January 28, 2019
Trades & Tutorials
By Geoff Bysshe
When you make 500% on a trade, I consider it a home run.
When you do it in 2 days or less, it’s even better!
You might be thinking that the only way to make 500% in 2 days or less is to get lucky with a huge unexpected move in a stock, but that’s not true.
Yes, in this post I’m going to outline an options trade setup that enables you to quickly bank 100, 300, 500, and even 1,000%+ gains in one day (maybe two) with an average sized move in a stock or ETF.
For example, last Friday I bought calls in AAPL for $0.10 in the morning. Then 30 minutes later, I sold half my position at $0.30 for a 200% gain.
A few hours later I sold the rest of my position for $0.43 for an over 300% gain. Plus, I had plenty of opportunities to take profits at over a 500% gain! I share why I didn’t grab the 500% and more below.
These dramatic gains were possible even though APPL’s move on the day was only about $5.00 which is not a huge move considering its average true range (ATR) over the last 10 days has been $3.50.
To be clear, this is not a get rich quick strategy, and the risks are in line with the potential gains (very high).
However, it’s fun (and profitable) making high triple-digit gains in one day, so when I see this set up I trade it with small positions, because even small positions can make more than a multi-week swing trade in just a few hours.
Plus, if you manage your risk properly, the dollar risk for the trade can be less than your average trade risk. I would recommend that you only do this with smaller dollar risks than you’d take on any quick hit trade idea.
The Home Run Options Pay Day Setup
Here’s how it works.
First, I’m trading weekly options that expire in 1-2 days.
This very short time frame enables you to find options priced under $0.20.
There’s nothing magic about $0.20, but the low price can more easily lead to bigger percentage gains.
More importantly, the lower priced options reduces the required capital at risk.
I prefer to buy 5, preferably 10, and maybe even 20 contracts so I have more flexibility to scale out of the position.
If you follow my opinion on our strategy for NASDAQ 100 Active trades you know that in that case I’m happy with just 2-3 contracts, so don’t interpret this as size matters!
A lot of contracts is not required, but at the small price point of this strategy the reward to risk that you’ll see in this post makes it worth considering.
Plus, scaling out of a position both to reduce losses and lock in profits, makes it emotionally easier to hold your winners longer.
Since I don’t want to risk any more than a couple hundred dollars on these trades, the sweet spot for me is 10 contracts at $0.10 to $0.20. You can go higher or lower. For example, I’ve had situations where I’ve made $0.03 options work!
You need to be clear on your risk level, because…
The right mentality going into this trade is that this option WILL most likely expire worthless.
This is why I took profits on half of my AAPL position in 30 minutes when it was up only 200%, even though I saw the potential for over 1,000% gains ahead.
Don’t gamble. This is a calculated bet. It’s very short-term nature requires discipline.
With 10 contracts at $0.10 I could sell 5 at $0.30 and lock in a profitable trade even if the remaining trade goes to zero. Plus, if the stock had climbed just $0.50 higher at its peak intra-day, it would have been easy to lock in a 1,000% + gain.
Below you’ll see why I believed there was a good chance that would happen.
The second ingredient for this trade to work is very liquid options. You need a tight bid-offer spread!
If you don’t have a tight spread, you as the expiration gets close, and you’ll get stuck exiting even a good trade at a loss.
Think about it. If you’re trading a $0.10 option with a $0.05 spread the option has to go up 50% just for you to be able to break even with a market order to sell! That’s not a good game to play.
The spread in AAPL’s option was $0.02 which is about as good as I think you’ll get.
Here’s The Secret Sauce
For Traders WITHOUT A MarketGauge Edge…
Look for a strike price that is close to 1 ATR away.
Until you are an expert in 48 hour expiration strategies this is critical. And it does not always exist.
If the strike price and an the price action don’t line up to give you a strike that is less than 150% of an ATR from your entry then you’re playing with fire because…
While this strategy does work with further strikes, the advantage you have with a close strike is that when your stock moves very close to, or even better, beyond your strike, it will hold value in the last few hours of the day much better than an out of the money strike.
Often times the last few hours of the day are crititcal so this is incredibly valuable!
Plus, with far out of the money strikes you have less time before your option goes to zero, and you’re already short on time in this trade!
Additionally, the home run scenario is that your stock significantly exceeds your strike and you pick up massive gains from the effect of Delta increasing as the price crosses the strike with so little time left to expiration.
Let’s Be Clear!
The reason you’re looking for a strike distance that is not far from the stock’s average daily move is so that you don’t need a home run move to create home run gains!
In fact, sometimes these trades come from buying an opening range reversal near the low of the day when the stock is down on the day.
Even better would be a situation where the high of the prior day is higher than your strike price. In this case, it can be a home run trade even if the stock only trades back up to the high of the prior day!
This is just one example of why understanding how to trade using the Opening Range can give you a huge edge in this trade.
Here’s The EXTRA Secret Sauce
For Traders WITH The MarketGauge Edge…
There’s still one very important piece of this puzzle of triple-digit one day winners.
One of the strengths of this trade is that we don’t need to count on an unusually large price move to earn an unusually large profit.
However, there aren’t any free lunches on Wall Street.
There is a ‘catch’ here, so let’s deal with it!
The catch lies in the fact that the reason we don’t need a big price move is because we’re trading so close to expiration.
This means our timing has to be very good.
The Backwards Discovery of A Successful Trade
I didn’t find this trade set up by setting out to figure out how to trade weekly options. In fact, the opposite happened.
I discovered an intra-day pattern that does a great job at telling me not only that tomorrow is going to be a trend day, but also identifying the direction of the trend!
Armed with this precise timing, I looked looked at weekly options for a way to leverage this power with a trade that I could put on in the morning and just let run until the end of the day and have the risk be the same or less than if I traded the stock.
