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How do single-day stock gains of 40%, 50%, 75%, 100%, or even more sound? If you're anything like me, they sound pretty darn great.
Those kinds of gains happen almost every day, but the mainstream financial media would much rather focus on Facebook's 0.5% jump forward on some new VR breakthrough, or Alphabet's top line beat sending the stock up 2%, say.
Don't get me wrong; those are great single-day gains for large-cap companies – but the real single-day home runs usually come from micro- and small-cap companies – for instance, biotech companies that have just announced exciting news.
The news can include positive trial results, a partnership with a major pharma company, earnings that surprised the Street… Almost anything that catches traders by surprise can spur huge gains.
When these kinds of announcements occur, it's not uncommon to see shares gap up 50%, 75%, 100%, or more, overnight. Those are the kinds of gains that create unimaginable wealth – and very quickly, too.
But, as you can imagine, this story of riches can just as easily become a nightmare if the company releases unfavorable trial results.
When that happens, shares can easily drop 50%, 75%, or more in after-hours trading. Even prudent investors using protective stops will feel the sting because they won't be able to exit the trade until the market opens… after the damage is already done.
But I'm going to show one simple technique that will leave you free to target as many of those 100% one-day gainers as you can handle – and protect them once you've got them in the bag.
Here's how it works…
Insuring Your Biggest Gains Is Actually Simple
All you need to do is purchase just one accompanying "put option" for every 100 shares of the stock you own, which essentially guarantees your exit price – no matter what price the stock is trading.
Professional traders refer to this as "marrying" the put option to the stock. I just refer to it as "buying insurance."
Let's take a moment to look under the hood of this strategy – in five quick and easy steps.
Profit Insurance: Step No. 1
Let's assume we've identified a company that is scheduled to make an important announcement on a specific date. My favorite announcement is the release of data from a clinical trials program.
Once we have a company we're potentially interested in, it's time to buy some insurance.
Step No. 2
We're going to focus on put options with the nearest expiration date "after" the scheduled date for the upcoming announcement.
For instance, if company XYZ plans to release clinical trials results on Dec. 10, 2016, then we'll want to investigate put options with the first expiration after Dec. 10, 2016.
Just a quick side note: Typically, options expire on the third Friday of the month, but there is an increasing amount of companies that have "weekly" options. Just make sure to target an expiration that falls after the planned date of the announcement. Remember, the put option is insurance… and as insurance, it won't do us any good if it expires before the company announcement.
Step No. 3
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About the Author
Sid is the investment community's best-kept secret. Since 2009, he's served at Money Map Press as Director of Research, analyzing thousands of securities and profit opportunities for subscribers. He's an expert in identifying "alpha" potential in a wide variety of industries, but especially the small-cap sector, where he's discovered a pattern of profits that's almost foolproof. In Small-Cap Rocket Alert, Sid uses a single precise trigger - the "Launch Alarm" - that consistently forecasts when small-cap stocks are on the verge of propelling to new highs, making investors potentially life-changing gains in the process.
Tags: trading strategy