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Look For This Stock To Breakout Into Earnings

Today I want to reveal to you one of the best looking technical setups in the market right now.

But first, let's talk some football.

Over the past month, there has been so many amazing college football games on TV. The Rose Bowl was an instant classic. Both Alabama and Clemson put on defensive performances that were a work of art. It's been a fun ride.

Yet I know many don't share my view.

Over the past few years, cord-cutters have continued to end their subscriptions.

Plain and simple... some people just don't like to watch live sports.

Instead, they binge watch shows on Amazon and Netflix.

The most recent show on Netflix that is getting a ton of attention is "The OA." Now I watched it, and it definitely wasn't for me but it's good enough to get a second season.

Here's the crazy thing-- Netflix spent about $6 billion on original shows in 2016, and they plan to ramp up spending even more into this year.

And it appears to be working... let's have a look at a weekly chart of the stock.

The Massive Basing Pattern

nflx-weekly-chart

After having some trouble back in 2012, the stock bottomed out and has been in a slow and steady uptrend ever since. In early 2015 the stock topped out... right after the stock split. Since then it has een in a range between about 90 and 130 for basically two years.

Recently, the stock had a massive move on earnings and has been consolidating just underneath recent resistance. We can call this a cup and handle pattern. 

Now let's zoom into a shorter term chart...

Look To Drift Higher

nflx-daily-chart

On the previous earnings report the stock had a massive gap higher and then a few more days of momentum into resistance.

Since then, the stock has been in a pop drop and chop pattern, where the stock popped on earnings, dropped as momentum waned, and then has chopped around this entire time.

Here's how I think this stock will play out...

The Upcoming Catalyst

When a stock has this pattern, many times it will drift higher into its next earnings event. Basically, anyone that bought before the previous earnings is in a position of strength and is willing to hold the stock through the next earnings.

Sellers just run out.

This is called a pre-earnings run.

Now combine that with the fact that we have a 2-year long resistance level right at 130. If the stock manages to break above that, then the momentum players will pile back in as it breaks to new all-time highs.

The positive feedback loop will build on itself.

My initial target for the stock is 140, and I think that into this year... if the breakout holds... it will be one of the more healthy trends in the market.

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Does Dow 20k Even Matter?

EVERYBODY GET YOUR HATS!

dow2k

The Dow Jones Industrial Average is just spitting distance away from a nice, round, whole number.

But who cares?

After all, the index is just a handful of stocks picked by a group of people in a conference room.

It shouldn't really matter to the markets, right?

Not so fast!

It Matters Because it Matters

There's this concept in the markets called reflexivity.

If a stock is rallying, then it gets more attention, more people want to work with them, the company gets more sales, the fundamentals improve, and the stock continues to rally.

Basically, the perception of a stock or market can affect the company.

Now I'm sure you'll have some college professors out there tell you that the market is efficient and how we're all rational actors.

Suuuure....

Yet savvy traders like you and I know better.

We're just a bunch of hairless apes that can't tell the difference between a sabertooth tiger and a 1% drop in the markets.

Well, the market is simply a collective opinion... on lots of things.

One of those things can be a price level. Like Dow 20k.

Or a "golden cross."

Or the "Hindenburg Omen."

If you get enough people to accept the narrative, then it starts to matter.

You may not like this idea... but that's just the reality of what we have to work with.

A great example is something called the $100 roll.

If a stock is trading in the 90 dollar range for the first time, it has a high odds of touching $100.

Why? Because it's a big whole number and market participants like big whole numbers. Why sell your stock now when you can sell it at $100?

So think about this magical level in the Dow.

The media is obsessed about it. It's starting to leak into "mom and pop" local news.

Now think about it... what happens if we clear 20k?

We get the headlines. Everywhere.

And maybe investors who aren't fully loaded on stocks, they start to think about it some more. It may not happen consciously, but you know the lizard brain is working overtime on the "fear of missing out."

So those investors call their brokers and chew them out about having them overweight in bonds when they've sold off 10% and the market's rallied 10%.

And those brokers rebalance those assets, adding fuel to the fire.

Again, it's not guaranteed that we'd see a momentum continuation, but it's possible. That's how psychological reflexivity works.

Go a Step Further

This is kind of where it gets tricky...

