SATS2 With PUT Option Strategy

Additional to trading the stock with SATS2, we can generate more profit using PUT options during correction phases. From the SATS2 buying point we use trendlines and sup-port lines. Breaking the trendline or support line is the trigger to buy PUT contracts. Clos-ing the PUT contracts is triggered when the last trendline or support line is broken. We look preferably for slightly out-of-the-money puts with a time to expiration close to 6 months. Detailed basic information about support and resistance lines and about trendlines can be found in part 4, the basic technical analysis part of this manual.

 

Example: Advanced Micro Devices Inc (AMD)

From the first buy of the stock in March 2003 till the last one in November 2008, AMD generates using SATS2 a profit of $1,436 with a starting capital of $1,000. Avoiding losing trades as demonstrated in part II, gives a much bigger profit of $15,166.

Let’s find out if we can add still more profit using additional PUT options.

For the easy of calculation we keep a separate account for the puts. We start with $1,000 and use a maximum buying amount of 50% of the available capital. To be as realistic as possible, we will limit the number of option contracts to a maximum value of $5,000.

Put prices used are calculated with the Black & Scholes model. The applied used volatility is 40% and the used interest rate is 5%. The blue down arrows on the charts are PUT contracts buying points. The blue EXIT sign is the PUT option selling point.

Search the Internet

 

Figure 3.1: Buying the first PUT contracts on 04/24/2003.

From the SATS2 buying signal of the stock in March 2003 (figure 3.1), we can draw uptrend lines that are accelerating two times. The last one is broken by the closing price on 04/24/2003. This is the signal to buy some PUT contracts.

04/24/2003: stock price $7.80; strike price $7.5; expiration date October 2003; PUT unit price $0.62; buying 8 contracts for a total cost of 8*$0.62*100 = -$496

We use a stop level at $8.2 at the resistance line.

In figure 3.2 you can see how price makes a down move with each time lower to equal tops. The very sharp fall at the beginning makes it impossible to draw an acceptable downtrend line. Resistance is however doing a good job and after some time we can start drawing a downtrend line. From the beginning of June the trendline starts accelerating the downward move. When this steeper downtrend line is broken on July 2 it is time to close the PUT contracts.

07/02/2003: stock price $6.75; PUT unit price $0.98;
closing 8 contracts 8*$0.98*100=$784.
Profit/loss = $784-$496 (buying cost) = $288.
Available cash = $1,288.

Figure 3.2: Closing the PUT contracts on July 2, 2003.

We now have to wait for a SATS2 entry signal before we can start a new uptrend line.

 

SATS2 PUT Strategy NEXT -Part 1 -Part 2 -Part 3 -Part 4

STOCATA Stocks Technical Analysis HOME