Prof. Tyler yamazaki

Momentum trading
In momentum trading, traders tend to focus on stocks that are currently
moving in one direction a significant amount. Those who trade based on
momentum typically only hold their positions for a few minutes at a time,
though it can be longer depending on the speed at which the stock is
moving.
Successful momentum trading requires the trader to analyze the list of
stocks they favor by watching the charts, particular the momentum indicator
which visualizes the total net change of a stock’s closing price over a
predetermined period of time. The momentum line is typically show in
tandem to the price line and it shows a zero axis with positive numbers
indicating an upward trend and vice versa. This indicator will typically
determine an incoming breakout which means that even 2 periods of
sustained momentum will be enough to cause a breakout.
Once a potential momentum trade is found, you don’t need to jump on it
right away as this type of trend is typically likely to continue for more than

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a few periods. It is important to keep an eye on the stock in question once
you have made a move, however, as the second the trend seems to be dying
out you need to sell to keep from losing a slice of your profits. The goal
here is to find the saturation point which is where the number of orders
starts to increase and the overall volume of bidding begins to slow. This
point doesn’t mean the momentum is stopping, it is just a good indicator
that it is slowing down.
Butterfly spread
When it comes to trading options many day traders remain perfectly content
with simple puts and calls when it comes to making money from market
indecision or possibly using covered calls as a means of generating income.
There are more promising alternatives available, however, and one of these
is the butterfly spread. This strategy allows traders in the know to pinpoint
the traders that are likely to generate the greatest amount of profit for the
lowest amount of risk. The modified butterfly spread, also discussed below,
takes things up a notch.
Standard butterfly spread: The perform the standard butterfly spread you
are going to want to utilize 3 different puts or calls in a 1, 2, 1
configuration. The first call you place is purchased at a strike price that is
similar to the current price of the underlying asset, the second pair is
purchased at an increased price and the final call is purchased at an even
higher price. The same strategy can be used for puts though the price
descends rather than ascends.
What you end up with is a neutral trade that is sure to generate a profit
assuming the underlying asset remains somewhere in the range of the strike
prices. It is also useful if you are interested in profiting from a directional
trend as long as you set all three either below or above the current strike
price depending on if you are purchasing puts or calls. Assuming it is done
correctly, this strategy minimizes risk to a defined level and offers a
reasonably reliable potential for profit and the potential for a significant rate
of return as well.
Modified butterfly spread: The more advanced form of this strategy is
called the modified butterfly spread and it has similar goals to the standard

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version, though it differs in a few key ways when it comes to execution.
The biggest difference is that it offers you the opportunity to maximize your
profit if put trades are bullish and call trades are bearish. This is done via a
ratio of 1, 3, 2 which leaves just the first put or call at the breakeven point
and triples up on the higher/lower price and doubles up on the final price
point.
For example, say that an underlying asset is currently being sold for $194
per share. To activate the modified butterfly, you are going to want to
activate the first put at $193.50, three more at $190 and then the final pair at
$175. The key takeaway from this example is that puts are selling at 5
points beneath the at-the-money point and another at 20 points below. As
the price is currently at $194 this means that you will be able to breakeven
if the price drops to $184 which means that the strategy generates 5 percent
worth of downside protection.
This means that the underlying asset in question would need to drop a total
of more than 5 percent before any type of loss would occur. In this example,
the total potential loss is approximately $2,000 which equals the amount
required to put the trade into action. In this case, the loss would not occur
until the underlying asset dropped to a price that is lower than $175. On the
other hand, the amount you stand to gain from the aforementioned trade
equates to about $1,000 which is a 50 percent return on your investment
assuming the underlying asset only increases to $200. The strategy would
also result in a $500 profit as long as the underlying asset doesn’t move past
$195.
While the modified variation of the butterfly spread contains a greater
degree of risk than the standard version, it also offers a higher profit to risk
ratio. It is most useful when you believe the underlying asset is likely to
remain stable over the timeframe you have chosen or when you are looking
to profit from capital gains on an underlying asset that is likely to remain in
the middle of the road.