Click on the chart to enlarge it.
Back to our hunt for a trade: Since many stock options are not heavily traded and price data is sparse, we need to select time frames that allow the price bars to form up in a manner that allows us to adequately analyze them.
That is, unless there is heavy activity in the option a bar chart of very short time frames has a spotty and gappy appearance. A good-looking chart is somewhat subjective, but I've found that time frames that allow roughly 10 bars or less for the day session tend to look OK for thinly traded options.
As used in other Ocean examples, it's important to use bar durations that are evenly divisible into a day session. This is so because Ocean calculations are based on each bar and we don't want undue weight to be placed on the final bar of the day that might have significantly less duration that the other bars throughout the day.
As usual, we'll begin our analysis of the actual option from a relatively high timeframe and work down to an entry one, just as we do with any Ocean based analysis.
At this point we're looking for buy signals in the put itself to establish our position. Beginning with the 78-minute timeframe (thus allowing 5 bars per day of the same duration), we can see some juicy Ocean formations in the August 47.50 put.
Notice that NMC generated a ZeroHit setup for a potential buy entry in the first 78-minute bar of the day (July 20th). However, as prices worked lower there was no actual entry signal yet (see area labeled A in first sub-graph).
Note too the declining prices relative to the prior day's close, the “premium squish” and the spring loading that I like to see when considering an option trade. And prices are finding support at the NMA, another healthy and supportive event (shown as the circled arrow on prices).
Notice also that the NMM ROC has exceeded it's lower boundary, the same "slingshot" formation that we successfully employed in other markets and timeframes (shown as a large circled arrow in bottom sub-graph).
Then, when the bar ends at 12:42 PM MST, the NMC violates its zero line, while NMC2 produces its own ZeroHit (shown as pt. B in the middle sub-graph). This one bar overshoot by the NMC is something that often happens as NMC2 is doing a ZeroHit, and is perfectly within the norm of Ocean guidelines and expectations.
At the time of this 78-minute NMC2 ZeroHit, it's now time to roll down to a lower timeframe to finesse an entry!
(This is the end of Part 7. Go to Part 8.)
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