the Position■
With this strategy, you can simply unravel the spread by buying back yourcalls and puts.
Mitigating a Loss■
Buy back your sold options.
■
Advanced traders may consider buying further OTM calls and puts on eitherside in order to create a Long Iron Condor, which is more conservative.
5.2.7 ExampleABCD is trading at $25.37 on May 17, 2004.Sell the June 2004 $22.50 strike put for $0.35.Sell the June 2004 $27.50 strike call for $0.65.Net Credit
Premiums sold$0.35  $0.65  $1.00
Maximum Risk
Uncapped
Maximum Reward
Net credit$1.00
Breakeven Down
Lower strike  net credit$22.50  $1.00  $21.50
Breakeven Up
Higher strike  net credit$27.50  $1.00  $28.50
Compare this to the previous Short Straddle. We’ve sacrificed some net credit formore safety in terms of our wider breakeven points on both sides.As with the Short Straddle, the major problem with this strategy is the uncappedrisk position. Any surprise concerning the stock could leave you with a serious problem, and frankly, it simply isn’t worth the risk.
5.3 Short GutsProficiency
Direction
Volatility
Asset Legs
Max Risk
Max Reward
Strategy Type
Uncapped
Capped
Income
Expert
Neutral
Low
■ Short Call■ Short Put
Sideways Strategies
5.3.1 DescriptionThe Short Guts is a simple adjustment to the Short Strangle that increases the netcredit. Instead of selling OTM options, we sell ITM calls and puts, which creates ahigher net credit. As with Short Straddles and Short Strangles, the risk we run witha Short Guts is uncapped on either side.The Short Guts is precisely the opposite of a (Long) Guts. We short ITM puts andcalls with a short time to expiration (one month or less) in order to pick up income.Because we’re short options, time decay works for us, so we only select short-termexpiration dates. Also we’re exposed to potentially unlimited risk, which is anotherreason for making this a short-term strategy. It’s not one I’d recommend. The additional risk you face with a Short Guts is that each of the strikes is ITM, and thereforeyou could be exercised early, so stay away from this strategy!Each leg of the trade has uncapped downside. If the stock starts going ballistic ineither direction, then your position is precarious to say the least. If the stock remainsrangebound, then we’ll make a limited profit.You would never trade this strategy right before a news event like an earnings report.You certainly wouldn’t want any nasty surprises to be lurking around the corner.
Sell ITM call
Sell ITM put
Short Guts
Steps to Trading a Short Guts1. Sell ITM (lower) strike calls, preferably with one month or less to expiration.2. Sell ITM (higher) strike puts with the same expiration.Steps In■
Try to ensure that the trend is rangebound and identify clear areas ofsupport and resistance.
■
Try to ensure that no news is coming out soon for the stock.
Steps Out■
Manage your position according to the rules defined in your Trading Plan.
■
Close the losing side by buying back the relevant option if the stock breakssupport or resistance.
■
Buy back both options if the position is profitable but you think news mayemerge about the underlying stock.
5.3.2 ContextOutlook■
With Short Guts, your outlook is direction neutralyou are looking for nomovement in the stock.
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Rationale■
To execute a direction-neutral income strategy for a net credit while expectinga future decline in volatility. Ideally you are looking for a scenario where theimmediate Implied Volatility has been high, giving you above average optionspremiums, but where you anticipate the stock to consolidate (become lessvolatile) and remain rangebound for the duration of your trade.
■
Because the options are ITM, a Short Guts can raise a significant net credit intoyour account. This makes a Short Guts a plausible hedging strategy againstsomething like a long Straddle or long Strangle, for example.
Net Position■
This is a net credit trade because you have sold calls and puts.
■
Your maximum risk on the trade itself is unlimited, whereas your maximumreward is limited to the net credit you receive for selling the calls and puts lessthe difference in strike prices.
Effect of Time Decay■
Time decay is helpful to a Short Guts. Because you are short in options, andbecause you are exposed to unlimited downside, you want to be exposed tothis position for as little time as possible.
Appropriate Time Period to Trade■
One month or less.
