Editor’s Note: If you’re watching the financial news networks, you’ve probably seen all the so-called experts trying to predict which earnings reports could “save the stock market” after its recent mini-crash. But they’re missing one small detail that could completely change the way you profit from earnings. And today, Tom Gentile is sharing the details you need to cash in on any earnings report- good or bad. Click here for details.
Dear Power Profit Trader,
Trading this market is like riding a bucking bronco.
For instance, the S&P 500 has dropped 11% in October which has led to many heading for the sidelines or watching like a deer in headlights.
On the other end of the spectrum, some are playing the downside by shorting stocks or buying put options.
However, this only works as long as the market keeps dropping…
But you don’t have to roll the dice in this volatile market because there’s a surefire way to grab gains no matter which way the market turns.
Here’s how you can easily turn volatility into profits…
Ride this “Bucking Bronco” Market to Profits – Here’s How
We are currently in the midst of extreme market volatility. The month of October has seen the S&P 500 drop 11% to a low of 2603. We have seen daily drops as high as 3% intermixed with rises as high as 2%.
Although many believe the market has further downside, some are left wondering when the market will bounce back up.
You see, going long (bullish) in this market won’t work if the markets continue to drop.
Shorting this market will hurt should it rebound.
So, in turn, this has left many people to retiring to the sidelines, shaking their heads, not sure what to do.
But regardless of the uncertainty, one thing remains clear: the market will remain volatile for now.
That’s why the one word I’m about to say is so important…
What it is: An options trading strategy where you buy an at-the-money (ATM) call and an ATM put with the same strike prices and expiration dates – at the same time, on the same order.
When to use: In high volatility and during earnings season
How to profit: When the stock (or other underlying security) moves either up or down
Maximum risk: The net debit paid (cost of both the call and put)
Maximum reward: Unlimited
Pre-earnings straddles: Exit before earnings come out
Post-earnings straddles: Exit within a few days after earnings come out
And it allows you to win no matter which way the market goes…
You see, when the stock goes up enough the calls make more money than the puts lose and vice versa. This is illustrated in the straddle risk graph below:
Now, like with any trade setup, there is risk in a straddle. If the stock stays flat, both the call and the put lose money.
But this can be avoided by identifying stocks that are moving a lot.
The best way to do that is to find stocks that have the highest Average True Range (ATR). Average True Range, developed by J. Welles Wilder, simply indicates the stocks volatility over a 14-day range. The higher the ATR, the more the stock moves around.
Here are my top 10 volatile (highest ATR) stocks for this month:
Now remember something… these stocks are the wildest movers in this wildly moving market. In other words, the likelihood of them continuing to move is high.
The next step is to construct straddles. Here’s what you do:
- Buy At-The-Money (ATM) Straddle (strike price = stock price)
- Use 60-90 Day Options.
- Exit Conditions:
- 25% Profit.
- 25% Loss.
- 30 Days to Expiration.
- After Earnings Announcement.
Think of this system as grabbing chunks of money off the table when they’re available… similar to the kid’s game, “Hungry Hippo.” With the right stocks, you can essentially keep playing this game at infinitum.
Over time you will generate a stable of stocks that produce the best gains, so don’t be afraid to replace stocks that don’t perform.
And if you’re new to options trading, don’t worry. The straddle is the safest option strategy available, particularly if you follow the exit rules above.
Now, there is one more critical piece when it comes to finding success with straddles – and it’s by digging into the slippage.
It’s critical that you avoid options with too much slippage. Slippage is the difference between the bid (sell) and ask (buy) price and you don’t want it to be any higher than 10%.
For example, in the following straddle, the slippage is $0.25 ($3.05 – $2.80).
America’s #1 Pattern Trader