Algunas reflexiones finales

The most obvious and immediate advantage to trading multiple option contracts is the savings in brokerage fees. For example, Charles Schwab

& Company (http://www.schwab.com) charges $9.95 per trade plus 75 cents per contract for online options trades. So a single option costs

$10.70; two options cost $11.45; and 10 options traded at the same time cost $17.45, or less than $1.75 per contract.

The savings are only the first and most obvious type of economy.

Multiple contracts also add great flexibility to your swing trading strat-egy. Multiple contract strategies may include:

1. Partial profit-taking, partial hold. You can add great flexibility to your swing trading strategy when you employ multiple contracts.

For example, you may respond to a buy setup by going long on four calls for a stock. After an exceptionally strong uptrend, you can close out the position at a profit. Or, as an alternative, if you expect the momentum to carry the stock even higher, you can close out two of the calls, covering your cost and producing a profitable result; and hold onto the remaining two calls. For ex-ample, the 60-day chart for Diebold (DBD) provides an example of momentum in both directions, as shown in Figure 9.1

S w i n g Tr a d i n g w i t h M u l t i p l e - O p t i o n C o n t r a c t s 167

The movement in this stock showed momentum in both direc-tions, the first three in downtrends and the final in an uptrend.

In this situation, a swing trade using multiple contracts could have produced additional profits due to the momentum trend.

You could, for example, have reacted to the sell setup at the very beginning of the chart by buying four puts. The downtrend ap-peared to end at note 1. However, the downtrend was quite strong and in only five days produced a five-point fall in the stock’s price. If it were possible to cover your investment and pro-duce a profit by selling two of the puts and continuing to hold the remaining two, you could have gained an additional point of profit by observing the sell setup at note 2, or the other at point

You can tie in profits with multiple options by closing some po-sitions and keeping others open. When trend turns to momen-tum, this creates much greater profits.

Key Point

Candlestickchart.com

1

2 45.45

Jun Jul Aug

02 09 16 23 30 07 14 21 28 04

44.55

43.65

42.75

41.85

40.95

40.05

39.15

38.25

37.35

1.0 M 0.8 M 0.6 M 0.4 M 0.2 M

3 4

© 2006 The RediNews Network

FIGURE 9.1 60-Day Chart with Momentum in Both Directions: Diebold Source: Candlestickchart.com.

3. You may have also noted the buy setup at the extremely nar-row spinning top signaling the bottom of the downtrend. At that point the remaining two puts could have been closed out and even replaced with the purchase of four calls (in response to the strong buy signal). While the sell signal occurred nine days later, the uptrend was strong; so you could have sold two of the calls and held the remaining calls to ride out the upward momentum in the stock.

This example provides a clear view of how you can modify your swing trading strategy with a multiple option approach. At those times when the trend is especially strong (either upward or downward), it makes sense first to cover your investment and produce a small profit; and second to continue holding through the momentum to produce additional profits.

2. Partial profit-taking, partial exercise. Some swing traders decide that they want to buy and keep shares of a particular stock. One form of diversification that makes a lot of sense is to identify hold stocks and invest in them; and also swing trade on the short-term price changes in the same stock. The traditional method for buy-ing stocks is acceptable for this, of course. However, so many op-portunities are lost because investors hesitate. Options can solve this problem as part of a swing trading strategy.

For example, you may identify a limited number of stocks that you believe would provide worthwhile long-term investments as well as profitable swing trade candidates. On a buy signal, you purchase four calls and the strong moves upward strongly. At this point, many swing traders face a dilemma. If you swing trade us-ing stocks, do you sell shares after the uptrend and take profits?

S w i n g Tr a d i n g w i t h M u l t i p l e - O p t i o n C o n t r a c t s 169

For anyone combining swing trading with a long-term hold strategy, options enable you to pursue both strategies in the same trades. This gives you far greater flexibility than a com-plete separation of strategies.

Key Point

Or if the stock will continue to rise, should you just hold onto those shares? In many respects, the goals of long-term investing and swing trading contradict one another. However, using calls you can accomplish the goals of both strategies: profiting from short-term upswings and creating discount basis in stocks.

This is the result of selling two of the calls to take profits at the top of the upswing; and exercising the remaining two calls to purchase 200 shares below current market value. At this point, if you also believe that a sell setup has occurred in the stock’s price, you can also purchase puts as part of your on-going swing trad-ing strategy. That creates two strategic advantages. First is the swing trade setup; second is the downside protection it provides for your long-term stock investment. Every loss in the stock will be offset by gains in the puts. If you buy two puts and hold 200 shares, the offset is equal. If you buy four puts per 200 shares, your swing trading profit on a downtrend will be double the loss in the long stock.

A six-month chart for Anheuser-Busch (BUD) demonstrates how this works out. The chart is shown in Figure 9.2.

Candlestickchart.com

1

2

Jun Jul Aug

02 09 16 23 30 07 14 21 28 04

48.60 49.00

48.20

47.40 47.80

47.00

46.60

46.20

45.80

45.40

45.00

44.60

5.6 M 7.0 M

4.2 M 2.8 M 1.4 M

3 4

© 2006 The RediNews Network

FIGURE 9.2 Swing Trading Profit on Downtrend: Anheuser-Busch Source: Candlestickchart.com.

At note 1, a buy setup occurs. At this point, you could purchase four calls in the stock. By point 2, you may determine that the swing trading upswing is exhausted; however, you also believe the long-term prospects for this stock make it a worthwhile buy. So you cover your investment by selling two calls and exercising the remaining two, buying 200 shares. Because a sell signal has oc-curred, you also buy four puts. The stock immediately falls nearly two points. However, your swing traded four puts would have in-creased by twice the amount of the loss in the 200 shares. The puts could be closed out profitably at any time in the “uncertainty”

range of trading that dominates the middle section of the chart.

A similar pattern emerged at point 3. Here a clear buy setup oc-curred, so you may have purchased four calls at about the 45 level. Note the price gap taking place three days later on a strong uptrend. That uptrend continued through eight days in total. At point 4, a sell setup appeared. The stock peaked at nearly $49 per share. You could sell all of the calls and take a nice swing trading profit; or you could sell two of the calls and cover your position, and exercise the remaining two. Exercise would get you 200 shares at $45 per share at a point where the stock was trading be-tween $48 and $49.

3. Incremental additions to momentum situations. Referring once again to Figure 9.2, another swing trading strategy involves the use of multiple contracts when a trend shows momentum. For example, the price gap occurring right after note 3 shows a strong upward trend. If you had picked up calls at the buy setup at note 3, you could buy additional calls at any time during the eight-day uptrend, ultimately closing the position upon seeing the sell setup at note 4.

S w i n g Tr a d i n g w i t h M u l t i p l e - O p t i o n C o n t r a c t s 171

Buying long-position stock or increasing short-position stock is expensive and high-risk. But with options, it is an affordable and often viable strategy to increase open positions based on price trends.

Key Point

This example demonstrates that swing trading does not have to consist of a single opening position and a single closing position.

You can modify your positions at any time. Using stock on either long or short side, this can become quite expensive; but option brokerage fees are so low that you have much greater flexibility to modify positions. Figure 9.2 shows a good example of how incre-mental additions can be made to augment your swing trading profits.