The futility of bottom and top picking is a favorite verse to those preaching technical analysis. The ranks of those professing to have accurately picked a bottom are filled primarily with three groups of traders: those who conveniently forget to mention their previous ten failed attempts, out-and-out liars, and those struck by a rare occurrence of dumb luck.
When it comes to strategy selection, I contend that options are far superior to stocks when attempting to trade against the prevailing trend. The difficulty with stocks lies in the fact translate trend line you have little margin for error.
Fortunately, options open the door to a much wider profit zone, thereby granting additional breathing room. As opposed to shorting an uptrending stock expected to reverse, traders may opt instead to sell an out-of-the-money call spread or call ratio spread.
In the event the stock continues to rise further over the next few days, the option spreads are generally more forgiving and easier trading options with a trend manage. This explains in part why call ratio spreads are a strategy of choice when attempting contrarian plays in gold.
Now, consider the following two graphics comparing a simple short position to the call ratio spread. Take special note of the difference in the profit zones. Those engaging in contrarian trades may consider adding options to the mix to exploit some of the benefits outlined.
Tyler Craig is a trader and blogger at TylersTrading.