{"id":22091,"date":"2024-08-21T07:30:28","date_gmt":"2024-08-21T11:30:28","guid":{"rendered":"https:\/\/www.jeffclarktrader.com\/?p=22091"},"modified":"2024-08-21T07:30:28","modified_gmt":"2024-08-21T11:30:28","slug":"how-we-banked-two-wins-from-a-single-stock","status":"publish","type":"post","link":"https:\/\/jeffclarktrader.com\/market-minute\/how-we-banked-two-wins-from-a-single-stock\/","title":{"rendered":"How We Banked Two Wins From a Single Stock"},"content":{"rendered":"

Managing Editor’s Note:<\/strong> Today, we’re handing the reins over to colleague Larry Benedict – a market wizard and legendary hedge fund manager.<\/p>\n

Today, he’ll tell you about how he captured a great reversion-to-the-mean trade for his readers.<\/p>\n

Here’s Larry…<\/p>\n

\n

Even before the rout on August 5, a huge money flow was already underway…<\/p>\n

The major indexes (including the Nasdaq and S&P 500) topped out in July. Investors were dumping stocks as a major pullback took hold.<\/p>\n

By the time both bottomed out on August 5, they’d lost almost 16% and 10%, respectively.<\/p>\n

Throughout that flight to safety, a big chunk of that money found its way into bonds. Weakening economic data exacerbated that move. (Note that bonds increase in value as the likelihood of rate cuts intensifies.)<\/p>\n

But like any switch in money flow, that move can become overdone…<\/p>\n

And that’s what we saw with bonds.<\/p>\n

By August 2, the iShares 20+ Year Treasury Bond ETF (TLT) was trading in overbought territory. It looked vulnerable to a fall.<\/p>\n

Not only did we get that call right and prosper from a down move… we also caught the next move when TLT bounced.<\/p>\n

Today, I want to show how we pulled off two winning trades on a single stock among all the market carnage…<\/p>\n

Capturing a Fall<\/h2>\n

In the chart of TLT below, you can see its sharp rally from mid-July. TLT leaped above its 50-day moving average (MA, blue line).<\/p>\n

That move coincided with momentum turning higher as well (green circle), as shown by the Relative Strength Index (RSI).<\/p>\n

<\/p>\n

iShares 20+ Year Treasury Bond ETF (TLT)<\/strong><\/p>\n

\"Image\"<\/p>\n

Source: eSignal<\/em><\/p>\n

But that surge in buying soon put the RSI into overbought territory (upper gray dashed line). And that move looked overdone.<\/p>\n

That’s the type of scenario I look for to capture a mean-reversion trade. I aim to profit when an overstretched price snaps back the other way.<\/p>\n

So on August 2, we bought a put option on TLT. A put option increases in value when the underlying stock falls.<\/p>\n

Although we were a little early with the trade, it proved to be the right call…<\/p>\n

After peaking on August 5, the RSI formed an inverse “V” at “A” and retraced from overbought territory.<\/p>\n

As the chart shows, TLT declined as momentum steadily fell.<\/p>\n

Our position was in good profit, and TLT’s down move stalled that day. So we exited our position by selling our put option on August 7.<\/p>\n

That enabled subscribers of my option advisory The Opportunistic Trader<\/em> to generate a 34.5% gain. That’s a handy profit in just five days.<\/p>\n

But with that reversal to the downside looking overdone, we next decided to set ourselves up for a bounce.<\/p>\n

We just needed to wait for the right setup…<\/p>\n

Trading Both Directions<\/h2>\n

That setup appeared the following day when the RSI reversed at “B.” The move coincided with TLT trading around $95. That was a key support level from which I believed the stock would rally.<\/p>\n

Take another look:<\/p>\n

<\/p>\n

iShares 20+ Year Treasury Bond ETF (TLT)<\/strong><\/p>\n

\"Image\"<\/p>\n

Source: eSignal<\/em><\/p>\n

In anticipation of a rally, we bought a call option on TLT on August 8. A call option goes up in value when the underlying stock increases.<\/p>\n

And again we made the right call…<\/p>\n

TLT gapped higher the following day but then reversed off its highs. So we played it safe and closed out our TLT position by selling our call option.<\/p>\n

That netted those subscribers who placed the trade a 15% gain in a single day. Altogether, traders who took part in both positions generated a combined 49.5% gain in a week.<\/p>\n

<\/p>\n

\n
\n

Free Trading Resources<\/strong><\/p>\n

Have you checked out Jeff’s free trading resources on his website? It contains a selection of special reports, training videos, and a full trading glossary to help kickstart your trading career \u2013 at zero cost to you. Just click here<\/a> to check it out.<\/p>\n<\/p><\/div>\n<\/div>\n

<\/p>\n

Now, remember, options magnify both gains and losses. And because options have a finite life, the clock is always ticking down to expiration.<\/p>\n

So if the move you planned for doesn’t pan out, you can lose all the premium you paid if you hold the option through expiry.<\/p>\n

But as this trade shows, options are a great tool to profit from sharp reversals. We can generate outsized gains quickly…<\/p>\n

And among all the market carnage, it enabled us to generate a nearly 50% return in a single week.<\/p>\n

Happy Trading,<\/p>\n

Larry Benedict
Editor, Trading With Larry Benedict<\/em><\/p>\n","protected":false},"excerpt":{"rendered":"

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