NSP-31

The Path to Trading Success Starts Here.

Trading Options with NSP-31

by Nirvana Club Member Ted McNeill
February 3, 2007

I wish to share with my fellow club members and NSP owners how I trade options.  Utilizing OmniTrader as my technical and prospecting tool, coupled with a good brokerage website of internet tools, my trading has been successful.

I have found that NSP-31 strategies perform remarkably well with Options.  Here are the option trades I made using Signals from NSP-31 since receiving the System in early November.

NSP-31 Trade Chart

During this period, I made an actual 644% return on these trades. 

I have traded options for years.  Although I trade both stocks and options, I prefer options over the outright purchase of stock shares for three (3) reasons: 

  1. Limited risk -  I can control the movement in a stock for a fraction of the cost of purchasing the stock. Plus I can lose no more money than my option purchase.
  2. Leverage - I can achieve percentage gains from successful options investments that are 5, 10, and even 20 times the gains achieved by stock trades.
  3. Profit in both market directions - By buying put options, I can achieve leveraged profits with limited dollar risk when a stock declines in price.

The price of an option is calculated by six different variables: the current price of the stock, the strike price, the time to expiration, the implied volatility, the current risk-free interest rate, and the dividend yield.  These variables are dynamic, making it difficult to determine which one variable might affect an option's price.

I took a 6 month options course with a pit trader and have compiled a lot of information.  Spreads are too time consuming with small rewards.  I made some money but nothing like just buying calls.  Occasionally, I purchase puts. Puts are dangerous in the hands of inexperienced traders.  All strategies have a risk graph as below.

Risk Graph

I have included a sample Risk Graph Table at the end of this write-up.

I prefer the Long Call because it offers a leveraged alternative to taking an outright position in the stock. Additionally, the long call has an unlimited profit potential and the risk is only the premium paid for the option.  In by opinion, spreads are too time consuming with smaller rewards. Occasionally, I do purchase and sell puts.

The Importance of Volatility

Importance of Volatility for short term options traders like myself:

I look for the average volatility of the stock to be greater than implied volatility. This was the case in the successful NSP-31 trades posted.  Also the prices of the calls were inexpensive in terms of volatility.  The importance of Volatility for short term options traders like myself cannot be over stressed.  Do your homework and study this concept before trading options.

Option Trading Checklist

1. Symbol XYZ
Sources:
√  Internet
√  Broker
√  Newspapers
√  OmniTrader NSP-31

2. Is it Optionable?
Does the stock have options?

3. Examine the Stock Price
√  Is the stock price above $30
√  Higher price stock = less percentage movement of the stock to profit
√  Stock Price +/- 25% or Greater. The greater the percentage move up or down the better. A 50% mover would be better than a 25% mover
√  Find Out Why

√  Pending Dividend?
√  When is the earnings reported

4. Is it trending?
√  Check Chart
√  Trending for 6 wks or more
√  Is the current move within the trend?

5. Check Volume Spikes
√  Look for overall stable or consistent volume
√  Avoid stock with major volume spikes or dips
√  300,000 Shares on Average minimum
√  Block Trades

√  Institutional Trades

           
6. Moving Averages
Is the 5 day shorter term moving average above and moving away from the 20 day longer term moving average?

7. Call / Put Price Discrepancy
√  ATM Call more than ATM Put?
√  Price discrepancy indicates market sentiment

8. Check News
√  No news is good news
√  Some news is O.K. if it supports the trend
√  Also check pending news

9. Trade Strategy
√  3:1 Reward to Risk ratio
√  Exit Strategy
√  Follow the exit rules of the strategy selected
√  Exception: If you are happy with the profit, exit early. If its moving against you, exit early.

Using NSP-31 for Options Trading

As I mentioned earlier, I have found the NSP-31 strategies perform remarkably well with Options.  Since the NSP system is looking for a momentum move on volatility it is the ideal strategy for an option trader. Remember we are looking for a stock that is trending (consequence of momentum) and that the volatility is low among other criteria.

As I trade, I look for an option price that is not too expensive.  Many times, like Google, the options are outrageous because the implied volatility is high.  I also want to know the open interest.  Volatility and Delta must be considered.  I want to know all the things about the symbol, exactly like purchasing stock; i.e. news, dividend date, and earnings announcement date.

Once a candidate is selected, find an option that meets your criteria. My preferred plan is to hold the option only 4-5 trading days buying the first or second full month out, at the money or one count deeper in the money.  Look for options which have not had the volatility built in yet, this option will be better priced.   If you want to be conservative buy the option four or more months out and two to three counts deeper in the money.  Lately, I have traded the latter successfully, based on a tip from another Nirvana Club member.

Additional Tools

I frequently use two Nirvana plug-ins (available separately from the company) as entry and exit indicators:  Pring’s “KST Basic Strategy” and the “iTLB Reversal Strategy”.  Both strategies provide excellent short-term trading signals.  I would also advise anyone looking at trading options to also look at the Guppy “GMMA” Strategy (another Nirvana plug-in) as it excels at spotting trends. 

Remember, trend is your best friend.  Before initiating an option trade, check the current trend of your stock as well as the overall trend of the market. Because option trades are time limited make sure the trend is working for you.

Tip for Club Members:  If you are a Nirvana Club Member, I suggest looking at the  ARM3_R2_Stocks Strategy on the S&P 100 list to locate short to medium term breakout candidates. 

Summary

I look for opportunities to come to me rather than look for them. Hopefully, others will have the same great returns as I in their trading.  You have a great software package in OmniTrader to examine the technicals.  You also have the best strategy, NSP-31, to harvest profitable symbols.

Finding a good brokerage house with a web site full of educational and trade tools for options should be one of your priorities if you wish to trade options.  Another source for trade information is the NSP and/or Nirvana Club membership forum.  Personally I would suggest both.  

Regards,

Ted McNeill
Nirvana Club Member since 2005.

Option Strategy Quick Reference Guide