One of the best benefits of trading options, even for beginners, is the ability to profit in both rising and falling markets. With one small tweak, a winning strategy in a bullish trend easily converts to a winning strategy in a pullback.
But traders can easily be lulled to sleep following the market's trends. Bearish traders made a killing March and April, but if they didn't switch strategies, they lost out during the rally in May and June.
That could be happening today. In fact, one way to take your options trading to the next level is to dig deeper into market trends by looking at technical indicators. And one we'll show you today is showing signs of a change in direction.
With stocks more or less in a holding pattern since early June, big Nasdaq tech stocks excluded, it is time to consider that the market is setting up for a deeper pullback in July. After all, it has been quite a recovery rally from the March low, and factors outside the market, like COVID-19, are keeping many people quite nervous.
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Money Morning's options trading specialist, Tom Gentile, thinks just that. Now, Tom likes the long-term outlook for stocks, but he's looking at some technical indicators that show a short-term pullback could be in the works. In fact, his proprietary Money Calendar is flashing a lot of bearish signals right now. And so are traditional technical signals, including rising volatility.
The Money Calendar looks at the top 250 "optionable" stocks and crunches 10 years' worth of precise performance data to tell us which direction to trade. As July progresses, the calendar looks more and more bearish – so much so that by the end of the month, the short term looks pretty dicey.
Now, we can wait for the trend in the market to actually change, or we can get ahead of it and make some money. That's the beauty of options. For very little money, we can trade in anticipation of the coming pullback.
Plus, we'll likely be able to buy cheaper options by getting ahead of the crowd. That's because volatility, while rising, is still very low compared to where it was during the panicky days of late March.
Here's exactly how you can turn this data into a profitable trade, and it's still simple enough of a trade you can do it on user-friendly platforms like Robinhood or WeBull.
The Best Robinhood Options Trade to Make Ahead of Pullback
Since we are looking for a decline in the market, we want to buy put options, which rise in value when the underlying stock or index falls in price.
Tom is looking at the SDPR S&P 500 ETF (NYSEArca: SPY), which tracks the performance of the S&P 500 index itself. He thinks that the coming pullback will take this ETF down to the $270-$280 zone from its Monday close just above $313. That's about a 15% decline.
To take advantage of Tom's research, we're looking at the SPY Sept. 18, 2020 $275 put, which gives it a little time to work, but not so much that we lose the real bang for the buck in a short-term trade. This put closed Tuesday at $5.14.
If Tom is right and the SPY drops to $275 by the end of July, then this option could triple in price – a 200% gain.
He Made Millions Trading for an Hour Before Breakfast
Andrew Keene was living with his parents. Two years later, he had $5 million to play with – all because of this one strategy.
The crazy thing is you can do it in less than 90 minutes a week.
To see how easy your life could be, click here.