fbpx

 

Stocks were all over the place this week, as most major averages closed the week lower. With major earnings on the way, and the election around the corner, I expect to see a significant rise in market volatility.

Remember, investors hate uncertainty because it creates volatility.

However, traders thrive off it.

That’s why I am focused on trades with a defined edge.

I believe a perfect storm is brewing, creating an opportunity for a savvy options trader like myself to take advantage of MISPRICED OPTIONS.

To find these trades I’ll be using my favorite indicator, fractal energy.

As well as share with you a recent trade I had in TSLA, an earnings play which took advantage of the options mispricing.

Which I’ll teach you how to spot.

 

Earnings Can Move The Markets

 

Here’s a look at just some of the earnings that were reported last week

 

 

And for me, this is one of my best strategies taking advantage of market volatility and options mispricing.

Now, it’s important to remember to be careful around earnings and trading options with higher levels of implied volatility can be risky.

But if you have an indicator that is designed to profit during high volatility, then you have an edge against the other traders

For example, TESLA (TSLA) is expected to report earnings on 10/21/2020.  Many traders like to understand what the financial ratios and car sales would be expected.  The key for me would be to look at price action

 

Source: Thinkorswim

For the most part, TSLA has been respecting the Bollinger Bands over the course of the year, and has let me know where the support levels are.  In turn, I’ll know where buyers are likely to step in.

So with TSLA, I’m looking at the Fractals combined with Bollinger Bands to determine where the buyers will likely step in.  When the price action mixed with these two indicators start to show that the buyers are back in this stock, I will start looking for a place to sell bull put spreads on this stock.

You see, I can use these areas and indicators to look for price action where I can take advantage of the increased levels of implied volatility.

To execute this trade, I would like to leverage the power of short credit spreads, or bull put spreads.  This means I will sell a put spread to profit on the high volatility of these options.

Over the weekend, I want to show you a few stocks with earnings coming up that I might be trading in the weeks ahead, so make sure you look out for the e-letter

Want more than just the research?  Only members will get the trade alert when I actually place the trade

Don’t get the e-letters? Sign up here

Author: Dave Lukas

I’ve never heard of a trader who wanted to make less money

If you are a trader the chances are you want to increase or replace your current income

And that is what I aim to do for every trade I take

You see… I want to be the casino with the house odds in my favor 

Which is why I turn to different credit spreads every time I trade

And one way to own a stock and boost your income is to use a covered call strategy

By using this strategy I return 90%+ on almost every trade

But before you run out and trade this strategy, you need to hear these two tips 

Let me explain…

 

The Covered Calls

 

A Covered Call is a little known credit strategy used by traders who want to own stock and generate additional income.

This strategy is an options strategy involving trades in both the underlying stock and options contracts.  

So, what is the purpose of a Covered Call Strategy?

To generate income on top of owning a stock

And as an income-generating focused trader, I am always in the hunt for the perfect covered call opportunity.

Stay tuned here for a deep-dive into covered calls coming up soon, where I dig into different aspects of this strategy you might not have heard of before.

 

How To Create A Covered Call

 

Creating a covered call is a straightforward process once you understand the basics of options, and it’s done in 3 basic steps.

The 3 Steps To Creating A Covered Call:

  • Purchase or already own a stock that you have an interest in owning for a period of time.  Be sure to purchase stocks in only lots of 100 shares.
  • Sell 1 call contract for every 100 shares of stock you own.  For example, if you own 500 shares of AMD, you will want to sell 5 contracts.  
  • Wait for the call to be exercised or to expire worthless.  If the call expires worthless then you will keep the premium and also keep the original shares of the stock you own.

 

Risks Of A Covered Call Strategy

 

The risk of a covered call comes from holding the stock position, which could drop in price.

Your maximum loss comes from the stock going to zero, but that is the same risk any stock trader that is unhedged would have.

The Formula:

Maximum Loss Per Share = Stock Entry Price – Option Premium Received

Unfortunately, there is a trade off to generating income with this strategy.  Your profits are capped to the price of the options contract you sold.  

The Formula:

Maximum Profit = ( Strike Price – Stock Entry Price) + Option Premium Received

 

Quick Example

 

Here is a quick example of how I would use a Covered Call spread on my trading

 

Source: Thinkorswim

 

You might think this is a short put at first glance, but it’s not.

This strategy mimics the short put and allows a trader who owns a stock a way to generate income.

The possible outcomes:

  • If the stock falls, you keep the credit from the call option and maintain ownership of the stock
  • If the stock rises, you keep the credit from the call option and can either close your position out or let it exercise to deliver your shares

My ideal outcome is actually to let the stock fall or stay within a specific range.  

Why?

If the stock does this you can keep your stock and generate a considerable amount of income just by selling out the calls.

And if you maintain a covered call trading strategy, you could sell out calls almost every month on a single stock and generate trading income by simply owning the stock.