See, because the D0w 20k level is so obvious, then the story may flip. Where the smart money doesn't sell until we approach 20k and then looks to offload into that level.

A narrative can get so strong that it feedsback on itself and isn't a "sure thing" as you think. Sometimes there's a difference depending on how much energy has been spent on a strong rally or selloff.

But you basically get into a bunch of systems where some investors try to front run obvious levels, and others try to chase it after the fact.

Either way, it matters. You may not get a distinct edge at these obvious levels... but there is a way to profitably play it.

How To Trade It

What I've found is that trying to trade obvious levels when they happen is not going to be your best bet.

Many times, these levels can act as a magnet.

Think about some of the "obvious" levels.

Whole numbers. Pivot support and resistance. Moving averages.

You can construct trading systems that use these levels as magnets. 

For example, if a stock had a big gap up into earnings and then pulls back... odds are that earnings reaction high will act as a magnet. If enough time goes by it becomes a good risk/reward trade:

akam

Or if you have another stock that has been overbought for a while, odds are it will continue to slide into a major moving average... so you can either try to short it into that level, or anticipate the support level:

cat

This is an amazing approach to the market. Using behavioral finance and psychological reflexivity to get a sustainable edge in the markets.

Combine that with a little quantitative analysis and a great option trading system... and you've got a way to be consistently profitable over the long term.

If you want to see how I've combined all of this into an easy-to-follow trading service, click here to learn about Proactive Spreads.

Long Bonds is The Play Into the Fed

It's finally here.

The last Federal Reserve meeting of the year.

And after all the drama we've seen in 2016, this event seems to be approaching without a whole lot of protest from investors.

According to the Fed Fund Futures market, the odds are currently set at 95% that a rate hike will happen.

If I had told you that 6 months ago, you'd think the market would be selling off as investors throw yet another tantrum over a rate hike.

But it seems that we're taking this in stride. The Dow Jones is about to tag 20,000, the S&P 500 is at all time highs...

And the treasury market has sold off pretty aggressively into the event.

Taking a Look At TLT

tlt

This is a chart of TLT, which is an exchange traded fund for long Treasuries.

When TLT goes down, it means rates are going up. You may need to stand on your head to figure out how bonds work, but that's the general idea.

Now TLT is coming into levels that we haven't seen since July.

Some might call this a support level... at least I am.

On top of all that, there has been incredibly strong selling momentum.

Over a one month period, TLT had sold off over 9%. And it was 5% lower than its 50 day moving average.

That's statistically oversold.

Well... what happens when TLT gets that oversold? Let's take a look.

What Are The Odds?

tlt-returns

This chart shows us the 1 month returns after TLT has sold off more than 8%. As you can see from the total number of instances... it doesn't happen very often.

Other than one major selloff of 9%, the downside risk does seem to be muted. There does seem to be a slightly further negative bias, but most of the results are above the -5% mark.

Now let's just apply some common sense here.

On November 18th, TLT hit the "signal" of selling off 9% in a 20 day period. The closing price on that day is 114.80.

Assuming a lower bound of -5%, that means a "floor" should come in around 114.80. That's the low end as well.

Couple that with the clear technical support coming into play, and the momentum divergence that we've seen on shorter term charts, and it looks like good risk/reward to get on the long side of TLT.

Yet, we can't forget the Fed. This is the main catalyst that investors have been anticipating for over a month now.

When you see strong price movement into an event, often times the event has been "priced in" to the market. We see this a lot when a stock rallies hard into earnings and then doesn't move much after earnings.

It's where we get the phrase "buy the rumor, sell the news."

I think it's a high-odds bet here that as we head into support on TLT and how many sellers already came in... that it's a better bet to look for a lack of downside.

The Trade To Take

A simple bet here is to sell put credit spreads in TLT.

You'll get long exposure to TLT, and an added advantage of an elevated implied volatility environment.

I like the selling the Feb 109/106 put credit spread for a credit of at least 0.35.

tlt-risk

When I trade credit spreads, I combine analysis on both traditional technical analysis as well as my own quantitative models... but that's not where I get my edge.

Want to find out how to get your edge?

Click here to see how to become more consistent and how I can help you with your credit spread trading.

 

How to Trade the Twitter Takeover Talks With Options

After 9 months of chatter, new finally came out that TWTR is in talks to be acquired.

