When & why I just say no to signals
Here’s a quote for you – see if you can guess the source:
“We’re always looking for reasons not to take the trade.”
If you guessed that’s a direct quote from me, Andrew Keene – fan of the ultra-fast-moving options trade – well, you’re probably one of the few to get it right, to be honest.
And I’m fine with that!
Unless you’re one of my subscribers and you spend hours hanging out with me trading live in the morning, you might not know that I actually have some pretty serious trading rules… even for “adrenaline junkie”-style trades.
I mean, some traders will take a flyer on just about any old signal to hit one of my eight scanners – and I’m fine with that.
Everyone has their own personal appetite for risk, and yours might be even bigger than mine!
But I make sure to tell everyone, “I would NOT trade this” even as I share one of these “out there” ideas in chat – like this options flow on HOOD immediately after earnings:
So for those of you who don’t have my trade rules written on your heart, what are a few reasons I won’t touch a trade hitting my scanners?
On an absolute basis, I like to buy call options priced below $1.00 each.
There’s theoretically no limit to how high a stock can rally – and sometimes if you catch a short squeeze, it seems like some of these names really will go “to the moon.”
So low-priced options help me leverage that move.
However, if option prices start to get much higher than that – whether due to rising implied volatility (IV) or any other reason – I’m more likely to “spread things out” by adding a sold options strike to my strategy.
In other words, for my signature call-buying approach off the scanner, a high price tag usually takes an options trade right off my list.
- 1. Volume is lower than open interest.
We talked about this recently on a WeWork “no signal” trade – I’m always looking for situations where the day’s volume at a specific options strike is higher than the current open interest.
This helps me confirm that new positions are being opened, as opposed to existing positions being closed.
If volume is light, the signal is a non-starter.
- 2. The bid/ask spread is too wide.
This is a fun one!
Every option has two prices – the bid price and the ask price.
The bid is the price buyers are willing to pay, and the ask is the price sellers are willing to accept.
There’s typically a gap between the two prices – but depending on how heavily traded and popular (e.g., how liquid) a stock’s options are, that “bid/ask spread” can be as narrow as 1 penny, or as wide as $1.00 or more.
When it comes to bid/ask spreads, the tighter the better! That’s because this spread is an early indicator of how easy it’s going to be to enter & exit options on the stock… and a wide spread could leave you hanging when it’s time to exit, even on a winning trade.
What am I trading this week…?
So, which trades am I going to take this week?
Well, I’ll be going live with my subscribers in just a matter of minutes here to trade my favorite time of the session – and you can be sure I’ll keep you updated on the best signals, biggest bets, and smartest pro tips to help you pregame another busy five days of earnings.
Trade safe out there – talk to you soon!
Founder, Profit Pregame