Stock Option Investment Advice

Timing Investments when Stock Price Crosses a Moving Average

Timing your entry into a position using options is very important because time premium is continually eroding from the position.  Ideally we want to enter a bullish position just as the stock is about to move up.  It is not possible to know in advance when the move will occur, but we can get an early indicator once the move has started.  There are several tools available to help the investor pick the best time to enter a position.  One such tool, which has been recently added to the PowerOptions screener, is the crossing of a stock price above a moving average such as a 20 or 50 day moving average.  Another form of this tool is to use the crossing of the 20 day moving average over the 50 day moving average as a bullish trigger.

Investors will scan charts looking for this type of crossing to trigger a buying opportunity.  They also look for confirming volume as the crossing takes place, however, this effort can be very time consuming.  Using the PowerOptions screener an investor can scan the entire market very quickly to find a first-time stock price crossing of a moving average.  The parameter scanning form in PowerOptions to capture the moving average crossing is very simple to use:

Days Stock Cross SMA20
[Over] [1] to [1] days  {test for initial crossing}

This indicator will only show the first day crossing of the moving average, which is important for the initial entry of a position.  But it can also be used more generally to indicate that the stock continues to be in an upward and bullish trend by leaving the last number blank to indicate the stock is over the moving average for any number of days.

Days Stock Cross SMA20
[Over] [1] to [blank] days  {test for remains positive}

There may even be an occasion when we would like to know that the stock price is over the moving average for some number of days before we take action.  In this case the form might be:

Days Stock Cross SMA20
[Over] [1] to [5] days  {test for crossing for each of last 5 days}

This tool can be very powerful in finding emerging opportunities (first day crossings) that are either bullish or bearish. The table below is a list of long call options that were found using the first Days Stock Cross SMA20 screen mentioned above with the additional filters of:

Options expiring in May (2 months out in time)
Options 1 strike level In-the-Money
Open Interest on options Greater than 10 contracts
Implied Volatility Greater than 0.20
Stock Price Greater than $13 per share
Sorted by % Stock Volume

There are many other filters that could have been applied to narrow the field of selection even further, but this example demonstrates how this new search criteria on PowerOptions can be used to find trading opportunities.

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