By: Steve Smith
In case I didn’t stress it enough with all my recent Pre-Earnings trade articles — where I shared the strategies used to obtain an 81% win rate — earnings season indeed kicked off today with big banks JP Morgan (JPM) and Goldman Sachs (GS) reporting this morning.
More specifically, I used Post Earnings Premium Crush to gain a mathematical edge. While this will present many great trade opportunities for my Earnings360 Service members over the next six weeks, it means that my regular trading in the Options360 Service must make some adjustments to sidestep these reports.
This is why Options360 will now focus on shorter-term trades over the next few weeks. I’ll also be applying strategies with a higher degree of leverage, targeting 100% gains.
For Options360 Service members, or readers of some of the trades we’ve made here, know that I typically employ diagonal spreads anywhere between three weeks and three months until expiration. There are two main benefits to using spreads: It defines your risk and allows you to make adjustments to reduce cost basis through the process of rolling the short-term options.
The main drawback is that it caps your profits. Or even more frustrating, is if there’s a quick move in the expected direction and the price drives through the short strike, you may make little-to-no money at all — despite being ‘right’. This recently happened in a bullish Pinterest (PINS) trade where Options360 set up a bullish diagonal of long the April (4/16) 70 strike and short the April (4/1) 75 for a $4.50 debit. The stock proceeded to run from $70 to $80 in just the next three days. Great call on my part right? Even so, it was the wrong strategy. The spread only valued at $5.00, giving us a mere 11% gain on a 14% monster underlying shares’ move.
And that has been the nature of recent market action, which has been dominated by near-daily rotation among sectors with stocks going on a quick run then fizzling out. So, with the combination of wanting to sidestep earnings reports and take advantage of these quick and powerful moves, I’m focusing on shorter-term trades using strategies that can offer larger returns north of 100% on relatively modest moves in the underlying shares.
Case in point, the Options360 Alert that I sent today to set up a bullish trade in Visa (V) using ratio spread that gives you a net long or uncovered call for unlimited profit potential. Like the time frame which is just for the next 10 days, the Alert was quick and to the point:
Visa (V) has been holding above the $220 level. I think it can rally back above $225 ahead of earnings which are slated for April 27th.
Let’s use a short-term ratio spread in which we buy 2 contracts and sell.
-Buy to open 2 contracts April (4/23) 220 Calls
-Sell to open 1 contract April (4/23) 222.5 Calls
For a Net Debit of $4.90 or $490 for the 2×1 spread
(Do not go above $5.15)
Assuming V hits my initial $225 target by next Friday, the position will be worth $9 (an 80% gain). The great thing is that if the stock keeps rallying to $230, I can hold the ‘extra’ call and the returns would jump to 150%.
I plan on using more of these short-term, open-ended strategies in the coming weeks. Visa’s already moving higher with the trade up 15% in just a few hours. Don’t miss out on the next quick hit.