In order to trade option volume alerts successfully, you must be aware of two important factors: support/resistance levels and candlestick patterns. In the high speed world of day trading, there typically isn’t time to check the option time and sales data to see if the majority of puts/calls from a spike were bought or sold. Also, it’s not always easy to determine which is the case. As such, we have adapted our approach to use a clear cut strategy that enables largely positive returns.
When receiving an option volume alert, this tells us that momentum has entered, or is continuing to enter, that specific futures market. It doesn’t matter whether the option contracts bought or sold were puts or calls. All that matters is that a significant number of options were purchased recently. This typically means that there is a large move coming in the underlying futures contract, and that we should be ready to pull the trigger when that wave of momentum materializes.
After an alert has been issued, check the 5 min chart to interpret the previous bar/candlestick. For example, if an alert comes in at 9:45 AM ET, you would need to check the bar representing 9:40-9:45. A down bar where the low and the close are very close to each other, signifies likely continued movement downward. Conversely, an up bar with high and close very close, indicates likely continued movement upward. There are numerous candlestick patterns, but you want to confirm bullish or bearish sentiment from the previous bar before continuing in your interpretation.
Once you have determined the sentiment of the previous bar, next review your nearest support/resistance levels. An up bar into resistance or a down bar into support are less likely to have follow through in the desired direction. Always keep this in mind. We use the volume profile to determine our support resistance levels, both on longer term 20d 1h charts and in the shorter term on 1d 5m charts. These SR levels should ideally be identified at the beginning of the trading day.
After confirming sentiment and that your desired direction is not impacted negatively by support or resistance, you would place your order. We recommend the following trade locations:
Place entry above the high of an up bar or below the low of a down bar.
Place entry above the high of a down bar or below the low of an up bar.
Step 4 (Optional)
We always advise using stop losses to manage your risk, as trading is a game of probabilities.
Place your stop loss at the lowest low of the last five bars.
Place your stop loss at the highest high of the last five bars.
Using these steps, you can easily trade momentum moves in the futures markets generated by #OptionVolume spikes.
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As always, all information provided is purely educational and does not construe investment advice.