We get a lot phone calls related to option spread trading, many of which start of with something like “what do you think about the Delta for this option?”, or something similar related to one of the other Greeks: Gamma, Theta, Vega or Rho.
But before considering the Greeks, it’s a good idea to consider the support and resistance for a stock, index or ETF.
For example, consider entering a position for Chevron (CVX) with the graph as shown below:
For those of you who don’t already know, Chevron is in the oil and gas business and was formerly known as Chevron Texaco.
As observed from the graph, Chevron’s stock price was on an upward trend for several months, then entered a trading range with support around $97 and resistance around $110, as shown by the graph below:
A support level is a price at which a stock stopped dropping for a prior drop in price and resistance level is a price at which a stock ceased increasing for a prior increase in price.
Trading spreads for stocks in a trading range can be very tricky, as the stock’s price can trend up for a while, then trend down for a while, etc. It’s very easy to get on the wrong side of a spread when a stock is in a trading range.
The price of Chevron is trading in the middle between it’s support and resistance levels, so entering either a bullish position with a bull-put credit spread or entering a bearish position with a bear-call credit spread could result in a lot of management if the position goes against you, or worse result in a loss.
Sometimes the best trade to make is not to enter a trade at all, and with Chevron’s stock price trading near the middle between its resistance and support, the best trade in this case may also be not entering a trade and waiting for a better entry point.
For example, an option investor might wait until the price of CVX dropped to the neighborhood of the lower resistance price of $97 and enter a bull-put credit spread, or wait until the price of CVX increased to around the upper resistance value of $110 and enter a bear-call credit spread.
So, a better place to start than with the Greeks when considering a stock option spread trade is to consider the stock’s support and resistance levels.
OK, time for the sales pitch, you can learn how to trade options for your own account with PowerOptions or you can follow the option trading pros at PowerOptionsApplied.com for those of you that want to track and trade the experts recommendations.