Selecting the Stock■
Choose from stocks with adequate liquidity, preferably over 500,000 AverageDaily Volume (ADV).
■
Try to ensure that the trend is rangebound and identify clear areas of supportand resistance.
■
Try to ensure that no news is coming out soon for the stock.
Selecting the Options■
Choose options with adequate liquidity; open interest should be at least 100,preferably 500.
■
Call Strike—ITM—below the current stock price.
■
Put Strike—ITM—above the current stock price.
■
Expiration—Preferably one month or less. Use the same expiration for both legs.
Sideways Strategies
5.3.3 Risk Profile■
Maximum Risk
[Uncapped]
■
Maximum Reward
[Net credit received  difference in strikes]
■
Breakeven Down
[Lower strike  net credit  difference in strikes]
■
Breakeven Up
[Higher strike  net credit  difference in strikes]
5.3.4 GreeksKey:ExpirationToday – 1 monthTime(t) – 5 daysRisk ProfileIf the stock priceremains around thestrike price, we makeour maximum profit.If it moves explosivelyin either direction, wemake uncappedlosses.DeltaDelta (speed) is at itsgreatest when theposition is losingmoney in eitherdirection.
GammaGamma (acceleration)peaks inverselybetween the strikeprices and falls tozero when the position is loss makingon either side.
Risk Profile
Theta
ThetaTime decay is mosthelpful when theposition is profitable.
Delta
Vega
VegaVolatility is unhelpfulwhen the position isprofitable and viceversa.
Gamma
Rho
RhoHigher interest ratesare generally unhelpful to the positionwhen the stock risesand vice versa.
5.3.5 Advantages and DisadvantagesAdvantages■
Profit from a rangebound stock.
■
Comparatively high-yielding income strategy.
■
High premiums because both options are ITM.
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Disadvantages■
Uncapped risk if the stock moves in either direction.
■
Capped reward.
■
Certain exercise at expiration whatever the movement of the stock.
■
Bid/Ask Spread can adversely affect the quality of the trade.
■
High-risk strategy; not for novices or intermediates.
5.3.6 Exiting the TradeExiting the Position■
With this strategy, you can simply unravel the spread by buying back yourcalls and puts.
Mitigating a Loss■
Buy back your sold options.
5.3.7 ExampleABCD is trading at $25.37 on May 17, 2004.Sell the June 2004 $22.50 strike call for $3.30.Sell the June 2004 $27.50 strike put for $2.80.Net Credit
Premiums sold$3.30  $2.80  $6.10
Maximum Risk
Uncapped
Maximum Reward
Net credit  difference in strikes$6.10  $5.00  $1.10
Breakeven Down
Lower strike  net credit  difference in strikes$22.50  $6.10  $5.00  $21.40
Breakeven Up
Higher strike  net credit  difference in strikes$27.50  $6.10  $5.00  $28.60
5.4 Long Call ButterflyProficiency
Direction Volatility Asset Legs
Max Risk Max Reward Strategy Type!
Intermediate Neutral
Low
■ Long Call■ Two Short Calls■ Long Call
Capped
Capped
Capital Gain
Sideways Strategies
5.4.1 DescriptionThe Long Call Butterfly is another rangebound strategy and is the opposite of aShort Call Butterfly, which is a volatility strategy. Long butterflies are quite popularbecause they offer a good risk/reward ratio, together with low cost. The longoptions at the outside strikes ensure that the risk is capped on both sides, and this isa much more conservative strategy than the Short Straddle.The Long Call Butterfly involves a low strike long call, two ATM short calls, and anOTM long call. The resulting is profitable in the event of rangebound action by thestock. Although the risk/reward ratio is attractive, the problem is that the maximumreward is restricted to the scenario where the stock is at the middle strike at expiration.
Buy lowerstrike call
Sell middlestrike call
Sell middlestrike call
Buy higherstrike call
Long CallButterfly
Steps to Trading a Long Call Butterfly1. Buy one lower strike (ITM) call.2. Sell two middle strike (ATM) calls.3. Buy one higher strike (OTM) call.■
All options share the same expiration date for this strategy.
■
For this strategy, you must use all calls.
