Dale Whaeatley was a contractor who traveled around the country helping the telephone companies with their excess needs that they could not handle in-house. As with any type of contract work, it was inconsistent. It was difficult for him to budget his money not knowing what his income or expenses would be. Dale went looking for an alternative source of income. He attended the usual Real Estate seminars, but realised he had no real interest in becoming a landlord or managing property. Instead he turned to stocks.
Dale had played in the stock market in his 20s, but didnt understand it. He decided to educate himself on stock trading. During this process Dale read how options offered limited risk and unlimited potential for gains, a strategy that appealed to him. To learn about when to trade, he read many technical analysis books and spent over $500 a month just for quotes and charts. he also plotted many charts by hand. Years later, he discovered a company called AIQ Systems and bought two of their programs, TradingExpert and OptionExpert. Still, all Dale was doing was spending money with no return to show for it. It was not until he sat down and examined his winning and losing trades, comparing them to the charts and indicators, that he finally began to discover the value in one particular indicator, the MACD, known as the Moving Average Convergence Divergence. He knew that when one line crossed the other it meant to buy or sell, but that did not work well or consistently, both requirements for trading options, since they are wasting assets. By examining divergences in the MACD indicator, however, one could tell when a stock was ready to change direction with a great degree of reliability. He concentrated on perfecting his entry and exit strategy using this indicator, but incorporated various indicator time frames, a process Dale had never seen done before. Soon Dale's returns were improving dramatically.
Why did Dale choose options rather trade the stock itself? Options offer incredible potential that stocks can never give us. Plus chart patterns develop clearly enough to see definite direction changes that will produce returns in excess of 1,000% in hours, days, or weeks depending on the strength of the pattern relative to the price. Dale's philosophy is simple, he doesn't want to ownanything! He just want to make money to do the things he wants, when he wants. Sometimes the chart patterns looks so strong that Dale is sometimes limited by the number of contracts he can buy at one time.
The pattern of the underlying security is of primary importance in Dale's trading system. He does not use any pricing models such as the Black-Scholes pricing formula or any other valuation method. These formulas are not designed to help make a profit on options, but rather to show what happens if the underlying stock performs in a certain fashion. There is nothing that can Dale can do about the options prices. Whatever the bid and ask prices are that is what he has to pay. It's the surety in the trading startegy that is paramount.
The pattern that Dale looks for is always the same, but it could be on different time frames (hourly, daily, weekly, monthly, etc) depending on the time left until the options expiration and distance from next strike price. Whathe looks for is a divergence in the MACD indicator compared to the price of the underlying security. he then looks to buy call options when a stock tests its prior low but has a positive divergence in its MACD indicator. The opposite is true for identifying tops. He uses this pattern because after much experimenting he found it to be the most consistent and accurate.
Here are some great examples of Dale's trades. LAM Research (LRCX). Lam Research hit an initial low on February 12 and then rallied. That low was retested on March 1-5. In effect, a double-bottom pattern was forming. The key to the entry, however, was the positive divergence in the MACD indicator A similar example can be seen in Nicor Inc. (GAS), the initial low came in mid-January, the stock rallied, and then retested on March 5. Once again there was a strong positive divergence in the MACD indicator. March 45 calls were purchased on 03/07/07. Finally the topping formation of Freeport-McMoran Copper & Gold (FCX) hit level highs in April/May at the same time that its MACD indicator was falling. That was a time to buy put options. On a daily chart, this pattern does not always signify major reversals, but in the Freeport-McMoran case, the weekly chart also had a huge negative divergence. Huge downside divergences under multiple time frames is the perfect setup.The options went from $0.20 to $12. Dale made sixty times his money in just one week! More recently, in May he entered Advanced Micro Devices (AMD) and General Motors (GM) call options, and both turned into 1000% gainers in only a few days! Dale beliieves that you can avoid losing trades with his technique. A losing trade is not the fault of the charts, but rather the trader. It is really just a question of discipline and knowledge coupled with action when the correct pattern appears. If you learn the correct technique and act only when everything is in place, you will always make a profit.
Determining which option Dale purchases depends on several factors, such as the stocks price, how far that is from the strike price, how many days are left until expiration, the cost of the option, and the options liquidity. dale almost always buy out-of-the-money options that expire in the near term month if the pattern appears on the daily chart. If it appears on a weekly or monthly time frame, he buys out-of-the-money options that could expire several months away.Dale's selling technique is simple when the momentum turns back against the move using the MACD divergence line, he exits the position.
Dale educates others on the technique in his Options Hunter weekly webinar service, information can be found at http://www.aiqsystems.com/optionshunter.htm He began teaching others when some investors asked him to explain his trading style and ever since then he has been talking about his discovery to everyone he meets. Dale has taught people around the world, some that he met on airplanes in the seat next to him and in other casual situations. He enjoys showing people extraordinary possibilities. Dale wishes he had someone to teach him in the beginning how to avoid the pain of investing but, as the saying goes, The harder the conflict, the more glorious the triumph. What we achieve too easily, we esteem too lightly. Dale learned that the separation between rich and poor is because rich people continue to do the things that produced their wealth and poor people continue to do the things that created their poverty. Dale believes it is a choice each of us makes and he wants to help others to make the same choices and to feel empowered in their own lives. There was a time when he worried about everyone catching on if he told them what he did, but after teaching so many people over the years exactly what he does, he is still amazed that only a small number of people actually apply the strategy. Dale has found it has more to do with individuals and their preconceived ideas about returns and investing, along with the fear within themselves that actually prevents them from being successful. People all need to look hard at their beliefs before expecting to become successful options traders, or succeeding with anything in life.
Dale'sOptions Hunter service began rather slowly because people came from different backgrounds and experience levels. Some were beginners and others experienced. As time went by, however, those who stayed have found many charts without Dale having to hold their hands. One week, as the market was beginning to change its momentum, many subscribers chimed in with about 15 stocks that all had the correct look and the next week some of the options were jumping over 1,000%. There have been traders in the group buy calls on QLGC, HD, CAL, AIG, MM, VLO and the homebuilders and mortgage related companies (even with all of the bad news out about subprime lending, etc).
Information on The Options Hunter Service can be found at http://www.aiqsystems.com/optionshunter.htm
Steve Hill is President of AIQ Systems. http://www.aiq.com For the past 14 years he has been involved in all aspects of AIQ Systems, from support and sales to programming and education. Steve is a frequent speaker at events in the U.S. and Europe, talking on subjects as diverse as Portfolio Simulation Techniques, Advanced Chart Pattern Analysis and Trading System Design. Steve is an avid martial artist and cross-country skier. currently holding the rank of Shodan (first degree black belt) in Shito-Ryu Okinawan Karate. He also serves on the board of the Ralph Parks Portfolio Trust.
AIQ Systems is a world leader in intelligent trading software. Their web site can be found at http://www.aiqsystems.com