By: Costas Bocelli — October 22, 2020
Here’s How The World’s Best Traders Bag Bigger Gains With Less Risk
Election Day is right around the corner.
In 12 days, America votes (at least those Americans who haven’t mailed in their ballots already).
But let me tell you, the world’s best traders aren’t focused on election results right now.
Rather, their attention is on corporate earnings results.
That’s because the heart of third-quarter earnings season has arrived.
And it's where the action is for those looking to bag big gains.
You too can jump in and profit right alongside of them.
Typically, stocks make some of their biggest one-day moves on earnings.
And if you happen to be positioned on the right side of the trade, it could result in a huge windfall.
Take Snap (SNAP), the parent company of the social media platform Snapchat.
The company blew away analyst estimates and, for just the second time since it went public, posted an adjusted profit.
As for the stock, it soared, gapping-up more than +25% on Wednesday’s open in reaction to the earnings beat.
(Click any image to enlarge)
If you happen to own the stock, you’re sitting pretty.
But had you positioned yourself by using a strategy that's used by some of the world’s best traders, you’d be ecstatic!
That’s because this strategy can take a +25% gain and transform it into a +100% gain, or a +150% gain, or more.
But let me tell you, not all earnings reactions come up roses.
Take Netflix (NFLX), another internet communications services company that reported quarterly results after Tuesday’s close.
Netflix announced subscriber growth for the third-quarter, and guidance for future subscriber growth, that fell well short of expectations.
And the stock is getting punished for it. It gapped down more than -5% on Wednesday’s open.
If you owned this stock, you’re not that happy at all.
But what if you positioned yourself using the same bullish strategy used by some of the world’s best traders? In that case, you’d still be looking at a loss, but a much smaller loss.
In other words, instead of being down -5% or more with the potential of losing even more, the world’s best traders have ensured a much smaller loss, even if the stock keeps moving lower.
And the ones that bet against the stock, and are looking for it to go lower... they're sitting on huge profits.
That’s right. The same strategy can be flipped upside down to make bearish trades.
And these bearish trades can generate bigger gains with far less risk than with taking a short position directly in the underlying stock.
The strategy I’m describing involves options.
Specifically, it’s an options strategy called a vertical spread.
It’s the secret sauce that makes Profit Skimmer, my options trading service, so successful and widely popular with individual investors. (Even those just getting started or who don't have much capital to invest.)
I use spreads almost exclusively for trade recommendations in Profit Skimmer. One vertical spread trade I recommended in Johnson & Johnson (JNJ) recently generated a +90% profit return.
The vertical spread is versatile and provides investors with many advantages over trading directly in the underlying stock or ETF, such as:
- Cost efficiency and high returns on capital…
- Limited risk and fully hedged positions…
- The ability to take bullish and bearish positions, even in an IRA.
And it’s the perfect vehicle for if you're looking to trade directionally around an earnings event.
My point is, if options aren't a part of your investing toolbox, you’re simply making a terrible mistake.
To illustrate the versatility of my options strategy, let’s look at a couple of timely examples.
Whether you have a bullish conviction or a bearish one, you can take away an actionable trade idea using my spread strategy.
And both trades can potentially generate triple-digit returns.
Here’s Two Ways to Play Facebook (FB) Heading Into Earnings
Facebook (FB) is another internet communications services company.
The company is due to report Q3 results next Thursday, October 29th after the close.
Do you think the stock goes higher – bullish reaction?
Or, do you think the stock goes lower – bearish reaction?
The good news is that regardless of your conviction, we can create a vertical spread trade for you.
As of this writing yesterday morning, FB is trading $280 per share.
Here’s the daily price chart…
Say you have a bullish view and want to play for a potential move back to the prior highs of $300 per share.
You could look to buy the FB October 30th 280/300 bull Call spread for about $7.50. Each Call spread risks $750 and can generate a profit of $1,250, or a +167% return should FB trade at or above $300 by next Friday.
The weekly option captures the earnings catalyst.
And if you have a bearish view, and want to play for a potential selloff to, say, $260 per share (the October lows)...
You could look to buy the FB October 30th 280/260 bear Put spread for about same price of $7.50. Each Put spread risks $750 and can generate a profit of $1,250 or a +167% return should FB trade at or below $260 by next Friday.
So there you have it.
You can easily see the versatility of the vertical spread strategy to make directional trades, both bullish and bearish.
Got Profit Skimmer? You should!
Until next time,