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By: Tom Gentile
on October 23rd, 2024
Being Prepared for Stormy Situations in Life AND the Markets
ℹ️ This article was previously published in our newsletter. Subscribe for early access!
First off I want to thank everyone who sent in their best wishes for me and my family to get through these hurricanes safely. I am pleased to report post these two hurricane(s) and all is well with my family and home.
I consider myself and my family blessed to have come through this as well as we have. I know others haven’t and my hearts and prayers go out to those and their families as they work to recover and rebuild.
In the Tools and Observations section of this weeks newsletter I educate you all on a strategy that is one that can be considered when a stormy situation hits a particular stock, say an earnings miss.
When one is prepared with this strategy they can potentially weather that unfortunate occurrence and maybe profit from it. This is a strategy one of my trading colleagues, friend and instructor Mike Wade teaches in the Earnings Mastery Course.
If you wish to pursue that course, whether or not I run it live next year or not, I provide you with a means to acquire the latest 6-week course recordings at the end of the newsletter. Prayers to all still dealing with the post hurricane concerns.
To your success,
— Tom Gentile
Markets in Focus – SPDR S&P 500 ETF Trust (SPY) and SPDR Gold Shares (GLD)
GLD is a gold ETF. Gold is considered a safe haven, which would imply when equities are down one turns to gold.
We can see that the two are pretty correlated – the track the same for now.
It could be a sign investors are staying with an equal weighting of investments in each, so they are positioned when one sells off they are already hedged with the other.
Tools and Observations – An Options Strategy for when Things Go Awry
I wrote about how fortunate I feel that I and my family survived the hurricane in as good a shape as we did.
One of the major reasons I feel we made it through in as good a shape as we have is well, the Good Lord and for my being prepared.
I treat my process of options trading the same as I do in my everyday life. I plan and work on being prepared for when things go wrong just as well as when they go right.
Stormy situations can hit the markets and individual securities (stocks).
Especially during earnings season.
Earnins reports are a tricky thing to trade option on and around. Especially if you are not educated in a style of trading or an options trading process, like one of my colleagues and trading instructors Mike Wade teaches in the Earnings Mastry Course I run most years.
One option strategy taught in the 6-week Earnings Mastery Course is the Credit Spread. Specifically, the Call Credit Spread. Put credit spreads are taught as well, but for this piece I am going to educate you all on the Call Credit Spread.
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The chart below shows you what happened this past Tuesday when UnitedHealth Group Incorporated reported their earnings.
They reported a miss: The company missed expectations by 0.14% while revenue grew 9.16% on a year-over-year basis and that price action happened.
A strategy taught is a Call Credit Spread. This is a strategy where one Sells to Open one strike price Call option at an expiration date and at the same time or on the same order ticket Buys to Open a Call option with the same expiration, but it has a higher strike price.
The intent for the trade as we teach it is to place the strikes at a price where we don’t believe the stock will get to.
The Sold to Open Call should be higher in premium than the one you Bought to Open resulting in a credit amount to your account. One has to wait until expiration to realize the credit or they can buy the position back, hopefully at a lower price than sold and pocket the difference.
Our goal for a Return on Investment (ROI) is 1% a day. We like to do these with a week or less until expiration. This way we can get into the trade and out of it with our 1% or better ROI as quickly as possible.
When we Buy to Open options we want to give ourselves a good amount of time to be right. When we sell premium, which this strategy does, we want to have a short amount of time to expiration. This gives an advantage of having the position expire as quickly as possible so we can put cash in the account.
UNH gapped down, fell off some more, tried to rally and then settled back on the day (even though it closed higher than its open).
WE look at where it gapped down from as a resistance or place where we don’t think the stock will get to by expiration (within a week or less).
In this educational example it would be a price of $595. That is the strike in this example to Sell to Open. Then we look at the next strike price up which is $600. That is the one on the same order ticket to Buy to Open.
One would have to work the spread to get the price shown, but the pricing shown was a price of $0.15 or $15 per contract to open the trade. Do this times 10 contracts and that a potential $150 if it goes to plan.
That would be a ROI of 6.38% if it expires and one keeps the full premium, (0.15 / 2.35 = 6.38%). All UNH needs to do is stay under $595 by the Friday expiration. This would be a 3-day trade so if one were to realize the 6.38% divided by the 3 days that is a per day ROI of 2.12% – which is above our goal of 1% ROI per day.
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Choose from a wealth of Mastery Programs including our System Mastery, Hedge Fund Mastery, and Trend Mastery — or choose to get access to all of them with the All Access pass.
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Stock and options trading has large potential rewards, but also large potential risk.
You must be aware of the risks and be willing to accept them in order to invest in the stock and options market. Do not trade with money you cannot afford to lose.
This is neither an offer to buy/sell/ or recommend a particular stock or option.
Hypothetical or simulated performance results have certain inherent limitations. Unlike an actual performance record, simulated results do not represent actual trading. Also, since the trades have not been actually executed, the results may have under or overcompensated for the impact, if any, of certain market factors, such as lack of liquidity. Simulated trading programs in general are also subject to the fact that they are designed with hindsight.
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