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Thursday, August 5, 2010

Anticipating Another BIG Move - A Look at Doji Candlesticks

Once again I find myself writing about another anticipated big move. Once again we Doji'd on the S&P 500 index, this one being the highest quality Doji we've seen in a long time. The S&P 500 traded in a decent range Thursday, but managed to close just 3 hundredths of a point or 0.03 points above the open. This price action means a big move is expected and likely. The bad thing about doji's is that we cannot predict which way the move will be (bullish or bearish). I am guessing the way we move depends on the unemployment number released at 8:30 AM EST Friday. I would assume, if we get a better than expected unemployment situation number Friday it will be bullish, and the opposite holds true (bearish move) if we get a worse than expected unemployment number... However crazier things have happened. The chart below is a prime example of a doji on the S&p 500 index.

Yea so, what's the big deal if we don't know which way it is going to move? This is true, however this is ideal for an option strangle or straddle position which is exactly what I was opening near the close of trade Thursday. Using the weekly options (newer and still testing) I purchased both the 113 strike call and put options on the S&P 500 SPDR (SPY). Each straddle ran me about $130 which means a move of 1% or greater in the S&P 500 index should make this position profitable. The worst case is if the SPY closes at exactly 113 (unlikely) I would lose 100% of the premium paid or $130 for each straddle I opened. If the market opens up flat I may decide to add to this straddle as the market should have a large swing based on Thursday's price action. If you would like to learn more about trading stock options and different strategies used to make money in any market check out my stock option trading ebooks here. Sphere: Related Content

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