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In the following example, we have based our  QQQQ options trades on S&P 500 index volume indicators and on advance / decline indicators. Using the principles outlined below, you may wish to trade options on the SPDRs (SPY), ^SPX, DIAMONDS Trust, Series 1 (DIA), as well as on other underlies that generally tend to move in concert with the S&P 500 index. It is also conceivable that an analysis similar to the one shown below could be used to trade options based on the NASDAQ 100, Russell 2000, and other indexes.

For this “Best trade”, A trade (Buy Calls) is opened
in order to close it later with profit if the index moves in our favor.

Below you will find a Table of Trade Motivations and a chart showing the trades, including detailed trade calculations.

Chart 1:	Nasdaq 100 Volume Surges - March, 2006.
Chart 2:	S&P 500 Advance/Decline Issues Ratio - March, 2006.

In Table 1 - a 'Table of Trade Motivators' - we show the motivating factors that led us to take the above trades.

Table 1: Table of Trade Motivators

Below we list in detail the actual trades made, along with the netted returns achieved.

Table 2: Details of the trades

Fast Answers:

How should be invested in options?

If you trade options, we recommend you invest only a small portion of your assets - an amount that will fit your personal trading needs and risk tolerance. In our opinion, that amount should be about 10% of your total portfolio; it should never exceed 30%.

At the same time, we do not recommend that you commit more than 30% of your options portfolio to a single trade. If the market doesn't move in your favor, but indicators remain strong, you may choose to invest another 30% of your options portfolio on a second signal, and perhaps even on a third signal. By proceeding in this way, each time you enter the market in a better position, and usually the profit from the last trade will more than compensate for the loss from your first  trade.

If one of your trades has not yet been terminated (by the time you report it as a “Best Trade), should I try to follow it?

We do not wish to suggest that you should mimic these actual trades, even if they are still open. Only follow an open trade if you are aware of the risks involved and if you have access to real-time intraday volume and advance/decline charts (you can get these from www.MarketVolume.com).  For logistical reasons, we cannot always send our newsletters out exactly at the moment we open or close a specific trade. Even if we could, it might be too late, since the market can react strongly to intraday volume surges or negative/positive sentiment readings in our A/D indicators.

3/10/2006
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