Spread Trading: An Introduction to Trading Options in Nine Simple Steps

CHAPTER 29

Reading the Tea Leaves (2): Stock Trends

“To do this,” he continued, “you need to have a sense of the trends of those specific stocks. We mentioned earlier five trends you ought to have in mind: slightly bearish, bearish, stagnant, slightly bullish, and bullish. Look at the chart in Figure 29.1, for example—again, just pay attention to the overall look of the chart as indicated by the arrows.

“The first set of arrows identifies a steep bullish trend for this stock. The second set shows a more normal bullish movement, and the third set of arrows shows a bearish trend. And in the chart in Figure 29.2 we can see a stagnant trend (the first arrows) and also a slight trend—here, in a bearish direction (the second arrows).”

“So these charts give you a picture of what the trends look like, more or less,” said Nate. “Now, why do you think this is important? Why does it help to be able to determine trends?”

“Well, because different option instruments optimize different trends,” answered Lon.

“Okay ... but again, in plain English.”

“All right: different option instruments take advantage of different trends. We simply want to use whatever option instrument will make money for us, given the trend we’re in. A long call, for instance, is good for bullish trends. As the stock goes up in value, the long call normally goes up, too. I can then sell that long call for a profit. The long call therefore makes the most of—or optimizes—this bullish trend.”

FIGURE 29.1 Bullish and Bearish ...