when to buy puts

[alen]

when the volume of a particular stock goes up, it usually means that a lot of people are selling their shares at the same time; this usually drives the price down; this brings me to my question: when a stock's volume rises, is that a good indicator to buy put options?

 

[Rhody Trader]

Be careful with that assumption about high volume and selling. By definition, if people are selling others are buying. If price is rising on high volume that is generally considered bullish, not bearish.

The situation you might be referring to is "distribution" where the market stops moving higher, but volume stays high. That can be an indication that traders are getting out of there positions, which could have a bearish implication.

There are some really good discussions of price and volume in several threads. Check out the Price & Volume forum especially.

 

[RUDEBOY]

Alen....slow down, matey. I would carry on paper trading if i were you, for a while. Why don't you forget options and concentrate on the more basic factors. Sincerely. Rudeboy. P.S. you should keep your K a bit longer.

 

[alen]

Alen....slow down, matey. I would carry on paper trading if i were you, for a while. Why don't you forget options and concentrate on the more basic factors. Sincerely. Rudeboy. P.S. you should keep your K a bit longer.

for the last time, rudeboy: i have been paper trading options, and im not planning on trading for real anytime this month.

 

[alen]

this was on Jim Cramer's Mad Money: when the volume of a stock goes up, it means that its time to get out; he called it profit-taking; this drives the price down. isnt this true to an extent?

 

[Rhody Trader]

this was on Jim Cramer's Mad Money: when the volume of a stock goes up, it means that its time to get out; he called it profit-taking; this drives the price down. isnt this true to an extent?

It can be true, but you have to look at the whole equation. It takes volume to move a stock in any kind of sustained fashion. The standard theory among technical analysts is that if volume increases when a significant move takes place, like a break to new highs, that is generally a confirmation that the move is legit. Were the volume to drop off at that point, then the trader has to question the validity of the new highs.

At the same point, however, there are blow-offs where the market just gets way too extended on what can be considered excess enthusiasm. A volume spike in that sort of case can be an indication of a pull-back.

I guess the point I'm trying to make is that volume analysis, like much in technical analysis, is difficult put in to hard and fast rules like high volume=profit taking=pending decline. It's not that easy.

 

[alen]

oh. thx man.

 

[Bluebelle]

oh. thx man.

alen


Totally agree with RT. When people first start trading they come across simple relationships and think they've found the Holy Grail. We then gradually learn - at various levels of cost - that whilst there's an argument for keeping things as simple as possible, simplistic generally doesn't work in the long term.

Your 'volume theory' is sometimes true but used in isolation is, in my view, dangerous. I use volume as part of my evaluation criteria, but only as one component, linked to the direction of any price movement for example.

One other thing I would mention, don't confuse e.g. stock selection with how you trade it - buying, options, spreadbetting etc. They are two different things. If you're long on a stock using any instrument and the price drops, your down and vice versa, regardless of how you're trading it. Make your selection than choose the trading method that best suits your circumstances, your overall portfolio balance and your personal level of acceptable risk..