We’re going to discuss one of the more difficult aspects of sticking with the trend through a simple “tradism” that starts with some advice from Charles Dow.
But here’s me paraphrasing it…
“Respect the trend that was.”
In other words…
When I take a look at the overall movement in the UNH, and the XLV ETF that the UNH is heavily weighted in, one of the things that I know is while it’s been gradual… this market has been steadily moving higher. We can see that there have been mostly pockets of green grab candles which suggests bullishness.
So when the market pulls back, knowing that the tendency has been for a little bit more volatile but still a continuation to the upside, what do we do? We look for opportunities to get long in that ETF. So not only do I want to see what UNH is doing, but I also want to see what XLV is doing. Now XLV has been moving in a similar way to UNH — it’s been just gradually meandering higher. That bodes well for setting up a potential trade opportunity.
So let’s talk about something we did in UNH, which is a way to take advantage of what’s been going on in the broader ETF.
Playing UNH:
What we did is we looked for the 340 call when UNH traded down to 338 to 329. 338 to 329 is the zone that we created for this. That area was easily reached on the upper side with the pull back that we saw. So since that happened, we looked for the 340 calls.
Now for a couple of things that are very important to know about the timing of WHEN we buy calls (like the 340 calls mentioned above)…
The idea is to be able to find an opportunity with bearish momentum as the market goes down into the range. For this example remember that the top of the range is 338.50 to 333.10. On this particular day that we’re referring to, which was the 25th of November, we traded down to 329.14. So that 329.14 actually hit our conservative trigger as well. What’s that mean. Gang? This trade lower hit all 3 layers of our triggers.
The concept of a trigger is one that’s sometimes unique to options trading. So I want to explain why it’s more or less the backbone of almost all my trading. An options trade isn’t valid until a particular price on the underlying trades. So in this case, I’m willing to buy the Jan 15 UNH 340 calls once a specific price trades.
That’s a unique but very effective way to make sure you don’t overpay when trading options.
How’s This Effective?
Let me give you an idea, so on the 25th what did we see in terms of the cost of the option? If you took a look at the 340 calls that day, your typical price was going to be between $10 – $11 per option (it could have also been a little less, but there’s the spectrum we’ll work with). But fast forward, take a look at the 340 calls for Jan 15, they’re $19 – $20.
So you see by making sure we take advantage of bearish momentum, already we have a 2X winner in UNH. How? Well did the market move a lot? No… but we took advantage of momentum, Gang.
That’s why going forward, think about momentum, think about trigger areas, think about where you sell and buy, and you’ll find that your effectiveness will absolutely increase.
