Charles M Cottle’s Diamonetrics™ and my DiamondWise Chart

The book “OPTIONS TRADING: THE HIDDEN REALITY” by Charles M Cottle is one of my favorite option books. He developed a trading tool called Diamonetrics™. His website describes the tool as following:

Diamonetrics is the Risk Doctor's own technical analysis tool.  It was developed to determine profit opportunities based on forecasting probable trading ranges, at particular expiration dates. Diamonetrics is used most efficiently, for speculating with limited risk....high probability, short premium (time on your side) plays (butterflies, condors, calendar spreads, iron calendars, etc.), and hedges for stocks, equity indexes, financial futures, currencies, commodities and other underlying securities.

The essential Diamonetrics Grid comes pre-built, ready to copy and paste, to simply stretch, scrunch, and swivel into place capturing the market's essence.

The basic idea is that the price and time space is divided into grids of diamonds (Diamonetric Grid™). Once the size and the shape of the diamond are determined, the stock should move within the current diamond, unless it moves out into another diamond, then the stock should again move within that diamond… The diamond edges are the supports or the resistances. This tool is used to project the future price range. Users can then construct option strategies based on the projected price range for the stock. For example, on 7/17/07, he used the Diamonetrics™ to project August expiration day price range as the red vertical oval shown in the following diagram.

I like his idea very much, but Diamonetrics™ is selling for $349. So I developed my own version. In my version, you don’t have to manually place the diamond grid over a stock chart; all the diamond grids are automatically generated according to the behavior of the stock.

One example is shown below:

I will call my version as  “DiamondWise Chart” in my future blogs.