Today, I want to take you through a real trade – all the way from setup, to profit – that I did for subscribers of Jeff Clark Trader, which is my entry-level trading service.
I used my favorite trading pattern – the magic pattern, which you can check out right here – to help my readers make 222% in just six trading days.
And this isn’t a one-off… in the past year, I’ve traded this same pattern for gains of 26% in just two trading days… 152% in six trading days… and 97% in eight trading days.
Going into 2025 and beyond, I believe the coming market chaos will hand us many opportunities to exploit this pattern over and over for excellent gains.
Check out my video edition below, or scroll down to read the transcript.
Transcript
Hi folks, welcome back to another video version of Market Minute. I’m Jeff Clark. You know, last time we got together on a video version, I talked about gambling and the options market.
I’m generally against the idea of gambling, but I tried to explain how if you can at least put the risk/reward parameters in your favor, where there’s a lot more reward than potential risk, that it’s probably acceptable to go ahead and gamble little bit with options.
What I’d like to do today though is to show you how I trade options, which is really the way I think options are meant to be traded, which is with a view of risk.
In fact, it’s a view of lowering risk and keeping the same sort of potential that you would otherwise have on a stock.
So without wasting a lot of time here, let me share my screen with you. I want to show a trade that we did in Jeff Clark Trader, which is my entry level subscription service.
We did it back in late February. And this will give you a good example of what I’m talking about in terms of putting the odds in your favor and then lowering your risk as well.
So this is GDX.
This is actually my all-time favorite stock to trade. This is the VanEck Vector Gold Miners Fund. And it’s an interesting thing about this, if you had bought this one when it came out originally, I don’t know, 10,11,12 years ago.
it was trading, around $35 a share. It’s currently around $37 a share. So if you had bought it and held onto it for the length of time it’s been in existence, you’ve actually made pretty much nothing.
But it is one of the best vehicles for trading. So if you like the idea of trading options, you like the idea of even just trading stocks, GDX is volatile enough, it’s very emotional, and it gives traders lots of opportunities.
It’s something that I love to trade. I probably do 10 to 15 trades a year on GDX. So this is one that was set up way back in February.
And I just want to show you how it played out, because it’s a really good example of using options the right way.
So the first thing that I’ll point out on the chart here, what I liked about this particular pattern, this is the, I’m talking about the blue dashed lines.
If you’re familiar with my work, if you’ve read Market Minute for any length of time, you know I like these bullish falling wedge patterns.
Most of the time, this type of a pattern tends to break out to the upside and the move can be explosive.
So you can see here’s the resistance line of the wedge, here’s the support line of the wedge, and then in late February, this was actually February 27th is the date on the chart here, I recommended to my readers buying call options on GDX.
Now the reason I really like this setup, not just because of the pattern, but look at the risk/reward situation that’s facing you here.
So GDX made a low just above $25 a share last October. And so if we were buying the stock, we’d be buying it right here around $26.
So I figure you got about a dollar’s worth of risk in that stock. On the upside, if we’re right and the stock moves out, a big blast higher out of the wedge probably targets this price in here in early 2024, the resistance line, close to $30.
A Really Favorable Setup
So we’re looking at $1 worth of risk if you buy the stock at $26 and $4 worth of potential reward. And if this really kicked into gear, we could see it all the way up to the top of the wedge, which would give us $6 potential reward.
But I wasn’t planning for that. I was planning for this move up towards $30. So $1 risk, $4 of potential reward. That’s a really favorable setup. So I like that kind of an idea. Now, if I was recommending this trade to my
Okay, so this is a trade that I don’t want to get yelled at over Thanksgiving dinner about. I really want to reduce the risk as much as I possibly can. So I like this setup for that particular reason because my risk is defined down to a dollar.
But let’s just say we’re buying a stock. I tell mom, buy 100 shares here at $26. So you’re putting $2,600 into it. Now, mom’s very conservative. She probably would keep I don’t know, maybe a 10% stop on it.
And what I mean by that is if we’re wrong on the trade, the most she’s ever going to want to lose is 10% of that $2,600.
