By: Tom Gentile
on June 7th, 2023
Originally published via our newsletter previously. Subscribe for early access!
Different Options Trading Styles to be Taught
Last week you were provided an article of education from our resident Chartered Market Technician, (CMT), Clare White.
CMT’s are professional technical analysts.
There will be two articles per month from Clare and this week is the second one for the month.
We will also continue to provide education on how we utilize the tools to find opportunities to construct option trades.
In varying weeks, we may educate you one of our handful of option trading styles and emphasize which trading style we are educating you all on at that time.
We could go over a Seasonal Style of options trading one week, a contrarian style the next. We have a variety of trading styles and scans in my tools to help execute my three-step process to options trading.
- SPOT the OPPORTUNITY
- BUILD AN ACCEPTABLE RISK OPTION TRADE
- MANAGE the TRADE
— Tom Gentile
C1P: Chief 1-Percenter
We will start up our option style education next week as this week we are bringing you the second educational article from our CMT, Clare… Enjoy!
From the Desk of a CMT – Debt Ceiling Clarity?
A debt ceiling resolution this past weekend (in theory with the two parties coming to terms and awaiting a vote – who wants to be responsible for it not passing?) clears some market uncertainty, so a bullish scan seems like a good way to go this week.
A new scan was selected that searches for past positive earnings surprises. We’ll complete the scan, save the best performers to a list, then review stock charts in the list.
The scan is accessed from the following menu selections:
Stocks > Stock Rankers > Earnings Rankings
When reviewing the charts, we’ll reverse the logic from the last few scans. Since this is a bullish approach, we’ll want to find stocks that are near an objective support level with some room to run to an objective resistance level.
Positive momentum is a plus.
If the earnings date is within the next month, we’ll also see if we can benefit from implied volatility (IV) seasonality by purchasing lower relative volume now and sell before the earnings date with the expectation that IV will increase as earnings approaches.
There are no guarantees in the markets, so money management and risk management must be in place too.
32 stocks had 8 for the Num of Earnings with actual exceeding estimated, so the top 32 stocks were saved to a new list called Earnings Beat.
Once again, the Fibonacci chart option was selected to identify objective support and resistance areas.
You can also consider recent lows rather than support or highs for resistance to identify objective areas for exits, but there’s a touch less objectivity on that selection.
The main rhythm remains the same:
- Have specific exit prices for an expected loss and an expected gain,
- Include an IV assessment in your strategy,
- Identify a timed exit for the case study, and
- Manage the case study to a max risk, acknowledging that an overnight gap may result in you exceeding that risk. Size your position with that in mind.
Here is the list of 32 stocks in the Earnings Beat list on 5/30/2023:
ADBE TSLA TMO QCOM PYPL NVDA ORCL ABT AMGN LMT MA UNH UPS TXN AMD NKE HD LIN CVS WBA V CSCO JNJ RTX CMCSA BMY KHC GD T HON SO KO
The price action we were seeking combined with nearby earnings didn’t materialize but LMT has nearby support with reasonable 30-60 day at-the-money IV, so that stock is selected for a bullish Smart Search scan.
Note you can also run through the IV charts from a stock list, so that review can be very efficient too.
Figure 3 provides LMT’s 30–60-day ATM IV and Figure 4, the daily price chart with MACD.
Using the Fibonacci levels for LMT we have:
- Objective support at 432.81
- Objective resistance at 501.41
LMT’s close was 447.97 on 5/30/2032.
Sorting a vanilla call Smart Search results by Odds, the Jun 23rd 455 call has 1.2 to 1 for Odds and 38 days to expiration, so earnings seasonality is not expected to come into play. Figures 5 & 6 display the search results and the risk information, respectively.
Since conditions will clearly be different after this article posts, think more about the steps here.
Unless an outlier spike or drop occurs, the support and resistance levels should remain the same over the next few weeks. Ideally, you have the opportunity to wait for support to be tested and use a successful test of it to enter a bullish strategy.
I’ll post an update on LMT next article and prefer to see what a potential test of support brings. The 7–30-day ATM IV was slightly more elevated for LMT, a timeframe that better reflects the option expiration selected in the scan. It’s reasonable to think that a later dated option may make more sense at that time. If successful, the exits are expected remain the same:
- Objective support at 432.81 serves as the exit for an expected loss and
- Objective resistance at 501.41 serves as the exit for an expected gain.
Consider exiting at an 80% move to the 501.41 level. Additionally, you must identify a timed exit for the strategy, as well as a max risk.
In the event the good news about the debt ceiling deal wears off quickly, consider viewing stocks with actual earnings that were worse than estimated by selecting the next button on the wizard panel.
Clare White, CMT
Thank you, Clare!
— Tom Gentile
C1P: Chief 1-Percenter
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