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Trading Breakouts with Options By Keith Harwood – Option Pit

Introduction

Trading breakouts can be a highly profitable strategy in the options market. Keith Harwood, an expert from Option Pit, has developed a systematic approach to trading breakouts with options. In this article, we will explore his methodologies, offering a comprehensive guide to understanding and implementing breakout strategies in options trading.

What is a Breakout?

A breakout occurs when the price of an asset moves outside a defined support or resistance level with increased volume. This movement can signify the start of a new trend.

Understanding Support and Resistance

• Support: The price level where a downtrend can be expected to pause due to a concentration of demand.
• Resistance: The price level where a trend can pause or reverse due to a concentration of supply.

Importance of Volume in Breakouts

Volume is crucial in confirming a breakout. Higher volume indicates stronger momentum and a higher likelihood that the new trend will continue.

Keith Harwood’s Approach to Breakout Trading

Keith Harwood emphasizes a disciplined approach, combining technical analysis with strategic options trading.

Identifying Breakouts

Harwood uses several technical indicators to identify potential breakouts:

1. Moving Averages
2. Relative Strength Index (RSI)
3. Bollinger Bands

Setting Up the Trade

Once a breakout is identified, setting up the trade involves:

1. Choosing the Right Option
   • Call options for bullish breakouts
   • Put options for bearish breakouts
2. Determining Strike Prices
3. Setting Expiration Dates

Risk Management

Harwood stresses the importance of managing risk through position sizing and stop-loss orders.

Technical Indicators for Breakout Trading

Moving Averages

Moving averages help smooth out price data and identify trends. Harwood recommends using the 50-day and 200-day moving averages to spot breakouts.

Relative Strength Index (RSI)

The RSI measures the speed and change of price movements. An RSI above 70 indicates overbought conditions, while below 30 indicates oversold conditions.

Bollinger Bands

Bollinger Bands are volatility bands placed above and below a moving average. They help identify overbought and oversold conditions.

Strategies for Trading Breakouts

Bullish Breakout Strategy

• Identify the Breakout: Look for a price moving above resistance with high volume.
• Buy Call Options: Choose options with strike prices near the breakout level.
• Set Stop-Loss: Place stop-loss orders below the breakout point.

Bearish Breakout Strategy

• Identify the Breakout: Look for a price moving below support with high volume.
• Buy Put Options: Choose options with strike prices near the breakout level.
• Set Stop-Loss: Place stop-loss orders above the breakout point.

Case Studies

Bullish Breakout Example

In a recent trade, Harwood identified a bullish breakout in XYZ stock. The price moved above resistance at $50 with high volume. He bought call options with a $50 strike price and a one-month expiration.

Bearish Breakout Example

For a bearish breakout, Harwood noticed ABC stock breaking below support at $30. He purchased put options with a $30 strike price and a two-week expiration.

Common Mistakes in Breakout Trading

Ignoring Volume

Volume is essential in confirming a breakout. Low volume breakouts are more likely to fail.

Not Setting Stop-Losses

Failing to set stop-loss orders can lead to significant losses if the breakout reverses.

Overtrading

Trading every breakout can lead to overtrading. It’s important to be selective and only trade high-probability breakouts.

Tools and Resources

Option Pit Resources

• Webinars: Keith Harwood offers webinars on breakout trading.
• Courses: Detailed courses are available for in-depth learning.
• Community: Join the Option Pit community for support and insights.

Trading Platforms

• Thinkorswim
• E*TRADE
• Interactive Brokers

Conclusion

Trading breakouts with options, as taught by Keith Harwood, can be a highly effective strategy when done correctly. By understanding technical indicators, managing risk, and using the right tools, traders can capitalize on these opportunities.

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