Thursday, December 10, 2015

Daily Supply and Demand Roadmap

Since the collar case study is all about hedging AAPL, I put together a chart that shows the bigger picture of supply (selling) and demand (buying) areas to watch in the coming days or weeks.

It gives an idea of where to place hedges and where possible turning levels are. I can use this information in combination with the statistical expected move (EM) to further ballpark hedge strikes.

Chart 1 - Fresh Daily Supply/Demand Areas (TradingView)

In looking at my zone placements, the first thing I have noticed is that AAPL is nearer fresh supply than demand at this point. To me, that means price will be sold on rallies and there are two significant supply zones above current price that have not yet been tested.

The daily demand zone is not as clear. I needed to go way back to find a fresh demand level all the way down near the 91pt level. This is quite a distance away. A number of more recent demand zones have been tested. These are not fresh any longer. Any further tests of these levels has the probability of price going through them.

What the chart is telling me that there is a higher probability that prices will be sold than bought in the near term. In particular the top 120-122 level has never yet been touched. And it is above a recently formed daily level making it that much stronger.

A strategy is to keep short calls sold at these levels. Anything from 117 - 122 is going to prove difficult to break. A few tests of the area are needed before any breakout is going to occur.

A recent fresh daily demand level has yet to appear. Given where price is currently trading, the odds are that price can still decline. Any lower timeframe (hourly or less) demand zones are suspect and will probably be broken.

So my strategy for now is to keep short calls with a higher delta (and OTM puts) to capture time value and any downside moves and keep the position hedged.

If there is any predication to be made is that AAPL is not going to breakout without some significant institutional buying creating a demand area. Supply remains heavy and price will continue to churn, mostly lower.

Its necessary to be hedged while this works itself out.

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