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OPTIONS ANALYSIS


Charting QQQQ Options

03/03/05 03:39:00 PM
by David Penn

Can an option chart help traders get a jump on a move in the underlying stock?

Security:   QQQQ
Position:   N/A

I made the case for analyzing price charts of actual options prices in a recent Working-Money.com article ("Charting Options," January 27, 2005). Drawing from the observations of options expert Price Headley in his book BIG TRENDS IN TRADING, I agreed that charting actual options prices is a valid strategy for those interested in trading options.

In some instances, charts of the options can alert a trader to an opportunity a day before the underlying stock reveals its move. This was the case for me recently with Placer Dome (PDG). Using the moving average convergence/divergence histogram (MACDH)/stochastic/50-day exponential moving average (EMA) context I've mentioned before, I saw a sell point develop in Placer Dome on February 24. However, when I went to look at put options on Placer Dome, I noticed that the March 17.50 put had created (using the same technical context) a buy point a day earlier, on February 23.

Figure 1: QQQQ. The March 37 puts in the QQQQ bounce courtesy of a positive stochastic divergence and an upside reversal in the MACDH.
Graphic provided by: Prophet Financial, Inc.
 
The difference a day made? Buying the option on February 25 (after the underlying's sell point on February 24) would have cost at least 55 cents. The same option on February 24 (a day after the put option's buy point on February 23) would have cost 30 cents.

The scenario with the QQQQ does not seem quite as fortuitous. The developing buy point in the options chart shown in Figure 1 corresponds to the day with a developing sell point in the stock chart. This is an intraday look, so it is possible that the buy and sell points I'm referring to may disappear if the market moves significantly lower (or higher, respectively). But if the markets close approximately as they appear right now, then the opportunity will be in place.

The opportunity in the QQQQ options is apparent in the March 37 puts (QQQ-OK). Specifically, I'm talking about a positive stochastic divergence between the mid-February lows and the lows early in March. This divergence looks as if it will be triggered by the upside reversal in the MACDH on March 3 (again, if current conditions hold through the close). A confirmation (see my Working-Money.com article, "Confirming Divergences," from December 22) for this positive divergence has already occurred--specifically when QQQ-OK rallied above the 40-45 cent level (shortly after the chart in Figure 1 was captured).



David Penn

Technical Writer for Technical Analysis of STOCKS & COMMODITIES magazine, Working-Money.com, and Traders.com Advantage.

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