So if this stock was to trade down 10%, if she owned the shares, she’d sell the stock and take a $260 loss and be done with it.
Now there’s a couple things you have to remember if you’re trading stocks and you’re going to stick to a stop loss.
First of all, you have to have the discipline to stick to that stop loss. A lot of folks say, I’m going to risk 10% of my money, and then it falls 10%, and they say, no, you know what, I like it even better here, and then it falls 15%, and then they like it even better there, and then all of a sudden it’s down 90%, they’ve blown up their account.
So you have to have the discipline if you’re going to stick to that. The other part to it is there’s no guarantee it gives you an easy way out after it falls 10%. Stocks do have a tendency to gap, and you can see stocks gapping 10, 15, 20% lower.
So even though you thought you were going to stop out at 10%, you wind up taking a bigger hit.
So there’s no guarantee, but let’s say for example, you just wanted to do that. You’re going to buy 100 shares, you’re going to risk $260, that’s the most, and you’re out of it.
What I would do as an options trader is I look at that and say, okay, mom’s going to risk $260 on this. What I want to do is I want to take that $260, put the rest of that $2,340, leave that in the bank account.
I’m going to take the $260, I’m going to go over to the options market and see what sort of option I can buy that gives me the same sort of upside reward.
That way, whenever you’re trading options, the most you can risk when you’re buying an option is the amount you spend on it. So as long as I don’t spend more than $260 on the options, then I’m not risking any more in the options market than I would be doing on the stock.
So I go over to the option market and at the time, and this was the recommendation I made in Jeff Clark Trader, is we bought the $26 call options going out to April.
We bought the April $26 calls for 90 cents. So what I can tell mom is say, look, you know, let’s take the $260 over to the option market and we’ll buy some call options for 90 cents.
If I buy three call options, that’s $270, that’s too much. So I’m going to only go buy two. We’ll buy two call options for 90 cents each. That’s $180.
So rather than risking $260 on the stock, I’m already reducing my risk to just $180.
So I’m willing to lose less in the option than I would be willing to lose in the stock. So I’m already using options as they’re intended, to reduce risk.
So I’m spending 90 cents, buying two options at 90 cents, that’s $180. And I have the potential to buy the stock at $26 a share if it moves higher between now and option expiration in April.
Let me show you how this trade played out. So here it is, two weeks later, one week later, and we had this nice little pop.
So this bullish falling wedge played out as we thought it would, it popped to the upside. The stock rallied all the way up here to $29.16. It actually stopped at this resistance line here, or this is where I told folks to take their profit. It didn’t quite get to the first resistance line that I was targeting originally on the trade, but that didn’t matter.
The options that we paid 90 cents for were now trading for $2.90. So I made $200 on each call option. I had two of them, so I made $400 in total. Mom made $400 in total on this trade.
Now if she had bought the stock at $26 and sold it up here around $29-ish, she made a little bit over $300. Well, I did better on the options than I would have done on the stock.
So not only did I reduce my risk by only putting $180 into this trade rather than the $260 I was willing to risk on the stock, but I made $400 versus making just $300 on the stock.
So this is what I’m talking about when you use options the right way, you reduce your risk and you increase your potential reward.
So this is the best of both worlds.
Now you can gamble and you can say, okay, you know, it’s going to put $2,600 into the stock. I’ll take all $2,600 and put it into the option.
The problem with that is we talked about in the last video is when you’re wrong, it’s a devastating hit, you wind up blowing up your account.
But if you do things the right way, if you’re looking to trade long-term, you’re not looking to get rich quick overnight. What we’re looking to do is make this a business, something that we’re going to be doing for a long time, then you need to have some sort of a strategy that allows you to profit better than what you would do on the stock.
And when you lose money, you lose less than what you would have lost on the stock.
And what I’ve showed you here today, I hope, gives you a little bit of education about that.
So we’ll leave it at that for today. So like I said, we put risk/reward on our side, and then we use options the right way as they’re designed to be.
Reduce your risk and increase your potential reward.
So we’ll check back with you next time on Market Minute.
Have a wonderful trading day and happy Thanksgiving.
Take care,
Jeff Clark
Editor, Market Minute