One of my favorite short term plays is to short options in a stock that is breaking down intra-day. The ideal time to do these trades is the Wednesday or Thursday before expiration, as the time premium decays so quickly. This way you don’t have to be perfect on timing, just a long as momentum is waning. Here is a great example in GOOGL.
On Wednesday July 20th, The /NQ was making new highs, attempting to follow the /ES higher. As seen, on the next leg up in the /NQ, GOOGL refused to rally to a new high.
Also, GOOGL was at major resistance. Many “twitter-ers” were thinking GOOGL would fill the gap around 770. But to me, it was the prior congestion around 760 that looked more important.
As seen, GOOGL topped out around 11 AM, while the /NQ didn’t top out until 2 PM. But I am not just going on relative strength. I am also looking at the bear wedge that developed, combined with negative divergence.
For me, there are 2 places to short options in GOOGL. One is the first break of the bear wedge, which also breaks the ATR trailing stop. The second is the first rally UNDER the ATR trailing stop, that works off the oversold condition. What we are looking for is a loss of momentum, not a huge move down. The overall market is still in a big uptrend, so this is just a short term trade. It doesn’t hurt to have a mini-bear flag either.
When shorting options, there are two big keys. One, because most options expire worthless, do not become preoccupied with price. On the trades I do, I always sell the calls AFTER they have already sold off, as I want to be sure of the direction. Second, I like to sell options that are out-of-the-money, so I have a buffer, just in case I am temporarily wrong.
In GOOGL, I sold the July 765 calls. This way I am selling calls ABOVE resistance, and 6 points out-of-the-money, with only 1 and half days till expiration. As seen, I shorted the 765 calls at 1.30, when the stock failed around the 759 level.
On the first sharp move down, I covered half of my short calls at 90 cents.
When trying to ride a profit, I like to use a 5 minute chart, instead of a 2 minute, to give myself a little more of a “leash”. As seen, GOOGL was unable to get back above the ATR trailing stop. It also was showing negative divergence on a 2 minute.
The second part of my short calls I bought at 50 cents. I usually cover ALL of my trade when options hit around 50 to 60 cents, or around 30 minutes before the close. I do not want to mess with crazy antics that seem to occur too close to the closing bell.