33 lines
2.2 KiB
Plaintext
33 lines
2.2 KiB
Plaintext
Keys to Success
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No matter which trade is more suitable to Kathleen’s risk tolerance, the
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overall concept is the same: profit from little directional movement. Before
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Kathleen found a stock on which to trade her spread, she will have sifted
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through myriad stocks to find those that she expects to trade in a range. She
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has a few tools in her trading toolbox to help her find good butterfly and
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condor candidates.
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First, Kathleen can use technical analysis as a guide. This is a rather
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straightforward litmus test: does the stock chart show a trending, volatile
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stock or a flat, nonvolatile stock? For the condor, a quick glance at the past
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few months will reveal whether the stock traded between $65 and $75. If it
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did, it might be a good iron condor candidate. Although this very simplistic
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approach is often enough for many traders, those who like lots of graphs
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and numbers can use their favorite analyses to confirm that the stock is
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trading in a range. Drawing trendlines can help traders to visualize the
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channel in which a stock has been trading. Knowing support and resistance
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is also beneficial. The average directional movement index (ADX) or
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moving average converging/diverging (MACD) indicator can help to show
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if there is a trend present. If there is, the stock may not be a good candidate.
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Second, Kathleen can use fundamentals. Kathleen wants stocks with
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nothing on their agendas. She wants to avoid stocks that have pending
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events that could cause their share price to move too much. Events to avoid
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are earnings releases and other major announcements that could have an
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impact on the stock price. For example, a drug stock that has been trading
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in a range because it is awaiting Food and Drug Administration (FDA)
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approval, which is expected to occur over the next month, is not a good
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candidate for this sort of trade.
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The last thing to consider is whether the numbers make sense. Kathleen’s
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iron condor risks 4.35 to make 0.65. Whether this sounds like a good trade
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depends on Kathleen’s risk tolerance and the general environment of UPS,
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the industry, and the market as a whole. In some environments, the
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0.65/4.35 payout-to-risk ratio makes a lot of sense. For other people, other
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stocks, and other environments, it doesn’t. |