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Banking on Bull Call Spreads: A Case Study in GOOGL

HOW TO TRADE BASING PATTERNSDoing well in options trading isn’t just about picking the right stocks and hoping for the best.

It’s about understanding what option strategy is best given the current situation.

A few weeks ago, I became bullish on GOOGL as it failed to breakdown and had a good earnings reaction.

But instead of buying calls straight up, I got better risk-adjusted returns by trading bull call spreads.

Watch this case study on the move in GOOGL to see how I traded it:

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The Best Option Trading Strategy for New Traders

best option trading strategyIt’s gotta be overwhelming if you are just starting out.

The options market allows you to take different opinions on a stock…

… not just bullish or bearish, but how fast the stock will move and how long it will take.

So you crack open the closest option trading book out there and you see there’s about 25 different option trading strategies to choose from.

Where do you start?

Here’s the thing– there’s no single best strategy that works every single time.

But what you need to find is one strategy that works for you.

Especially if you’re brand new to options trading.

Through my work with hundreds of clients, I’ve discovered the best option trading strategy for new options traders.

Watch this video to see what it is:

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How to Trade Basing Patterns: A Video Case Study in FSLR

fslr-basing-patternBuying stocks that are in long term downtrends can be a tricky play.

How do you know that the rally isn’t just a fakeout to head to new lows?

How can you be sure that the stock will see followthrough so you can profit on the long side?

There’s absolutely no way to be 100% sure on this, but there are signs that a stock is ready to have a change in character.

Watch this case study on a breakout in FSLR to see what to look for:

Get a special introductory offer to IWO Premium

Making Money Trading AAPL 3 Different Ways

how-do-you-like-them-applesWhen trading options, the best edge you can get is understanding the role of volatility in both the stock and the options.

What that means is there is no “one size fits all” kind of option strategy.

Your trades should reflect what you think about the stock – not only what direction you think it will go, but also how fast you think the stock will move.

Over the past few weeks, we’ve taken 3 different trades in AAPL at IWO Premium – and all of them profitable.

Let’s review how I did it.

The AAPL Pullback Trade

After a massive rally up to $120, AAPL saw a “volatility event” and finished down a bit.

aapl-pullback

On this dip, I sent out a trade alert to sell the Jan 105/100 bull put spread for 0.80.

And because I know that I tend to be early on pullback trades, I suggested to go in half position size and then add at 1.50.

Bull put spreads were chosen because this is a pullback trade, meaning that the stock is selling off and we’re expecting the downside action to be not as great as what the options are pricing in.

This trade was set to expire worthless into January expiration, but because AAPL was trading right around 105 I made the call to close out the short 105 put for .10.

The first half of the trade had a profit of $70 per spread, which is a 16% return on risk.

If the second half was added (and I didn’t add) it would have been a profit of $140 per spread, which is around a 40% return on risk.

This is one of my “bread and butter” trades: find a stock in an uptrend that is pulling back, and sell credit spreads in the direction of the primary trend.

The AAPL Failed Breakdown

Another one of my favorite setups is to look for a “captain obvious” level where way too many people will have their stops.

What you’ll see is a “stop run,” where the level is violated and everyone thinks the stock is now broken and the stock is ready to collapse.

And then it fails to see any followthrough and it reverses higher.

On January 6th, AAPL broke down underneath its key support at 106, and I had a feeling that way too many people were watching that level.

Here’s the trick: you don’t buy the breakdown, you buy the reversal above the breakdown bar.

I sent out a trade alert that if AAPL broke back above 106.76, then get long the Feb 105 calls at a price around 5.50 – 5.70.

aapl-failed-breakdown

A key point here: it’s not a good idea to use the low of the day as a stop because it sometimes gets tested a little lower. You want to have some wiggle room.

After two days, the stock hit my first target, which is where I sent an alert to scale half of the options at 7.20 for a profit of around 1.50 per contract.

The exact same day, AAPL continued to rip higher above 111 and then gapped into 112. After 3 days higher finishing with a gap, that’s a great time to take risk off the table. That’s when I sent the alert out to sell to close the Feb 105 call @ 10.10 and buy to open the Feb 115 call @4.00.

This is known as a vertical roll, and allows you to take cash off the table but still keeps you in the trade. I also set a trailing stop just under 111.

aapl-trailer

The same day, 111 is broken and the Feb 115 calls are closed for around 3 bucks (depending on the fills).

