With this strategy we will take advantage of extreme price conditions – overselling and overbuying a particular trading instrument. The only indicator in use here is the Slow Stochastic with its default settings (3, 3, 15, oversold at 20.00, overbought at 80.00). More detailed information about this oscillator is to be found here. The time frame is set to 15 minutes, while the expiry time is 60 minutes (a four-candle expiration time).
In order to make trading decisions, one needs to take into account the following:
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If he/she is to buy a Call option, one needs to look for oversold market conditions. The Slow Stochastic will provide such a signal by crossing the 20.00 level in a bottom up manner.
If he/she is to buy a Put option, one needs to look for overbought market conditions. The Slow Stochastic will provide such a signal by crossing the 80.00 level in a top-down manner.
What is particularly important to note here is that the Slow Stochastic (as well as any other oscillator) tends to provide the most reliable signals when the price of the asset is moving within a trading range. In trending environment the possibility of a number of false signals is significant. Therefore, one should use this strategy only after he/she has identified ranging market conditions.
On the 15-minute charts above the vertical lines mark where a call and a put entry should be made, while the triangles mark the option expiry.