■
Remember that there should be equal distance between each strike price.The maximum reward occurs if the stock is at the middle strike at expiration.
Steps In■
Try to ensure that the trend is rangebound and identify clear areas of support and resistance.
■
Try to ensure that no news is coming out soon for the stock.
Steps Out■
Manage your position according to the rules defined in your Trading Plan.
■
If the stock veers outside your stop loss areas above or below the stockprice, then unravel the entire position.
■
You can unravel the position just before expiration—remember to includeall the commissions in your calculations.
5.4.2 ContextOutlook■
With long butterflies, your profile is direction neutral—you expect very littlemovement in the stock price.
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Rationale■
With long butterflies, you are looking to execute a potentially high-yieldingtrade at very low cost, where your maximum profits occur if the stock is at themiddle strike price at expiration.
■
You are anticipating very low volatility in the stock price.
Net Position■
This is a net debit trade, although the net cost is typically low.
■
Your maximum risk is the net debit of the bought and sold options. Your maximum reward is the difference between adjacent strike prices less the net debit.(Remember that the upper and lower strike prices are equidistant to the middle strike price).
Effect of Time Decay■
Time decay is helpful to this position when it is profitable and harmful whenthe position is unprofitable. When you enter the trade, typically the stock pricewill be in the profitable area of the risk profile, so from that perspective, timedecay harms the position.
Appropriate Time Period to Trade■
One month or less.
Selecting the Stock■
Choose from stocks with adequate liquidity, preferably over 500,000 AverageDaily Volume (ADV).
■
Try to ensure that the trend is rangebound and identify clear areas of supportand resistance.
■
Select a stock price range you feel comfortable with. Some traders look toavoid stocks under $20.00, claiming the need for adequate wingspan betweenthe breakeven points for the best chance of success. Ultimately it’s more important that the stock remains rangebound.
Selecting the Options■
Choose options with adequate liquidity; open interest should be at least 100,preferably 500.
■
Lower Strike—Below the current stock price.
■
Middle Strike—As close to ATM (or where you think the stock will be at expiration) as possible.
Sideways Strategies■
Higher Strike—The same distance above the middle strike as the lower isbelow it; use online tools to find the optimum yields and breakeven points atand before expiration.
■
Expiration—Preferably one month or less, but there is a trade-off between timeand profit potential. Use the same expiration for all legs.
5.4.3 Risk Profile■
Maximum Risk
[Net debit paid]
■
Maximum Reward
[Difference between adjacent strikes  net debit]
■
Breakeven Down
[Lower strike  net debit]
■
Breakeven Up
[Higher strike  net debit]
5.4.4 GreeksKey:ExpirationToday – 3 monthsTime(t) – 1 monthRisk ProfileAs the stock priceremains rangebound,the position is profitable, with maximumreward occurring atthe middle strikeprice.
Risk Profile
Theta
ThetaTime decay is helpfulto the position whenit is profitable andunhelpful when it isunprofitable.
DeltaDelta (speed) is at itsgreatest around theouter strikes and iszero around themiddle strike.
Delta
Vega
VegaVolatility is generallyunhelpful to the position unless it thestock moves outsidethe outer strikes.
Gamma
Rho
RhoHigher interest ratesare generally helpfulto the position whenthe stock price islower and vice versa.
GammaGamma (acceleration)peaks inverselyaround the middlestrike, highlightingthe position’s majorturning point andmiddle Delta neutralpoint, and peaks positively around theoutside strikes.
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5.4.5 Advantages and DisadvantagesAdvantages■
Profit from a rangebound stock for very little cost.
■
Capped and low risk.
■
Comparatively high risk/reward ratio if the stock remains rangebound.
Disadvantages■
The higher profit potential comes with a narrow range between the wingstrikes.
■
The higher profit potential only comes nearer expiration.
■
Bid/Ask Spread can adversely affect the quality of the trade.
5.4.6 Exiting the TradeExiting the Position■
With this strategy, you can simply unravel the spread by buying back theoptions you sold and selling the options you bought in the first place.
