We are bringing you this week a practical trading example using the best options strategies we have learned.
From the setup of the trade, through the entry criteria, all the way down on the exit criteria, we will share the Why, How and What took place to benefit from this trade.
The Best Options Strategies: Week of October 25
This is the bulk of the third quarter Earnings season that goes typically starts from Oct 15 through November 15.
This does not mean that other companies do not report outside of this 30-day window.
It is called the Earnings season because that is when we have the largest concentration of reports.
If you are new to trading, four times a year, companies set a specific date when they will announced how their business performed during the previous three months.
As such, the third quarter Earnings window will see companies provide updates on the 3-month going from July 1 through September 30.
In case the performance time frame is different, they will make a mention of that.
This concentration of news lend itself to great volatility.
This comes from the fact that analysts who are present at these announcements through conference calls are eager to report about the status of the businesses.
A bullish outlook can make a stock jumped much higher than during any other trading day.
On the other hand, a bearish outlook can lead to a severe plunge.
Allow me to illustrate this concept with the picture below.
The yellow areas in the above daily chart of Western Digital (Ticker: WDC) showcases November 2018 and November 2019 Earnings gap down.
The blue circle portrays n Earning Gap Up in January 2019.
What are gap down and gap up ?
A gap Up is when the stock price jumps and opens at higher value than the previous day close.
A gap down is exactly the opposite.
The two gap downs are of $6 and $4 respectively. The gap up is of about $6 as well.
In terms of percentage on a $50 stock is average, $6 is over 10%.
In the world of options, that is serious money to be made if you can predict that correctly.
In case you are wondering if one can play both side, the answer is Sure.
But Markets Makers are in control and can make sure you lose on both trades.
Nevertheless, many rookie and seasoned traders cannot help themselves but take part of this guessing game.
Let me tell you right now, it is not a sustainable method to make money trading options.
Do not get me wrong, huge amounts of money are made each quarter by those with the crystal balls.
I do not know about you but as for me, there is no trading options a stock before its Earnings in hope that the trade may go my way.
So, I am strictly picking stocks to trade from our Watch List after they have reported the quarterly performances.
I do not typically trade Amazon(Ticker: AMZN) because of the high cost of its options.
But I have learned how the early big techs to report have behaved post Earnings Release.
So I wanted to apply that knowledge to this high-flying stock to showcase that trading Post Earnings Release is truly among the Best Options Strategies.
The Best Options Strategies: Setup on AMAZON (Ticker: AMZN)
Earnings report came Thursday after market close and the stock immediately plunged. At one point, AMZN was down almost 7% in After Hours from 1775 to 1650.
Then it settled down around -6.5%.
By the time end of pre-market Friday, a rally has already started. This is a give away sign that the initial move down was unlikely to hold.
This gave me the direction of my trade. I was going to buy calls based on this pre-market volume.
The only question left was to determine a strike price since I had already decided to play this same Friday Oct25 Expiration.
This strategy is called playing lotto. It means that there is a calculated Risk that the trade may not pan out and thus lose money.
The upside of playing Friday Lotto is that even the smallest move (+/-1%) in the stock equates to substantial gains in expiring Options.
Thus making it one the most lucrative Option Trading Strategies to master when learning how to trade options.
The Entry into AMZN Call Options Trade
I usually like to buy at least 3 contracts minimum in any trade I take.
Why ? Because it enables me to employ a scaled exit.
This means that I set my first exit for 1 or 2 contracts if i am winning and leave at least 1 contract run it course.
Unfortunately for me, the capital allocated for this trade on AMZN was not enough to buy 1 decent OTM (Out of the Money) contract left alone 3 of them.
So, I had to just be content with one single contract if I was lucky to get a fill.
From the previous day After hours price of 1650, AMZN opened almost at 1700 and quickly spike to 1725.
I was late putting in my automated order which turned out great.
In the retrace phase thereafter, I figured i would go for the 1752.5 strike because 1 contract was close to my budget for this trade $200.
So I was able to eventually get a fill for 1 contract for the cost of $1.95
The Exit out of the Trade
As shown on the confirmation exit below, I sold my call pretty quickly because I was not at ease with just one contract.
So I decided to take the profit once my gain was above 100%. I automated the exit to $4.55 using the chart of the Options itself.
Yes, this is possible and it can provide a day trader with and exit level when the option is overbought or oversold.
This trade generated a net profit of $260. However, because I could only buy one contract, I was forced to sell my position earlier than I would have liked.
After another retrace, AMZN rallied to 1766 and the OCT25 1752.5 Calls peaked as high as $16 per contract.
Now, I leave it to you to imagine the emotions that carried me throughout the weekend after missing an almost 10-bagger on might AMZN.
In case you do not know, a 10-bagger is when you make 10 times the amount you initially placed on the trade.
How would you have reacted if you were in my situation in this trade ?