Trading Methodology

Forward Thinking

My theory of short-term speculation is based on the premise that tomorrow’s implied support and resistance is defined using today’s closing prices, implied volatility and volume profile. I analyze weekly options data everyday at the cash close to uncover KEY information about Futures Contracts, ETF’s and their implied trading behavior for the following trading session, based on 61.8% probability.

Closing Price of Underlying ETF
Futures Contract Conversion Price
Option Expiration
ATM Strike
Call Implied Volatility
Put Implied Volatility
Days to Expiration

The IV range outlines a good mathematical context of where price should settle, based upon 61.8% probability. This provides the speculator with excellent intraday implied market boundaries as well as psychological confidence when planning for execution.

So what does this all mean in terms of trading?

When price deviates above or below the IV range, suddenly the odds just shifted in favor of the speculator. One can anticipate an eventual reversion back within the IV range. However sometimes exaggerated deviations from the IV range can occur based on unforeseen or random volatility in the market. To be better prepared for such occurrences, the Statistical Pricing Model comes into play here.

Risk Management using the Statistical Pricing Model

After the IV range is broken, this model is KEY for carefully determining entries and defining risk.

Tomorrow’s implied price action is determined using today’s closing price and multiple standard deviations to arrive at high probability support and resistance levels. The daily implied range support and resistance is based upon 96.5% confidence.

The premise of this intraday strategy is based solely upon the reversion potential within a defined range or confidence interval once the implied move based on option pricing (IV Range) has been exceeded.

Outlier Range = Closest to absolute confidence

S4/R4 Range = 99.99% confidence

S3/R3 Range = 98% confidence

S2/R2 Range = 95% confidence

S1/R1 Range = 68% confidence

Advanced Charting Algorithm

Last but not least, I utilize a robust series of technical indicators measuring momentum and strength of trend. The chart works synergistically with the IV Range, Statistical Pricing Model and DP Sentiment for ‘timing the market’ and making real-time trading decisions.

“Don’t focus on making money, focus on protecting what you already have. Risk management is KEY to longevity in this business.”    Brandon Ross Kaye