Hey there, Power Profit Traders!
I hope the weekend gave you a chance to relax after another wild one on Wall Street.
Although Thursday was exceptionally brutal for stocks, the S&P 500 Index (SPX) still wrapped its best week since December, thanks to the latest batch of earnings reports and jobs data.
That’s why I’ll be talking about ways to navigate this crazy market volatility during today’s LIVE 11:30 a.m. ET Power Profit Trades session.
I’ll also be reviewing the top five coins in my Microcurrency Trader portfolio right now, and we’ll go over some blue-chip crypto charts and dive into some tips on allocation, while we’re at it.
Plus, as always, I’ll be taking your questions from the chat, so make sure you’re there at 11:30 a.m. ET sharp!
In today’s Power Profit Trades newsletter, though, I want to give you a preview of an options strategy that’s near the top of my trading playbook this week…
It’s a strategy I employ with my Operation Surge Strike traders, based on signals from my proprietary trading tools…
And it’s a strategy designed to make money from a stock’s volatility in EITHER direction.
You can skew the trade to be more bullish or bearish, but as long as the underlying shares make a big enough move one way or another, the position will come out ahead.
Ladies and gentlemen, let me introduce you to the straddle.
Straddling a Strike to Capitalize on Big Swings
Last week, we discussed the basics of call and put buying.
In the simplest terms, traders buy calls when they think a stock will go higher, and buy puts when they think it’ll go lower.
My Operation Surge Strike tools like BRUTUS are designed to alert trade opportunities to capitalize on rising or depleting implied volatility (IV), often ahead of or after an event, like earnings.
Sometimes these alerts are bullish in nature, and sometimes they’re bearish, depending on the historical patterns and IV trends for that particular stock.
However, sometimes we spot an opportunity to play both sides of the fence.
In this instance, we might initiate what’s called a long straddle.
A straddle consists of buying to open both a call and a put option at the same strike, with the same expiration date.
Although that might sound counterintuitive, as long as the underlying shares can make a big enough move to the up- or downside, or as long as IV inflates the option premiums enough to cover our initial cost of entry, the straddle stands to profit.
But let me give you a real-life example of a successful straddle we closed in Surge Strike recently.
On Jan. 13, my Surge Strike tools alerted us to an opportunity to straddle Blackstone (BX) ahead of earnings on Jan. 27.
I noted that BX stock historically runs hard into earnings, accompanied by a nice IV surge, and putting on a straddle would mitigate any directional risk on a trade.
BX stock on Jan. 13 after a Surge Strike signal
Plus, over the past two earnings seasons, buying straddles on BX had produced an average 89.19% return on investment (ROI), along with a very large 163.22% IV surge.
Therefore, we:
- Bought to open the BX $121-strike call expiring Jan. 28, and simultaneously
- Bought to open the BX $121-strike put expiring Jan. 28
Surge Strike members were told to pay no more than $7.40 combined for the pair of options – which were essentially at the money (ATM) at the time – and to target a 90% return.
BX straddle on Jan. 13 after a Surge Strike signal
Fast-forward to Jan. 24, when Blackstone stock gapped lower at the opening bell.
The stock was now trading beneath the $110 area (from around $121 at the time of entry), and IV was on the rise ahead of earnings, increasing the extrinsic value of our options.
So, while the $121-strike call option we bought was clearly deep out of the money (OTM), the $121-strike PUT option was now roughly $11 in the money (ITM) – enough to offset our cost of entry and then some!
As such, we closed our BX straddle well beyond our original 90% profit target…
And we didn’t even have to pick a direction on earnings.
In closing, I’ll be discussing the straddle strategy even more this week, as the current market conditions and flood of earnings still rolling in makes this a ripe environment for so-called directionless option trades.
So make sure you catch my Power Profit Trades LIVE sessions at 11:30 a.m. ET today through Wednesday, and I’ll see you here again tomorrow!
Tom Gentile
America’s #1 Pattern Trader
