Last week, I gave all of my Power Profit Trades subscribers a chance to follow along with a trade generated by Money Calendar.
Our recommended “loophole trade” on The Priceline Group Inc. (NASDAQ:PCLN) was a rollercoaster – some of you got in on the trade, while many more probably missed out.
Yesterday, those of you who got in had the opportunity to close down that trade with triple-digit profits (in less than a week), per our exit instructions.
Today, I’m going to walk you through the trade step by step, show you why the trade got away from us, how it came back to us, and how a lucky few managed to walk away with huge profits.
Let’s get to it…
First, let’s go back and take a look at what originally attracted Money Calendar to the trade in the first place:
As you can see, Money Calendar noted that PCLN has made this move nine out of the last 10 years, or 90% of the time, between October 12 and November 14.
Here are the original entry instructions for the trade:
Actions to Take:
Entry Date: October 13, 2015 (today)
BUY-to-Open: The Priceline Group Inc. (NASDAQ:PCLN) PCLN November 6, 2015 $1320 Call (PCLN151106C01320000) AND SELL-to-Open: The Priceline Group Inc. (NASDAQ:PCLN) PCLN November 6, 2015 $1330 Call (PCLN151106C01330000) to create a November 6, 2015 Vertical Call Spread for $4.00 or less.
Using Limit Orders to Combat Earnings Season Volatility
You’ll notice that we used a Limit Order to place this trade – and with good reason…
You can use a limit order to limit the price at which you enter or exit a trade. A limit order typically comes with a stipulation of a limit price “or better,” which means you’ll get the best available price (that’s lower if you’re buying, higher if you’re selling).
Limit orders are great for managing your risk and your profits – you can make sure that you don’t pay too much to enter a trade, and also capture profits at predetermined targets so you don’t get gamed by other traders or jerked around by volatile markets.
Earnings season heated up this week, as all eyes turn away from China, foreign currency markets, and even commodities for to focus on stocks.
The big news for the time being relates to the third quarter – will this seasons earnings be a trick or a treat?
It doesn’t matter for us because we either trade in front of earnings, getting out before earnings hit, or hold our trades through earnings if the numbers warrant. We may even elect to skip a trade opportunity due to the uncertainty that earnings brings.
But there is one thing we will ALWAYS do when it comes to our trading plan…
We will always use Limit Orders on trades in earnings seasons because volatility and uncertainty tend to upset markets during this time frame.
And there’s no better example than our PCLN loophole trade…
Let me walk you through the trade and show you exactly what happened.
Uncertainty Roiled the Markets… But We Stuck to Our Plan
Despite our best efforts, we really don’t know ahead of time where PCLN will open on our prescribed entry date. (Honestly if I had that information, I’d be the richest man on earth.)
As you can see in the chart below, when we first recommended the trade last Tuesday, there were no opportunities to get filled – the options were simply too expensive.
But as the week wore on, some earnings-related volatility worked in our favor. This was an unknown that everyone was surprised to see, as all options that expired November 6 were re-priced due to a slight change in the earnings report date. Any buyer of call (or put) options prior to that date saw implied volatility drops of 33% on average.
That’s right – the stock price wasn’t the only contributing factor to a drop in options prices.
Take a look:
Now, there wasn’t a tremendous amount of volume at our limit price, but as you can see, the loophole trade was periodically trading below our $4 limit price, meaning you at least had the opportunity to get in. Our limit order filled at $4 on Thursday, October 15.
If you were lucky enough to get into the PCLN loophole trade at or below our $4 limit, you should have immediately initiated our exit strategy. Here were our prescribed exit instructions, issued with the original recommendation last Tuesday
Exit Date: November 4, 2015
Exit Strategy/Profit Taking Option:
SELL-to-Close: The Priceline Group Inc. (NASDAQ:PCLN) PCLN November 6, 2015 $1320 Call (PCLN151106C01320000) AND BUY-to-Close: The Priceline Group Inc. (NASDAQ:PCLN) PCLN November 6, 2015 $1330 Call (PCLN151106C01330000) for a 100% return.
If you had your orders in place, then just after the open on Monday, those orders filled as the spread on our loophole trade went above $8, and you banked a nice 100% profit in less than one week.
If You Didn’t Get Filled, Don’t Worry
If you didn’t get filled last week, don’t sweat it. The important thing is that you went into the trade with a plan and you used a limit order to manage your trade (and your risk).
Most importantly, you didn’t chase the trade. You didn’t pay too much for pricey call options on a very expensive stock. You didn’t put more money at risk than was absolutely necessary.
You made the perfect trade – in this instance, that just so happened to be no trade.
Remember that trading is not about one trade, it’s about a lifetime of opportunities. There will be hurdles along the way, including limit orders that don’t get filled.
If your Limit Order doesn’t hit, simply wait for the next opportunity. Last week, Money Calendar subscribers had four more opportunities to get into trades with triple-digit potential – the next trade is never far off.
Now, there is a bit of housekeeping to tend to if you didn’t get into this trade:
Make sure you cancel your orders.
The price move that Money Calendar predicted has already occurred. If you’ve still got orders out in the market to execute a four-point spread on the PCLN options, go ahead and cancel those orders now. You don’t want the price of these options to come back down as they get closer to expiration, and for those old orders to fill.
Your Trading Lesson Summary:
- Always use Limit Orders during earnings season to protect against uncertainty and volatility.
- If you didn’t get a fill, don’t sweat it – sometimes the best trade is no trade.
- If you still have a limit order open for this trade, don’t forget to cancel it!
Talk to you soon…