Here’s how the total execution of this looked like:

Bought to open AAPL 105 calls @5.60
Sell to close half AAPL 105 calls @7.20
Roll second half AAPL calls to 115 for a credit of 6.15.
Sell to close AAPL 115 calls for 3.00

That’s a profit of $160 per contract for the first half of the calls and a profit of $350 per contract for the second half.

The Volatility Buy

On January 20th, I sent out this tweet:

aapl-tweet

Basically, if you think that the normal volatility of the stock will be greater than the cost of the weekly straddle, you should buy that straddle.

This makes many people uncomfortable because these options have a ton of time decay. But if the stock sees some decent movement, the time premium is replaced with intrinsic value and you can be profitable.

On January 20th I sent out a trade alert to buy the AAPL Jan4 107 straddle for 3 bucks.

Here’s what the risk of a single straddle looked like:

aapl-straddle-risk

Simply put, as long as AAPL sees $3 worth of movement in either direction, you’re at breakeven. The biggest risk to these trades is reversion so it pays to be aggressive in taking profits.

The next day, AAPL saw a 3 point move to the upside. I sent subscribers an email to either:

1. Bail on the trade at 3.56 for a profit of $56 per spread, an 18% return on risk.

2. Hold out on the trade and run a stop on a move back under 109.

If you chose door number 2, the trade’s now worth 5.40, which is a gain of $200 per spread.

This Approach Works

Can you make money just from timing the market and using long options only as leverage?

Yeah, but it’s really hard and you can blow out your account.

Can you just be a blind option seller and only focus on collecting as much premium as possible?

Sure, but if you get one bad trade it can wipe out weeks (or months) of hard work.

I believe that if you are looking to build aggressive and sustainable wealth with options, it requires a more nuanced approach. Sure it can be a bit more complicated but that is where the edge lies.

Do you like trades like this? Want to learn more?

Join me and the other traders at IWO Premium. You can learn more here.

Why We Took GOOGL Short On an “Obvious” Breakout

During the month of December, GOOGL puked and then bounced hard along with the rest of the market.

After a strong rally, the stock broke out of its downtrend, and I saw many people looking to get long the stock as the trend had changed.

googl-before

But I took the other side of the trade, getting net short.

Here’s why:

The Trend is Still Down.

In 2014 many high beta tech stocks were taken down hard throughout the year and just haven’t got up off the floor. Even though GOOGL was strong in the short term, the risk/reward on any rally was to the downside.

The Trendline Slope was too Steep

Bottoming patterns are processes, not one-off events. The first break above a trendline usually does not mark a change in trend. Instead, the stock will run for a bit more, then pullback, potentially make a higher low, and re-attempt the breakout again.

This means price levels are not the same every time. I was bearish on GOOGL into 540 but if it hit that level again I wouldn’t get short because it’s already been tested once before.

There was Secondary Resistance

Just above the trendline breakout was a declining 50 day moving average.

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These levels don’t always have to be major pivot levels, but considering that was the first retest since the breakdown in October, I had expected some funds to use that reference point as a level to lighten up.

The Rip Was Too, Hard Too Fast

One study I use often is a “Rolling Returns” study. This simply shows the price performance of an asset over a certain time period.

Here’s the chart of GOOGL with a 5-day rolling return:

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That rip higher left GOOGL with a return of over 7% in a 5 day time period.

That was the largest move higher on a non-related earnings move in the past few years.

Sharp bounces like that following a puke lower often stall out and back and fill. Given that the stock is still in a downtrend and there was a clear resistance level right above the breakout, it made plenty of sense to take this to the short side.

How We Traded It

I’m not a fan of shorting common straight up, especially when the stock is trading above $500.

Instead, I chose to limit my risk by using bear call spreads. This is an option strategy that makes money as long as the stock sells off, doesn’t move, or rallies just a little higher.

The trade was:

Sell to open Jan 560/565 bear call spread @0.80, 50% position size

Add to the trade at 1.50

Stop out on a close above 560

I use scaling entries on spread sales as I can often be early so I would rather work into better fills and trade around a core position.

This trade was sent out as an email alert to all IWO Premium members, and was also discussed in our Chat Room to make sure everyone understood the mechanics and risks in the trade.

The Outcome

A few weeks later, the position was closed at 0.2, which means a total profit of 0.60 per spread.

This equates to a 14% return on risk–a reasonable return and it was a high odds trade that produced reliable income.

Want more trades like this? Become a member of IWO Premium Today. Click here to learn more.