Fibonacci Analysis for Option Traders

12/20/2011 9:48 am EST


Carolyn Boroden

Commodity Trading Advisor and Technical Analyst, Fibonacci Queen

Technician Carolyn Boroden uses Fibonacci time and price analysis to uncover compelling trade set-ups, but prefers to execute using options because of the more favorable risk profile.

The Spyders are a very popular trading vehicle, and our guest today is Carolyn Boroden to talk about how she’s been trading them lately.

So Carolyn, you talked about a trade recently you had in the Spyders; what did you do?

Actually, what I had was what I call a Fibonacci time and price set-up, and it started actually with the August 31 high where we had time and price come together as far as resistance. Once I see a set-up like that in the market, what I do is I dial it down to a lower-time-frame chart.

So the original set-up was created on a daily chart. What I did was go down to a 30-minute chart and look for a sell trigger to give me an entry on the short side. 

Let’s talk about those sell triggers. What exactly is that?

Well, the basic sell trigger is taking out a prior swing low for a short. A buy trigger would’ve been taking out a prior swing high. 

That’s the basics, but I also use some filters along with that. One of them is a moving average crossover where essentially you have an eight-period exponential moving average (EMA) cross over a 34-period EMA. 

Alright, and you have changed your strategy a little bit now, right? You look at the Spyders as the underlying, but then you’re trading options on that.

Yes, options are a lot more forgiving. I did find that it was easy to stop yourself out of futures, but if you got involved in the options, it gave you a little bit of wiggle room there, and I definitely enjoy using that.

How are you choosing your strike price on this Spyder trade and your expiration month?

Well, I don’t want to get involved in any option that’s expiring within a week. I usually like to at least see 20 or 30 days left on the option, and what I’ll do is look at the target for the trade set-up, because anytime I have a set-up, the 127.2% extension is always my target. 

So, if I look at that target, I’ll try to set up the strategy that way. For example, if I had a target at the $113 area in the Spyder Trust (SPY), I might look at the 118/113 put spread.

Okay, and then you choose that for maybe the next month out and you expect the trade to obviously happen within that time frame?

Yes, absolutely, and typically most of the trades are lasting under a week. They’re happening pretty quickly.

How often are you finding these trades? Is it every day or at least a couple a week?

Well, actually, every day after I scan about 120 charts of stocks and ETFs, I typically have about 20 different trade set-ups to look at.

Now, they might not all trigger during that day. Some of them the market will just blow through, and that will negate the set-up, but then there are typically three or four set-ups a day that I can participate in.

Are you finding a lot more opportunities with a lot more volatility these days?

Absolutely, I’m enjoying the volatility, especially with the options.

Alright, and this one was on the Spyders, but it sounds like you’ve got a basket of stocks that you’re looking at. Are they in any specific sector or the indexes?

I like to look at the popular ones, I mean, Netflix (NFLX) used to be fun on the long side, and that one isn’t anymore. Chipotle Mexican Grill (CMG) is one; Apple (AAPL) is a big one.  

I will just scan a number of different types of stocks. I like to stick to the ones that are about $100 or higher.  The lower-priced ones, you’re not going get that much out of those. 

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