The U.S.-China trade war has been rocking the stock market all year long – and as a result, May has seen some of the worst volatility of the year.
As the war battles on, it’s driving big name stocks and world markets lower. Chinese companies are getting hammered, and so are U.S. stocks dependent on Chinese manufacturing.
Clearly, the market has been falling – but that’s not all it’s doing…
Positive news has actually interrupted these big drops with sharp rebounds, causing the market to zig-zag up and down all month.
Picking the market’s direction right now is tenuous at best. With the next news announcement, we could make a big move either way – causing many traders to get whipsawed and quickly migrate to the sidelines.
But not us. Because this is a high opportunity environment – and you don’t want to leave profits on the table.
Here’s a low-risk way to profit on this volatility…
Play Both Sides of the Fence with This “Crab Trap” Strategy
Thanks to the trade war, many big-name U.S. stocks dependent upon Chinese manufacturing have dropped dramatically over the past few weeks – like Apple Inc. (NASDAQ: AAPL), which has fallen 13% so far this month. And AAPL isn’t the only one…
Severe restrictions on China’s Huawei Technologies for the U.S. tech sector sharply drove down shares in tech stocks too, like Qualcomm Inc. (NASDAQ: QCOM), Micron Technology Inc. (NASDAQ: MU), and Broadcom Inc. (NASDAQ: AVGO).
Chinese companies are feeling the pain as well – the Amazon of China, Alibaba Group Holding Ltd. (NYSE: BABA), has dropped over 13% since its May highs, hurting with the increased tariffs.
Now, if the trade war lingers, then this is just the beginning – there are many other companies that will suffer. And the trade war’s impact is not confined to the U.S. and China.
We live in a global economy – so if the U.S. and China catch a cold, so will the rest of the world. Many believe that this trade war could even spark a global recession.
According to most investors, all of this is “bad” for stocks and “worse” for others.
Now, I put “bad” and “worse” in quotations, because as option traders, all of this volatility and bearishness shouldn’t have us scared – it should have us excited.
For us, volatility means opportunity.
We can capitalize on the falling stocks with put options on stocks like AAPL, AVGO, and BABA. And it could be as simple as that… but there’s a problem.
Any bit of good news, like a Trump tweet lowering tariffs, could have stocks and the overall market rebound dramatically – leaving a bearish put trade worthless.
We need a way to trade this volatility and not get hurt if good news creates a snap back…
So, we buy cheap puts – I’m talking less than $1. If the news remains bad and your stock continues to drop, your cheap puts will increase in value. If the stock rebounds on good news, you only lose a little.
I like to think of this strategy like placing crab traps. Drop your cheap crab traps into the water and wait for them to catch something…
And in this situation, that something is profits.
Let’s take a look at an example. Check out the AAPL chart below:
Right now, you can buy AAPL June $160 Puts for $0.99 per contract. For 100 shares, that’s a $99 trade.
Should AAPL drop over the next month, this crab trap will trap some quick profits. But if good news comes out and AAPL rebounds, you’re only looking at a $99 loss.
And as long as the stock moves quickly enough, it doesn’t have to drop below $160 to make money.
Specifically, here’s what to do:
- Buy an out-the-money (OTM) put. This means that the option’s strike price is less than the current stock price.
- Use 30-60 day options.
Remember, the trade war is affecting lots of big-name tech stocks right now, not just AAPL. Here are some other 30-day crab trap trades available right now:
Now, let’s say these stocks don’t drop. Positive news can come out at any time and drive these stocks back up, quickly leaving our puts worthless.
This is why we also place crab traps above the current stock price – this way, we can catch some profits with a rebound as well. To do that, simply buy OTM call options for less than $1.
For example, right now you can buy AAPL June $205 Calls for $0.60 per contract, or $60.
And it works the same way as our OTM puts – just in reverse. Should AAPL rebound over the next month, this crab trap will trap some quick profits. Should AAPL drop, we only lose $60.
So, now we have two cheap crab trap trades in place. If the tariff wars continue, that’s good for our $160 put trap. If good news occurs, then our $205 call trap will catch profits instead.
One or the other is likely to occur – so either way, we’re set.
If you want more time to be right, buy 60-day options instead of 30 days – just be sure to spend under $1 per contract.
This is one of the safest – and easiest – strategies to use if you’re new to options.
And I break down more strategies just like these even further at the beginning of every single month in my Million Dollar Masterclass sessions.
These live trading demonstrations – and a virtual step-by-step walkthrough – help you master the techniques we talk about often so you can feel confident using them in your everyday trading.
It’ll be like you’re looking right over my shoulder.
To make sure you’re set up to attend my next one, go here now.
Good trading,
Tom Gentile
America’s #1 Pattern Trader
