Trading the Bulls, Bears and Greyhounds
Earnings season separates the wheat from the chaff, the men from the boys and the athletes from the posers.
It is what I deem the “no excuses” phase of stock selectivity, for it is when every company becomes transparent for all to examine. If the numbers don’t live up to a company’s mid-quarter optimism, its stock gets body slammed harder than a CNN reporter in a President Trump YouTube video.
What seems evident from the tale of the tape is that professional market participants, including high-frequency traders (HFTs), hedge funds and institutional fund managers, glom on to certain names that nail the quarter and correspondingly move the price of these winning stocks rapidly higher to levels that are typically unsustainable over the intermediate term. For the swing trader, though, a three-to-six week sprint higher that reflects more of a greyhound-style rally makes for great option strategies that leverage winning stocks for the short term.
A powerful trading strategy to capture these greyhound rallies is to utilize a synthetic bull-call-spread option trade. This strategy applies both a long-term and a short-term call option to construct the trade. Purchasing a LEAP (Long-Term Equity Anticipation Security) and selling a short-term, out-of-the-money call option is an effective way to capture phenomenal upside appreciation and generate immediate income. The bull-call-spread trades I recommend are on stocks that trade well above $100 per share — the market darlings that dominate the trading landscape.
There is no doubt the so-called FAANG stocks, namely Facebook, Amazon, Apple, Netflix and Google, have maintained their luster. They currently occupy 10.6% of the weighting for the S&P 500. Other big names at or near the top include Microsoft, Johnson & Johnson, ExxonMobil, Berkshire Hathaway Class B and JPMorgan Chase. Within my bull-call-spread advisory, called Instant Income Trader, I’ve utilized most of the stocks noted above that trade north of $100 per share. Needless to say, these companies have been the right place to be for the most part, along with some other standouts like Broadcom, Lockheed Martin, Mastercard, Celgene and Boeing.
In most bull-call-spread trades, one can simply enter a net-debit limit order that takes into account a certain cost for the long call and certain amount received for the sale of the short call. In contrast, the trades I recommend involve buying a deep-in-the-money LEAP on the technical pullback of the underlying common stock and then placing a limit order to sell the short-term out-of-the-money call at a price that will require a move up from the common stock for the order to be executed. It is a two-step trade, but it is designed to be closed out within 90 days of being activated.
If the stock is still in a bullish uptrend, then we’ll just play it again and again. It is kind of like betting on the same greyhound over and over. Instant Income Trader is performing like a champ. The average number of days held for closed trades is 63 and the annualized average rate of return for 2017 is 55.7%, and we’re only in the month of July. This kind of return is outpacing the Nasdaq by a three-to-one margin by managing a conservative bull-call-spread strategy that only involves the crème de la crème stocks.
The bonus of the this program is that one can control about $1 million in blue-chip institutional darlings for about $100,000 without the use of a margin. This is about as close to having your cake and eating it too when it comes to having your trading capital work overtime in a manner that isn’t high stakes like most options trades, which lose 90% of the time. The secret sauce is to buy plenty of time, hence the use of the LEAP, and sell call premium after a big pop in the stock. It is a great way to stay invested in the very best names and beat the market’s performance by a factor of 3-5 times.
Click here to take a tour of Instant Income Trader and find out if this high-powered trading advisory is a good fit for your risk/reward profile. It is where we trade the purebreds and the thoroughbreds and bet on the favorites every day.
In case you missed it, I encourage you to read my e-letter from last week about how to play real estate investment trusts to your advantage.