 

Final Thoughts On The Covered Call Option Strategy

 

The main goal of the covered call is to collect income via options premium by selling calls against a stock that you currently own.

If the stock moves in any direction but not greater than the strike price, you are able to collect the premium and maintain your stock position.  

Traders should factor in commission on this trade, and if the commissions are greater than your option you are selling, you might want to consider selecting a different option to sell.

So if I decide to ever trade a covered call strategy or jump into any other credit strategies, my Energy Trader subscribers will be the first to know

And to learn the exactly strategy I’m using to trade stocks like these in real time – sign up for Energy Trader today

Author: Dave Lukas

Ever want to generate income outside of your daily job but don’t know where to start?

It’s ok – not many people do.

I turned to trading when I had that exact same question and started to trade options to generate income.

But I did not start selling options blindly – I turned to Fractals to guide me

Fractal Energy is the “thumb on the pulse of the market” indicator

So what is Fractal Energy, anyways?

It’s one of the two indicators that I use for steady and consistent profits!

And when I sell options combined with these indicators, I stack the odds of a win in my favor!

This core strategy allows me to win almost 75% of the time with profits consistently over 80%*

I’m talking about 93% in gains on my last trade

You see, in my opinion… it’s the simple way to generate steady and consistent income 

And if you want an income stream you need to put this into action for yourself

This is how it’s done…

Energy Trader

One thing I like about trading options is how a trader can create almost any strategy they want.

From buying options to credit strategies, the possibilities are endless.

But many strategies aren’t for me.

You see, I want the ‘house odds’ on my side.  

And that’s why I trade credit spreads.  

Now I don’t trade these spreads blind, instead I turn to my proprietary indicator that can gauge the internal momentum of a stock.

I call it Fractal Energy and I never trade without it.

And as a member of my service every member receives this indicator coded for the brokerage platform of their choice!

What is Fractal Energy

To cut down the work that I have to do every day, I only focus on stocks that meet qualifications set by the Fractal Energy Indicator.

To understand price action you need an indicator that is built for the job

Fractal Energy can determine stocks that are charged to run or exhausted and ready to stall out.

Now – what are fractals?

The power of fractals allows me to determine the strength of trends and how much “life” is in a stock’s movement.  

There are 2 main components of Fractal Energy:

  1. Markets Fractal Pattern
  2. The Internal Energy 

Those two different components create a single indicator that is able to determine the strength or weakness of a trend on any stock.

Here is how it looks


Source: Thinkorswim

It can’t be more clear

Fractal Energy signaled three of the recent market pivots many other indicators failed to recognize.

Here’s how the RSI looked for the same period


Source: Thinkorswim

Now according to the RSI indicator, it signaled 1 out of 3 pivots compared with Fractal Energy.

This is when I search for income strategies instead of taking bets in the market to put the odds of success in my favor like the casinos do.

Generate Income With Credit Spreads

In order to generate income, I need a strategy built for the job… and that’s why I turn to credit spreads.

My go-to trading strategy is the credit put spread or a  naked put in order to get paid upfront to own a stock at a discount!

The Credit Put Spread is a neutral to bullish options trading strategy.

It aims to capitalize on both sideways or upward price movement of the asset and theta (time) decay.

What does that mean exactly?

Selling options means that you receive the cash upfront …

That’s right, you get paid to take that trade! 

And there are many income trading strategies that are available to choose from, but these are my four favorite ones to use

The four main income strategies:

  • Short call spreads
  • Short put spreads
  • Credit puts
  • Covered calls 

Stack The Odds In Your Favor

Option sellers take advantage of two main components in the option pricing model, time decay and implied volatility.

And when you trade Out-of-the-Money (OTM) options they are primarily priced based on extrinsic value.

It’s the extrinsic value that is calculated by time until expiration and implied volatility.

This means that the closer to expiration you get, both the expiration and implied volatility decreases.

This allows traders to not have to worry about correctly predicting the market direction or timing the market perfectly to generate income.

We can take advantage and be the house with odds in our favor on every trade

Don’t forget that an option buyer needs to be right about direction and time! 

Remember traders, there are many ways to make money in this market and selling options is one of my absolute favorite go-to strategies.  

Key Points:

  • Credit Put Spreads profit if the stock goes down, stays the same, or goes up 
  • Limited risk
  • Puts the house odds in your favor
  • Allows you to get paid to take risk

Wrapping up

Fractals are the cornerstone of Energy Trader

When it comes to placing a trade I need an edge before risking my hard earned money.

So that’s why I I utilize a strategy of selling options or spreads to focus on generating a steady flow of income for my trading business.

But what’s extremely important to remember is that there is a strategy for both going long and short stocks that are available to you.

And unlike buying stocks or options, credit strategies give an unique advantage to the trader… and that means you are paid upfront to place a trade!

Ready to sign up and test this out for yourself?

Click here to sign up now!

Author: Dave Lukas