Unfortunately, I learned that “just letting it run” is not as easy as I’d hoped.
To really maximize these trades, you’ll want to watch them closely.
The Secret To Finding Stocks Today,
That Are Going to Trend Tomorrow
If you have access to our Real Motion Indicators, then you probably know what I’m going to say next. If you don’t know Real Motion, don’t worry, I’ll explain it quickly.
Real Motion is a MarketGauge indicator that measures momentum in a way that can tell you (before conventional charts see it) that the price trend is about to change.
When Real Motion indicates that a stock or ETF’s momentum has shifted from bearish to bullish, yet the stock’s price trend is still going down, there is a ‘divergence’.
When there is a divergence at the end of the day. The next day is set up for a surprise. The surprise does not mean the stock will move big. However, it indicates that the price trend will likely change.
Additionally, if it does change the next day, it will often trend in the new direction catching most traders by surprise.
Very often the trend day will be bigger than average, and very steady. Both of these qualities are good for the options trade discussed above.
To further improve the accuracy in picking the right day to trade, I use the Opening Range to confirm that the current day is going to be the day that the Real Motion divergence changes the price trend.
So the price set up for this trade is as follows:
The trade setup is even more powerful if the daily chart has a pattern that could become explosive if the day after the divergence reverses and trends as expected.
The charts below show how all this played out in AAPL on Friday, Jan. 25, 2019.
The Real Motion divergence we’re looking for is on the 5-minute chart with the 50 and 200 period moving averages used for Real Motion and the price.
The divergence is measured by comparing the 50 and 200-period moving averages of price and Real Motion on a 5-min chart at the end of the day. Normally, the pattern of these averages will be the same.
However, when they are the opposite (diverging), Real Motion is telling you the market is set up to change its trend!
The day before this trade occurred, I showed attendees of a free training webinar that it was setting up! You may be able to watch the replay here (if we haven’t taken it down).
As you can see from the chart above, AAPL’s price trended down on 1/24, but the Real Motion indicator turned up and closed with the 50-period average over the 200-period average.
Then on 1/25 AAPL gapped higher and the broke out of its 5-min. Opening Range (O.R.).
Below you can see how the weekly 157.50 calls expiring on 1/25 and the stock traded.
As you can see from the chart above as soon as AAPL broke its O.R. high I was able to buy the calls for $0.10.
After the breakout AAPL trended nicely for 30 minutes.
I have a simple trending market rule for taking profits quickly which is…
When a trending market trades below its prior bar low beware of a trend change.
In this case, I could lock in a 200% gain, and as a result, secure a risk-free trade, so I sold half my position at $0.30.
Considering the fact that an hour later the option was trading at $0.10 again, it’s my preference to take profits quickly when you have the opportunity.
The Home Run Potential
As you can see from the daily chart below, AAPL was breaking out of a daily flag pattern. Additionally, the daily chart has a bullish Real Motion divergence on this chart too!
Remember… The trade setup is even more powerful if the daily chart has a pattern that could become explosive if the intra-day divergence pattern leads to a reversal day as expected.
As you can see in the chart above, this day was challenging an important swing high. In fact, it broke it!
When the swing high of $157.80 was broken, I felt there was potential for AAPL to run to the next round number and resistance level of 160.
If that had happened, the $0.10 calls would have had a value of at least $2.50, or a 2,400% gain in one day.
Yes, AAPL would have had to have moved over $8 or twice its average range to reach 160, and that expectation is not part of this strategy, so I knew that was a stretch, but as I said earlier…
A spike higher to 159 on a swing high breakout over a resistance level of $157.80 is not unreasonable, and that would have been the 1,000%+ one day return I was playing for.
When the breakout failed by my trading rules, I settled for taking profits at $0.43 which was a profit of over 300%
This came after passing up 500% returns that were there for the taking for at least 15 minutes. You can see this in the option chart above. There were 4 bars that were trading over $0.60.
That’s my style. I don’t try to sell the high tick.
More importantly, now you know the strategy. You can play it your own way.
When you can reliably identify when a stock is going to have a one day or two day trend of an average size starting on a Thursday or Friday you can potentially make 3x to 10x your risk in 2 days or less.
If this simple but specific set up is in place, next…
In conclusion, this description of the “Home Run Options Pay Day” is intended to demonstrate how a trading strategy often has several specific components that each serve their own very important role in the success of a trade.
In this case I’ve combined the intra-day Real Motion divergence to identify the potential for a short-term reversal with the 5-minute OR to confirm the reversal has begun.
Then I leveraged to profit potential of this Real Motion setup with very specific options criteria.
Additionally, this description of the strategy demonstrates that a strategy should be constructed and traded with a very clear expectation of its potential outcome.
In this case, the strategy was constructed with a goal of having a very low cost of capital with limited risk, and the potential for an unusual large percentage gain.
It’s traded with the understanding that the odds of achieving the unusually high percentage gain are small, so tactics like scaling out (selling half the position quickly if the opportunity exists to take profits) are used to reduce the cost of a loss in the likely event that the option will expire worthless.
The expectations for the results of this trade are very clear.
Please DO NOT trade this strategy with real money if you do not have experience with weekly options, and never risk any amount of money that you are not willing to lose.
This is only one way in which I take advantage of the Real Motion divergence pattern that indicates a market is setting up to reverse and surprise traders.
For example, remember that the daily chart above also had a divergence pattern. This is why I was paying attention to AAPL and found the intra-day setup!
In addition to the 1 day trade I outlined above, the same reversal pattern can be used to enter the stock or longer-term options. In that case, you can use wider stops and targets with an objective of catching a multi-day rally.
If this is done correctly, capital risk can still be kept low, odds of the trade being profitable can be increased, and the trade would not require such intense intra-day focus.