The market hit another all time high this week which means traders did not have to dig deep to find ways to make money trading Options.
In today’s discussion, we are going to show you how to make money trading Options in this rare scenario for us.
Starting with the video analysis of McDonald’s.
HOW TO MAKE MONEY TRADING OPTIONS: MCD Calls Trade
After hitting a record High at close last Friday, SPY gaped up on Monday to $308 and proceeded to stay range-bound for the rest of the week.
This type of action is not ideal for basic Options Traders because time is adverse for calls and puts buyers.
It is important for traders be aware of sideways action as we alluded in this other article.
In that regard, here is a very general basic guide of market behavior when it comes to movements.
Throughout a trading day, we have other activities that we have to tend do. The table above is an attempt to to provide a global view of the market for periods of movements.
Of course, not all the stocks will abide by this “schedule” especially during earnings season or in case of a major news break.
A major news break is exactly what led us into our Top trade the week.
HOW TO MAKE MONEY TRADING OPTIONS: The Setup on MCD
Major news came on MacDonald (ticker:MCD) on Monday that the Chief Executive Officer was fired due to some companies violations.
It turned out that the departing CEO was having a relationship with one of its employees : She must have been Lovin’It
I digress but I just could not help myself on that one. The market did not like the news and the stock gaped down on Monday from $193.94 close on Friday to $190.16.
Below is the daily chart of MCD stock to help follow the movement this week.
I typically do not trade news at all because it is not a sustainable methodology. Most of us retail traders do not know when the news is coming out so by the time we take a position, the Smart Money may have already moved in the opposite direction.
The Entry into the Trade
So, On Tuesday morning, pre-market volume on McDonald(ticker:MCD) got my attention. This is one of the basic strategy to get involved into a trade : heavy unusual volume.
In the case of MCD, pre-market volume was about 117 shares which was above average and the price was bullish throughout .
I decided to enter the trade but I cautiously put a limit order well below the bid. Here is my entry order and fill below.
Notice the time gap between my order and the time it was filled. It took about 6 minutes (from 9:29AM – this means I pre-entered the order before the market opened !!) to be in the trade.
How did I know that 20 cents per contract would get me filled ? Remember in this article how we described Confidence ?
Yes, that is it at its best.
The Exit out of the Trade
In this trade, we ended up taking partial profits and kept one contract overnight as shown below.
- 9:35 AM EST : Buy 3 Contracts Order (See above) at 20 cents per Contract
- 11:48 AM EST : 1st Exit on 2 Contracts at 35 cents : 75% gain just over hours. Not as great as last week’s one on WDC…
- 10:12 AM EST (Next Day) : 2nd Exit on 1 Contract at $1.07 : 435% gain on this one Contract carried overnight
Why did I decide to carry the 1 contract overnight ?
Well for starters, after selling the 2 contracts early at 75% gains, I was guaranteed that this would not be a losing trade !!
The sale of those two contract on the 1st exit gave me all my initial risk plus a small benefit of about 15% (if I take away the tiny fees).
That alone gave me the confidence to hold the sole contract.
Secondly, we were only Tuesday, and I did not want to leave any money on the table 🙂
Thirdly, let me introduce you the chart of the position itself : not the chart for MCD stock but the chart for the Nov 8 195 Calls Contract.
We are scrutinizing that in this video.
In this trade, we showed you how to effectively use scaled exit to avoid leaving money on the table.
In the video analysis, we pointed out a good technique to define an exit strategy point.
I hope you enjoyed the review of this trade. Should you have questions, please leave me your thoughts on this trade in the comments section below.
How would you have reacted if you were in my situation in this trade ?