Zoom classic MACD daily divergence in early August

Sep 23, 2021

Daily Bullish MACD Divergence -Trade Analysis ZM August 5, 2021

The Options Hunter Approach is based on four distinct aspects 

Step 1: Divergences in technical indicators warn that the current trend is losing momentum in the short term. The stock or index is making new highs or lows, and the MACD indicator does not confirm new highs or lows, which is known as a divergence.

Macd Divergences can be Bearish or Bullish and signals to option traders a potential opportunity for extraordinary gains. Divergences can occur in any timeframes and with many indicators, but we’ll address multiple timeframes in-depth shortly.

The Options Hunter approach focuses on divergences between the MACD and the price action. We don’t employ other indicators such as RSI, Stochastics or Bollinger bands as we keep our approach simple, straightforward, and repeatable

Daily Chart ZM August 5, 2021


In this example, we’ve identified a Bearish Divergence on the MACD indicator in a striking contradiction to the Price Action.

Step 2: The second criteria is the Price Pattern. The Options Hunter MACD Divergence must coincide with at least a Double Bottom or Double Top. 

ZM had a double top from the 7th July 2021 the first top, to August 5, 2021, the second top, which satisfied the Price Pattern component, coinciding with the bearish divergence on the MACD  Indicator on the daily Chart. This is a promising trading candidate. The Next step is the application of multiple Time frames is critical for Options traders.

Step 3: Multiple Time Frames is the exercise of reviewing a potential trade setup under differing time frames. The granularity of the time frames defines your trading style.  A good rule of thumb is using a ratio of 1:4 or 1:6. Determining your time frames will clarify the type of trader you are. We consider ourselves medium-term traders as defined by Trading Style.

Longer time frames establish the overall trend. ZM has a bearish MACD divergence along with a double top. Now we examine the lower times for an entry. We are not looking for any additional divergences, but they sometimes appear.

In this example of ZM, we identified a Bearish Divergence on the hourly and 30-minute charts occurring on the  August.

 ZM Hourly chart

                                                            IWM 30-minute chart

Both 30-minute chart and hourly chart show MACD divergences and gives us our entry point to determine optimum trade execution.

 Price Target, Trade Duration and Exit Plan

The divergence pinpoints the change in trend and provides an estimate of the magnitude and the duration of the move.

Price Target can be estimated by simply comparing the slopes of the divergences to gauge a potential target price. 

In the ZM example, we’re simply comparing the slope of the trendline on the MACD divergence and overlaying it on the price to calculate a potential target price for the move. The primary higher timeframe is where we look for establishing our target price.

Trade duration can be estimated by counting the number of bars required to establish the divergence and use that number to estimate the number of bars (periods)  the trade could last. In this case, the daily ZM chart divergence indicates the trend could last 20+ days and reach near 355.

Step 4: Trade execution is the most critical aspect of the Options Hunter approach and, in some ways, the easiest. The options we trade have two characteristics

  • Weekly Options with Limited Time premium
  • Out of the Money (OTM) options offer the most significant leverage and define the risk.   

In ZM, the slope, and duration of the MACD divergence give us a target of around 360 for ZM over 20 or so daily price bars from August 5.

The weekly OTM 350 puts expiring on August 13, opened at 55 c on August 6. By the following Wednesday, 2 days before expiration they traded as high as $4.50. Over 7 x your money. 

More nimble traders could have taken a weekly call expiring on 8/6/2021. With only the day's trading left on these options, a strike place closer to the current price but still out of the money could be sought. The August 6 expiration 385 puts opened at 55c and traded as high as $5 before expiring. Over 8 x your money. 


What are Weekly Options and Why Do I use them.

Trading Weekly Options can result in extreme profits, and those profits can also be incredibly volatile.

How do Weekly Options Differ from Monthly Options?

Weekly options and monthly options are similar—the primary difference between the two lies in the expiration dates. Monthly options expire every month on the third Friday of the month, whereas weekly options expire almost every Friday and are issued on Thursdays.

Traders who were previously limited to just 12 options expirations each year with monthly options can now capitalize up to 52 expirations by adding the tool of trading weekly options to their trading portfolio.

Weekly Options are More Cost-Effective than Monthly Options

Weekly options are less expensive than shares of the stock and cheaper than standard monthly options. This is because the time duration (premium) is minimal with weekly options, as traders have only a couple of days to wait for the underlying stock to make the predicted move. Do not be scared off by the quickness of these weekly options trading opportunities. The increased volatility within the weekly options trade holding period presents an increased profit-taking opportunity, more so than an increase in risk.

Weekly Options Listings Feature Popular Stocks and Indices

Weekly options listings change every week, mainly because the weekly options expiration period is limited.  The CBOE is always in a constant process of listing attractive weekly options to increase trading volume. Therefore, traders have seen a significant rise in the popularity of weekly options over the last few years. High-volume stocks are the most likely going to make it to the new weekly options list each week. Additionally, the weekly options listings may also include stocks that are slated to announce big news in the near term.

Weekly Options Maximize Profit Potential

Weekly options allow traders to profit during any kind of market environment. The short-term nature of weekly options trades calls for efficiency in a fast-paced stock market that can be highly unpredictable for long-term investments. With weekly options trades, traders can benefit from buying cheaper options and then selling them for more than purchased within a short period of time.

Regardless of the price movement, it is always possible to see triple-digit returns with weekly options buying. Unlike stocks that only benefit investors if the stock price increases, weeklies let traders benefit regardless of the stock price direction.


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