If you are still getting your feet wet trading options, chances are you are using a popular platform like Robinhood. The easier it is to enter and follow your traders, the better.
But now that you know where to trade, you need to know what to trade. That's where we come in.
And you're in luck. This week is going to be one of the biggest earnings weeks in years, with more than 400 companies reporting Q2 earnings, giving us our first real glimpse into how businesses handled the coronavirus shutdown.
That means stock prices will be moving, which is great for options traders.
But too many traders try to make money by guessing whether a company's earnings will be good or not. They might see a talking head on TV predicting what the results may be and buy the corresponding puts or calls. If you really want to gamble like that, you'd be better off in Las Vegas.
It takes a little more effort to have success with options. Fortunately, you're in the right place. We have a team of experts doing the heavy lifting for you. Combined with your goals, it produces a winning combination, and more importantly, a bulging trading account.
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Today, we are going to bring you a great options trade for earnings season from Money Morning Quantitative Specialist Chris Johnson. Curated from his proprietary system, this trade is easy to understand, and just as easy to execute on a free platform like Robinhood or Webull.
Chris is looking to take advantage of seasonality on the market. This is the tendency for stocks to either go up or go down depending on the time of year. What he has found is that stocks tend to move higher in May and June, before earnings come out in July. Traders think they can get into their positions ahead of earnings so that when the news comes out, they will have the jump on the competition.
The problem is that the enthusiasm wears thin by mid-month, and that's when things can get a little dangerous. After all, if these traders already bought their stocks, there is not a lot of fuel left to power them higher. That's especially true this year, after indexes have rebounded to all-time highs in the wake of the coronavirus crash this spring.
This is also where the bulk of that old saw that says to "sell in May" comes in. July tends to end on a weak note, August gets even weaker, and September is often the worst month of the year ahead of the seasonal rebound in October.
But you don't have to be left holding the bag when the seasonal selling starts after this week's big earnings calls.
Chris' options trade will put cash into your pocket if markets continue following this pattern. According to Chris' research, this trade could more than double your money...
The Best Options Trade on Robinhood Today
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Chris is honing in on the Russell 2000 index of small-cap stocks. The reason is that small caps tend to fall faster than their larger cousins when the market pulls back.
Smaller stocks are more speculative as a group and therefore are usually the first to be sold. People tend to hold on to their blue-chip stocks longer, only selling when a real bear market sets in. But many traders buy small caps in hopes of a big gain, so if the market gets shaky, these are the first stocks they sell, which means the small-cap indexes could fall farther and faster if the market slows down.
And you can play this to perfection with a simple put option.
Chris suggests buying a put option on the iShares Russell 2000 Index ETF (NYSEArca: IWM). The Russell 2000 is the index of small-cap companies, and this ETF will track its movements. Here's how to trade it:
Buy to open the IWM Nov. 20, 2020 $140 (IWM201120P00140000) put with a limit price of $9.60.
The limit order ensures you won't overpay for this option, and the long expiration date gives you some time cushion for the price to move.
Right now, this option is out of the money, because the IWM ETF is trading below the $140 strike price. However, Chris expects a correction in the Russell 2000 of potentially 20% by the end of the summer. That should put the option well into the money and make your puts very profitable. If IWM drops around 20% by Sept. 21, the end of summer, you'd be looking at a gain of 163%.
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Click here for the full story and the next three plays he has his eye on.