Options Trading Based on Momentum

Tom Gentile

Posted in

By: Tom Gentile
March 22nd, 2024

5 mins read

When I say the markets don’t like uncertainty, I am talking about situations like we had this week with the anticipated announcement of what the decision the Fed will make regarding interest rates.

About 10-20 trading days prior to the announcement there was this ‘will they cut in March or will we have to wait until June’ talk. There were even talks of whether or not we would get three rate cuts this year or could the Fed get away with 2 or less.

With Uncertainty, Eventually comes Volatility

The markets, going in to the announcement this week traded sideways. But, with Chairman Powell saying amongst other things, they were still anticipating 3 cuts this year the markets ran higher the rest of that day, Wednesday, March 20, 2024).

In fact, the markets as referenced by me using the SPY, broke out of the consolidation that predated the announcement and made yet another all-time closing high.

Figure 1: SPY Breakout to All-Time High
Figure 1: SPY Breakout to All-Time High

Volatility can sometimes be described and at times is a situation where the security moves up and down more often than not over a period of days and in a wild up and down fashion.

Sometimes volatility isn’t a situation where the security oscillates back and forth, but the move it does make on whatever news or event for that security investors and traders were looking for can be a volatile, impactful move, higher or lower. Like the move and all-time high made on the 20th of March 2024.

5 Types of Options Analysis

There are 5 types of analysis I use to execute my options trading. They are based on

  1. Statistical data,
  2. Seasonal Patterns
  3. Volatility based info
  4. Contrarian Analysis

The one I want to focus a bit on now is 5-Momentum based

Momentum is trading a security that is already in a presumed trend higher or lower. One is not trying to catch the security as it is first breaking out higher or lower nor is it trying to catch it off a support or resistance.

The move is already under way, and one is trying to jump on that train as it continues its course keeping an eye out for when that trend or momentum seems to be coming to and end to then close out the trade to capture any profits one may have.

Moving Average Crossover Can be Used for Momentum Trading

A means to identify momentum in place and or continuing is with the use of Simple Moving Averages, (SMA’s).

My best friend, business partner and trading partner, George Fontanills – God rest his soul – was famous for a lot of things, but a staple in his technical analysis was the use of the 10-30 SMA Crossover analysis he used.

This is where he used the 10- and 30-period SMA’s.

The concept is to entertain going long a security or find a bullish option trade opportunity when the shorter -term 10-period SMA would cross above the 30-period SMA.

It could be used trading a bearish situation where the shorter-term 10-period SMA crossed below the longer-term 30-period SMA.

And when I say period as in a 10-period SMA, that period can be whatever time frame one wishes to use, whether it be a day bar, week bar, a 1-hour bar. It can be used, and he deemed it works in all periods.

Adding in One More Piece of Data to the Crossover System

One thing I added years later and what I currently use and teach to this day is to look at not only those two SMA periods (the 10- and the 30- period), but to also then look at where they are in comparison to the 200-period SMA.

I not only want the bullish cross to happen, but for those two period SMA’s to also be higher/above the 200-period SMA. And in the case of a bearish setup, I want both the 10- and 30-period SMA’s to lower/under the 200-period SMA. 

Figure 2: SPY Riding 10-Day SMA
Figure 2: SPY Riding 10-Day SMA

In Figure 2 above one can see SPY is already in a strong upward trend. The 10-day SMA is want I am looking at. I see the SPY has been hugging that 10-Day SMA for awhile and if there comes a day the 10-day SMA crosses below the 30-day SMA I may start to believe the momentum is at least stalling.

Figure 3: Latest 10-30-Day Bullish SMA Crossover SPY
Figure 3: Latest 10-30-Day Bullish SMA Crossover SPY

I thought I’d show you what we look for when it comes to considering a long position on the security or a bullish option trade when the bullish crossover appears. Figure 3.

It is not shown, but both these SMA periods are above the 200-day SMA.

Again, if and when the 10-day crosses below the 30-day is when I will start thinking of closing the trade.

As for entering a bearish trade that may take some time as I will want both the 10-30-day SMA to be below the 200-day SMA.

One my trading instructors contributed a Mastery Course for a number of years for me. It is called the Trend Mastery.

In it this strategy is discussed; from how to have your charts set to see the pattern, to entry and exit rules and how to filter out candidates to where you only want to trade options on those you have the most certain expectations.

To get ahold of the latest batch of recordings for the latest/most recent run of the Mastery Series click here: https://learning.tomstradingroom.com/

Tom Gentile
C1P: Chief 1-Percenter

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