Spread Option Plays

Session 1 – Introduction to SGB's

The initials SGB are an acronym I created for a "Solid Green Bar" on the candle charts.

I have seen them for years, but never paid much attention to them; in fact, they actually annoyed me; I even tried to figure out how to get rid of them on my Worden TC2000 charts; however, about four years ago, I started trading on the TOS platform (Think or Swim from TD Ameritrade) and they were not showing up there, so I gradually moved over to those charts, but I was still using the Worden charts at www.FreeStockCharts.com to do my daily analytics.

One day, when the markets got crushed, I was doing my research over the weekend and that is when I noticed that several of the stocks I followed all had these Solid Green Bar Candle Sticks (SGB's) the day before or a few days back; and most of them were whacked when the market turned south. After that day, I started to pay a lot more attention to them, but I was still not convinced it was anything significant. Eventually, I started to test out shorting stocks at these SGB's, and to my amazement, the accuracy was well over 70%!—enough of an edge to exploit a stock for consistent profits over time.

Now that I discovered something I believe to be significant, I called the TOS tech support line and asked if they could help me set up my charts to reflect the SGB's, and to my amazement, the gentleman I was speaking too said that was a setting already programmed in.

Well, that was very intriguing to me because the programmer's who built TOS were also Market Makers, so they must of had this setting in there for a reason right?

Here is how to turn them on in TOS:

(Their setting is "Candle Trend" in the style menu.)

In the www.FreeStockCharts.com settings you un-check the Filled Based On Up Bars checkbox.

Since I have discovered these, I have had tremendous success making short entry decision and/or lightening up my longs when the stock tends to head back to a SGB—they also work as long signals when they show up in a down trending stock—especially at major moving averages.

You will also see these on any time frame for day trading, but you have to have strict discipline if you use them.

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Session 2 – How they are formed.

The way an SGB shows up is when a stock gaps higher or opens higher than the previous day, but closes lower than the open; and is still "higher" than the previous days close.

In other words, the stock gapped up and was immediately sold back down all day, but still closed that day higher than the previous days close.

The way I interpret that is market makers or big funds are "SELLING" the gap and dumping their position; because that is the only way these seem to show up. I think it takes a lot of selling pressure to make them happen; and they tend to show up at tops of ranges or parabolic exhaustion highs. They can and will happen a few days later when a stock has topped out; and they do not always work out, so you have to be disciplined with stopping out if the stock trades back over the top of the SGB zone.

Once I see the SGB, I will immediately use the rectangle tool and draw my "SGB zone" so I know where my entry exit points can be—I extend the zone into the future so I know where that last SGB that worked out is for future entry/exit points.

Here is the actual stock and it's PCLN!

Look at all the money to be made if

you were short at that SGB!$$!

Now we have another SGB signal, and the bias is to the long side with strict stops just over a 55% retracement of the zone (when the zones are large or you can stop out of the stock when the zone is smaller) or if the stock trades past that SGB's low—you must stop out with100% discipline every time...there is another profitable SGB trade coming!

Do they really work?

The answer is YES THEY DO...better than 70% of the time in my experience.

Here is another excellent example of SGB short opportunities in the index's and how you can use them to increase your odds of trading success!

When the $DJI was trading at record decade high's, a DOJI SGB appeared; and then another larger one a few days later which gave you on opportunity of a lifetime because a couple of days later, we had the biggest one-day-drop in the history of the US Stock markets!

In fact, you had SGB signals on ALL the major indexes!

If you were laying orders on PUTS, then you had the opportunity to catch the Grand Daddy Moby Dick Lotto Trade of your career!

This is of course past history, but you have to realize this will happen again; and all you need to do now is prepare; watch for them, and lay those orders when you see them appear at tops or bottoms of ranges.

Now that I have PROVEN they are very effective, it's time to learn how to use them!

Session 3 – How to trade the SGB

I make all my shorting decisions based on the location of the SGB and/or previous SGB zones on a daily or weekly chart; however, when I am aggressively shorting, I want to see the stock in a longer term up trend topping out with candle wicks, Squeeze setups, B180's and/or other well known technical signals—in my experience, I have had the best success trading them at tops or sideways channels that failed to break out.

When you see an SGB on the daily chart, you want to draw a rectangle around them to create a zone; which gives you a reference point as time marches forward; that way, you know exactly where and when to trade around them in the stocks future price movements.

NOTE: if the body of the SGB is a large candle, then I would use the body of that candle as your zone (#1) and if there is large wicks with a small body (#2), I use the wicks as the zone.

What you are looking for is a "reversal" of a strong up-move or trend; and that is when I short those stocks—it's my "line in the sand" to trade aggressively if the stocks move down into the SGB zone.

Note: if the SGB happens after a stock has fallen into a known support area, I consider that a stopping point and/or a long entry point with my stop at the bottom of the SGB zone.