The stock jumped from 18.50 to the low 20's overnight.

twtr-1

This is after peaking out in the 70's a few years back:

twtr-2

We aren't sure who will take them out, but here's the current list:

  • Microsoft
  • Google
  • Blockbuster
  • Salesforce
  • Bill Gross
  • Verizon
  • Disney
  • Comcast

And probably about a dozen others.

Personally, I think there's a ton of value in the company that has been poorly executed upon.

And even if they are bought, company cultures will clash and it will not act as a "magic bullet" for the acquirer.

But that's just me as an armchair quarterback. Let's see how you can potentially profit from it.

Potential takeout prices have ranged from 24-30, and the implied volatility has jumped pretty significantly:

imp-vol

The IV is high but is on par with what we see headed into an earnings event.

There's 3 setups to consider here:

If You Are Pretty Sure The Stock Will Be Bought At A Premium

Consider this trade:

TWTR Call 1x2 Trade Setup
TypeSizeAssetDurationStrikeC/P
BTO1xTWTR21 Oct 1626Call
STCAMZN16 Sep 16720Call
STO2xTWTR21 Oct 1628Call
Total Debit:0.03

 

Now this is a call 1x2 sale that has theoretically unlimited risk. So if TWTR is bought out at $40 then you're basically hosed.

Yet if you are pretty certain that the takout price will be in the high 20's, this is a way to capture a significant amount of premium without needing to worry about if the takeover talks get pulled.

If You're Not Sure The Stock Will Be Bought But Still Want To Play Upside

IWO Premium Order Ticket
TypeAssetDurationStrikeC/P
BTOTWTR21 Oct 1622Call
STOTWTR21 Oct 1626Call
Total Credit:1.77

 

So this is a decent bet that allows you to get some decent gains on upside movement and still have wiggle room if any bids are pulled.

If TWTR is taken out, great you've got about an 80% return.

If it isn't and the stock drops, you can buy to close the 26 call and just have the 22 call on straight up. Odds are any gap-down-on-bad-news will fade a little bit so you can still earn some decent money anticipating that bounce.

If You Think TWTR Won't Be Taken Out

Proactive Spreads Order Ticket
TypeAssetDurationStrikeC/P
STOTWTR21 Oct 1618Put
BTOTWTR18 Nov 1618Put
Total Credit:0.28

 

This trade makes the bet that if the offer is pulled, TWTR will gap down hard back under 20.

Also, the October options will lose their premium and the November will stay elevated into earnings. So you get an extra "kick" with your trade.

Get An Edge In Your Trading

This is a "special case" kind of trade setup that doesn't come along very often. Yet the idea flow at IWO Premium will give you plenty of setups to trade over the next few weeks.

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Why GOOG Options Are A Buy Right Now

I've been talking a lot about how options are really, really cheap right now.

And to be fair, it makes sense. The S&P is in the tightest range we've seen in something like 20 years, so the options market is responding in kind.

But we're starting to see an overshoot.

Take Google Alphabet (GOOG) for example.

goog

The stock had a nice pop on earnings, and really hasn't gone anywhere over the course of a month.

What's the options market telling us?

One quick way to measure the volatility in the market is something called "price over strike."

We take the price of the straddle and divide it by the strike price of the straddle.

The Sep 770 straddle is going for $19.

That gives us a price over strike of 2.4%.

What does that mean?

If you buy this straddle and GOOG moves at least 2.4% by Sep opex, you're going to make money.

Show Me The Odds

You may ask yourself...

Well, how often does GOOG move 2.4%?

I've ran the numbers.

Looking at a 10 day trading window... so not even 20 calendar days but 14 calendar days, this is what I see:

goog-max-change

Here's how I got this graph...

I looked at the maximum gain and maximum loss of any time during that 10 day window... and took the largest of those values.

Clearly, GOOG moves a lot more than 2.4%.

How much?

This sample is over a 5 year window... I've got 1,248 samples.

The number of times over 2.5%?

933.

That means you've got a 75% chance that GOOG moves more than 2.5% in a 10 day window.

It's not just slightly better than a coin flip... it's a flip and a half.

I don't recall many times when the options market skews the odds this far into the option buyer's favor.

Pretty good odds, don't you think?

If you want to see how I'm trading this, come join us at IWO Premium. 14 Day Trial for only $14.