If you’ve been paying attention to the stock market over the past year, you know that it had a pretty great run. Stocks are up 22% since this time last year.
And now that we are in earnings season, Wall Street is looking for the good news to keep coming. But that doesn’t mean just buying any call option ahead of an earnings report. That’s a recipe for failure.
Options do take a little effort to master, but if you do your homework, you’ll be well ahead of the game.
And that means you will be on your way to making money.
Today, we’ll show you exactly what you need to know to make money with options trades during earnings season, including one stock we’re eyeing for a trade…
The Key to Options Trading Success
Think about it. Many investors spend more time picking out a restaurant than researching an investment. And the same goes for options. If you know what you are doing, you should be able to consistently make money.
You don’t have to go it alone, either. Money Morning’s options trading specialist, Tom Gentile, is an expert in uncovering patterns in the stock market that recur year in and year out. If you can find stocks that are already in a trend, whether they’re heading higher or lower, you can buy or sell with confidence. Further, Tom’s research digs deep to find real trends that aren’t obvious yet.
Right now, Tom sees bearish trends in three specific stocks that you can exploit for profit using a basic options trade. And the best part is that you can jump on them before the rest of Wall Street realizes what’s happening.
Sure, you could have cashed in on Tesla Inc. (NASDAQ: TSLA) if you saw it a few months ago, before it tripled. Or Boeing Co. (NYSE: BA) before it slid 18% from its September 2019 high. Those big-name trades are trains that left the station long ago.
Instead, let’s focus on stocks that haven’t made their moves yet.
Tom looked at S&P 500 stocks and noticed that 47 of the 500 were at 52-week highs. And nearly half were at or above 90% of their 52-week ranges.
In other words, a lot of stocks have rallied sharply, and very few have been left behind. That means there is little room for the natural rotation from winners to losers to sustain the current trend without some sort of downside reaction.
Of course, stocks that have been so strong tend to stay strong, so any correction could be mild. And stocks that were weak don’t have all that much to lose. That’s why Tom focuses on the stocks in the middle of the pack. These are the ones that could move the most if their earnings reports are anything but perfect.
And one stock looks especially juicy as a short-side play.
Here’s the stock - and how you can cash in with a simple put options trade…
Bad Action on Good Earnings
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The stock we’re looking at just reported strong earnings, but that’s proving to be fool’s gold for traders, creating a nice bearish trade opportunity for us.
After the bell on Jan. 21, IBM (NYSE: IBM) announced a surprise revenue gain, its first year-over-year sales increase in more than a year, driven by the company’s cognitive solutions and cloud segments. The stock jumped 3.4% during the next day’s session in what looked to be a breakout move.
However, within days, the stock gave back the entire gain and then some, and now it is back in the mediocrity of the middle of its 52-week range.
What’s worse for the stock – and good for you – is that poor reaction to what is essentially very good news is a bearish sign. It tells us the jump higher was only a temporary reprieve and that there was ample supply of stock offered for sale at that better price.
In other words, it’s a weak stock.
But how do we know if that was a true failure at a resistance level aside from subjectively labeling it “bad action on good news”? Tom uses Fibonacci retracement levels to help.
Based on a natural construct of numbers, the Fibonacci sequence describes how many things in the real world move. From the spiraling of petals on a flower to the spiraling of arms on a galaxy, the ratio of any consecutive numbers in the sequence describe them. The value of the ratio is 0.618.
In the stock market we use this ratio, called the golden ratio, to our advantage. If a stock makes a strong move in one direction, it often retraces it back in the other direction by 61.8%. We also look at moves of 38.2%, which is 100% minus 61.8%.
More often than not, a stock will find support or resistance at these levels.
That’s what we see with IBM. After falling in July and August 2019, it rallied back several times and was stopped at all three of these levels periodically through this month. Of course, it’s not perfect, as the overshoot on September shows. But for the most part, they do help find possible turning points, especially if they’ve been tested a few times.
IBM was trading at the 38.2% retracement the day before earnings. After the announcement, it jumped to the 61.8% level. And then fell back to 38.2%. If it can’t hold this level as support, the odds that it will fall all the way back to the August low are rather high.
In order to take advantage of this, you could sell shares short, but that can be tricky. An even simpler way is to buy an at-the-money put option, which has a limited, defined risk and a potential to multiply the percentage profit of simply shorting the stock.
Of course, that’s just one of Tom’s trades. But he’s unlocking the vault for his subscribers…
Learn How to Harness This Powerful Options Trading Secret for Yourself
Live from his private office in Florida, America’s No. 1 Pattern Trader is revealing his most lucrative options trading secret yet.
It’s the reason he’s able to make such fast, profitable moves on companies like Netflix, Apple, Facebook, even Amazon – the reason he’s able to see major paydays long before they happen.
We’re talking about the potential to see the future of any stock on the market.
And Tom Gentile’s going live to show you exactly how to do it.
Believe it or not, it’s as easy as a few simple clicks of your mouse…
In no time at all, you could be lining up trade opportunities one by one and watching as your account grows bigger and bigger.