The thesis: Buying beaten-up blue-chip stocks towards the end of the year can be lucrative. Whether it’s a Santa Claus rally or the promise of a January effect or window dressing by mutual fund managers, a basic market lesson is that blue-chips tend to be a safe play around the holidays; trading beaten-up name-brand stocks was precisely why last November and December were my most profitable months of the year.
The latest: On Wednesday, I bought 4 IBM Feb. 16 (2018) $155 calls at $4.20 per contract. Normally, when trading options, I go a month out — to the third Friday of the following month — which would have landed my expiration date on Jan. 19.
But IBM is a slow mover. Very slow, unless they miss earnings (which they always seem to do, so there’s no way I’d hold the stock through an earnings announcement).
That’s why I bought an additional month’s time on the options. With slow-moving options trades, you want to let an ideally profitable trade run without getting damaged by theta loss, or time decay. That means extending your time frame.
How it turned out: I’m green on IBM, up over 10% on these options. The stock caught buyers faster than I expected; it is creeping up on the 200-day simple moving average line and I’ll sell for a profit if it stalls there.
Moral of the story: On slower moving trades via options, buy more time. It will help you play blue-chips and big names while reducing theta loss, and that will make it easier for your trades to pay off.
Davis Martin is the head trader at Dailyprofitmachine.com. He trades SPY calls and puts and swing trades individual stocks and stock options. At the time this article was published on RagingBull.com, he had the 4 options contracts on IBM described in this commentary, but no other shares or open orders. This is his first-ever trade in IBM.