Here are several examples of how the

SGB proved to be the perfect short signal on AAPL.

As you can see, AAPL was running up nicely for close to a month; and then the SGB shows; up and the stock starts to top out a few days later. Once you see that SGB, you draw your zone, and when the stock trades below the "body" of the SGB, you SHORT it!—If you look at the bottom yellow box, there was an SGB that did work as the SHORT; and then was taken out by another SGB which gave you the "LONG" entry point—a double dip profit opportunity!

Looking at the top of this chart, you can see that once AAPL traded back down into the SGB zone, you want to aggressively SHORT it clearly failed the up-trend, and as you can see, you would have been rewarded very nicely !$$!.

In the next chart below, we can see AAPL sold off nicely, then bounced around until it put in TWO more SGB's—which resulted in another drop down until finally finding a bottom and reversing as a Bull 180 pattern. (see my training on B180's)

If you were still short on that second SGB, and did not take your profits, then you would have definitely stopped out once AAPL traded back to the next SGB zone; because once a stock has topped out with a SGB; and then retraces back with another SGB; I would NOT be shorting again at that point.

Next we get a huge gap UP; which turned into another SGB; however, this one was in the "ZONE" of the original SGB that was a successful SHORT; therefore, you would now be looking to get "LONG" plays once the stock cleared that zone with a drop dead 100% disciplined stop at the bottom of this new SGB zone...NO EXCEPTIONS!

After AAPL topped out again, we get yet another DOUBLE SGB signal and down we go into a Bull 180 setup.

Three months later, AAPL tops out again; and when it traded back into that previous successful SGB zone; you should have shorted it—look at that HUGE drop you could have benefited from...WOW!

Then we had that huge blowout black Monday; and AAPL rebounded with a SGB LONG signal. Here is where you get long now with a strict stop at the bottom or just over a 55% retracement of this current SGB zone.

Here is the entire chart with all the SGB zones extended.

As you begin to look at past and future charts, you will now see how ACCURATE the SGB is; and you will now have the perfect short signal or exit points to make the best possible trading decisions!!

Session 3 – Entry Guidelines

When you see the stock pulling back from a recent gap up; or it is topping out and you see that SGB form; then you start your shorts plays with shares.

If you wait until it gets to the bottom of a SGB zone; then you can get more aggressive with options or spreads; however, I prefer to only trade shares when day trading with SGB's because they can and do fail; and exiting shares is much easier, cheaper and less downside compared to the spreads, slippage and costs of day trading options!

However, I do like day trading with weekly options on Thursday or Friday's and have had some great success; otherwise, I prefer to trade longer expiration cycles if I do trade options off SGB's—if you do options with longer expiration, consider doing at least one contract with a minimum of a .70 delta; and the others can be OTM with the intent on selling the .70 delta with enough profit to cover your OTM costs. That way, if the SGB holds, and the stock picks up momentum to the downside, you have a free roll trade going—and the skies the limit!

Session 4 – Exits

Once you enter a SGB short, you MUST have 100% stop discipline if the stock trades back above the SGB high. I do consider the size of a topping tail/wick, and adjust my stops according to the amount of trade size and risk I am willing to endure; however, stopping out is mandatory if the SGB fails—if I do get stopped out, then I re-enter the short if the stock falls back "inside" that SGB zone.

Once you are in a profitable trade, you place a $1.00 GTC trailing stop on stocks you trade with low volatility, but open the stop up on high beta stocks so you do not get unnecessarily shaken out of a great trade. I look at profit targets based on a daily chart vs. using intraday charts once I know the SGB is firmly triggered; and then I will follow the daily chart bar-by-bar, but you have to ultimately decide when to take your profits, so I always employ proper chart analysis with candle patterns; and I ALWAYS take profits if there is a Bull 180 formation.

If you play options on these SGB signals, then buy ITM preferably with .70 Delta and more time to expiration for PUTS. I always place stops at 55% of what I paid initially (after the first day); then I follow that up with a trailing stop—be sure to TAKE profits along the way when trading options!

If you sell Bear Call Spreads, then place stops at 55% or you can roll out to the next month the week of expiration if the stock trades back above the SGB more than the distance of the initial SGB short signal.

If you trade weekly options (I prefer to do the majority of them on Thur or Fri), then you always trade for ALL OR NOTHING—NO STOP LOSS— and take profits as you see fit...but DO TAKE PROFITS!

NOTE: If you get stopped out, then short again if the stock trades back into the SGB zone at 55% or greater from the top to bottom; and include the wicks or tails in that calculation.

These can and will fail, so proper money management and trading every signal I post will aggregate profits over time. Once you get profits going, increase your size conservatively.

THERE IS ALWAYS ANOTHER PROFITABLE

SGB SHORT TRADE COMING!

Profits Up!

Frank

The donFranko