■
Advanced traders may leg up and down or only partially unravel thespread as the underlying asset fluctuates up and down. In this way, thetrader will be taking smaller incremental profits before the expiration ofthe trade.
Mitigating a Loss■
Unravel the trade as described previously.
■
Advanced traders may choose to only partially unravel the spread leg-by-legand create alternative risk profiles.
5.4.7 ExampleABCD is trading at $50.00 on May 17, 2004.Buy the June 2004 45 strike call for $6.12.Sell two June 2004 50 strike calls at $3.07.Buy the June 2004 55 strike call for $1.30.
Sideways Strategies
Net Debit
Premiums bought  premiums sold$6.12  $1.30  $6.14  $1.28
Maximum Risk
Net debit$1.28
Maximum Reward
Difference in adjacent strikes  net debit$5.00  $1.28  $3.72
Breakeven Down
Lower strike  net debit$45.00  $1.28  $46.28
Breakeven Up
Higher strike  net debit$55.00  $1.28  $53.72
Max ROI
290.63% if the stock is priced at $50.00 at expiration.
5.5 Long Put ButterflyProficiency
Direction Volatility
Asset Legs
Max Risk Max Reward Strategy Type!
Intermediate Neutral
Low
■ Long Put
Capped
Capped
Capital Gain
■ Two Short Puts■ Long Put
5.5.1 DescriptionThe Long Put Butterfly is another rangebound strategy and is the opposite of a ShortPut Butterfly, which is a volatility strategy. Long butterflies are quite popularbecause they offer a good risk/reward ratio, together with low cost. The longoptions at the outside strikes ensure that the risk is capped on both sides, and this isa much more conservative strategy than the Short Straddle.The Long Put Butterfly involves a low strike long put, two ATM short puts, andan ITM long put. The resulting positionis profitable in the event of rangeboundaction by the stock. Although the risk/reward ratio is attractive, the problem is thatthe maximum reward is restricted to the scenario where the stock is at the middlestrike at expiration.
Buy lowerstrike put
Sell middlestrike put
Sell middlestrike put
Buy higherstrike put
Long PutButterfly
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Steps to Trading a Long Put Butterfly1. Buy one lower strike (OTM) put.2. Sell two middle strike (ATM) puts.3. Buy one higher strike (ITM) put.■
All options share the same expiration date for this strategy.
■
For this strategy, you must use all puts.
■
Remember that there should be equal distance between each strike price.The maximum reward occurs if the stock is at the middle strike atexpiration.
Steps In■
Try to ensure that the trend is rangebound and identify clear areas of support and resistance.
■
Try to ensure that no news is coming out soon for the stock.
Steps Out■
Manage your position according to the rules defined in your Trading Plan.
■
If the stock veers outside your stop loss areas above or below the stockprice, then unravel the entire position.
■
You can unravel the position just before expiration—remember to includeall the commissions in your calculations.
5.5.2 ContextOutlook■
With long butterflies, your profile is direction neutral—you expect very littlemovement in the stock price.
Rationale■
With long butterflies, you are looking to execute a potentially high-yieldingtrade at very low cost, where your maximum profits occur if the stock finishesat the middle strike price at expiration.
■
You are anticipating very low volatility in the stock price.
Net Position■
This is a net debit trade, although the net cost is typically low.
■
Your maximum risk is the net debit of the bought and sold options. Your maximum reward is the difference between adjacent strike prices less the net debit.
Sideways Strategies
(Remember that the upper and lower strike prices are equidistant to the middle strike price.)
Effect of Time Decay■
Time decay is helpful to this position when it is profitable and harmful whenthe position is unprofitable. When you enter the trade, typically the stock pricewill be in the profitable area of the risk profile, so from that perspective, timedecay harms the position.
Appropriate Time Period to Trade■
One month or less.
Selecting the Stock■
Choose from stocks with adequate liquidity, preferably over 500,000 AverageDaily Volume (ADV).
■
Try to ensure that the trend is rangebound and identify clear areas of supportand resistance.
■
Select a stock price range you feel comfortable with. Some traders look toavoid stocks under $20.00, claiming the need for adequate wingspan betweenthe breakeven points for the best chance of success. Ultimately it’s