Option trades create some of the most impressive gains.
That power comes from an options’ leverage.
And my favorite way to take advantage of that fact…Finding Explosive Moves!
Which is what my top three trade ideas this week are all about.
One method I teach my LottoX members – playing the short squeeze.
Short squeezes occur when too many traders sell a stock short, betting against shares.
That builds energy like a storm, releasing in explosive moves.
And if I play the setups just right…I just might be able to catch a ride.
I wouldn’t classify Carvana as a stay-at-home trade. But it certainly falls into the momentum category.
When I look at their business, I can’t help but think of them as giant car vending machines. Yet, I know a few people who used them and enjoyed the experience.
What I’d enjoy more is if this TPS Setup pushes off to new highs.
Let’s take a look at the chart.
CVNA 78-Minute Chart
Here we’ve got a classic TPS setup, which contains three key elements.
Now, one thing you’ll see at the bottom in the white box are the red dots (squeeze) and a histogram. The dark bars signify waning bullish momentum. I’d like to see that turn light blue, meaning a rise in bullish activity.
However, it’s at a great entry point between the 8-period and 21-period exponential moving averages.
With this being the 78-minute chart, I’d expect this trade to finish in 3-5 days.
As I explain to LottoX members, the stop isn’t always a hard, fast place. I look for either the squeeze to fire, a break in the pattern, or some other move that signifies bears regaining the upper hand.
Lastly, I want to point out that this stock has 31% short-interest, meaning nearly a third of the shares available for trading are currently sold short. That can lead to explosive moves from margin calls during what’s known as a ‘short squeeze.’
As one of the largest trucking carriers in the U.S. you would think I might have traded them before. Yet, I can’t think of it ever happening.
There’s a first time for everything!
What attracted me to this stock initially was the 25% short float, which I mentioned can lead to a short squeeze.
Once I looked at the chart, I found my TPS setup waiting for me.
KNX 78-Minute Chart
This TPS setup is pretty easy to spot. With a swift (pun intended) move upwards, bulls established their dominance. As it traded sideways, it found support on the 21-period exponential moving average.
During that time, it created a beautiful consolidation pattern (nicer than CVNA’s).
However, even with the squeeze (red dots at the bottom), I still see dark blue bars representing declining momentum.
Because price is near the lower end, I would be ok with starting to scale in here since I’m so close to risk, even though I typically wait for momentum to turn.
Being so close to risk (my stop) cuts my potential losses and improves my risk/reward ratio.
Plus, the ‘beaten down’ names like transports and hotels haven’t seen too much love lately. If they get money flowing in, this name could really take off.
Despite Reddit rumors that the company is involved with child smuggling via furniture shipments, Wayfair keeps pushing higher and higher.
Those rumors are untrue by the way.
Yet again, we find another stock with high short flat at 29%.
And yes…another TPS setup.
W 78-Minute Chart
The chart’s pattern may look a little choppy. However, when you draw trendlines (white lines) connecting the tops and bottoms of the candlestick extremes, you start to see how they’re converging. That’s what tells me I have a workable pattern.
It’s all good to talk the talk. But I prefer to walk the walk.
That’s why I detail my trading plans for my LottoX members, host weekly live training sessions, and more.
Give a person a fish and they eat for a day. Teach someone how to trade…well you get the idea.
Most of us know about trendlines at a basic level. But let me describe how I look at them so we’re all on the same page.
Trendlines are straight lines drawn between two or more points – although typically it’s only two points.
Drawing these lines defines a range for a stock, a support level, or resistance.
You can have multiple trendlines on a chart at the same time.
Usually, I connect them using the lowest or highest points on candlesticks.
Here’s how it might look on Restoration Hardware (RH).
RH Hourly Chart
Here, I drew the trendline using the two points the arrows identify. You can see how the next time it ran into that trendline, price was swiftly rejected lower.
Interpreting trendline breaks
Trendlines hold for only so long. Eventually, price shifts in the other direction, whether immediately or over time.
The strong the trendline, the harder the break tends to be.
Here’s an example of one in Tesla (TSLA) intraday.
TSLA Hourly Chart
In this chart, I drew two trendlines. One stretches a little longer than the other. However, they both converge at the same point.
When Tesla shares closed below both of those lines, sellers swiftly stepped in, sending shares plummeting in a matter of minutes.
That’s the kind of move that happens when a trendline breaks.
Here’s another example with Inovio Pharmaceuticals (INO)
INO Hourly Chart
After an explosive move, INO began to lose momentum. Slowly, it started moving sideways.
In that process, it tried to sell off a couple of times. When it did that, it created the swing points needed to establish a trendline.
Once shares finally broke that trendline, the jig was up. After a brief rally, shares rolled over and headed lower.
Turning this into a trade
Here’s where the fun begins.
Quite often, when a stock breaks a trendline, it will come back up to retest at or near that trendline or breakdown area.
I use that to create better entry prices for myself. All of my trading balances the risks (potential losses) and rewards. By waiting for a retracement, I put my entry closer to my stop out, lowering my total risk.
Using these trendlines, there’s two ways I would use stops. First, any close back above the trendline could act as a stop.
Second, a close back above the highs would also work if they’re available like with TSLA or INO.
What both of these identify is where the reversal failed.
Next, I need to establish targets. The way I do that is looking for support or resistance levels.
Typically, I rely on the 8 and 21-period exponential moving averages on larger timeframes, Fibonacci retracement levels, consolidation areas, or other places of significance.
Before I make the trade, I ensure that the potential reward is enough to justify the risk. If the targets are too close to the entry, I won’t make enough money compared to possible losses.
Lastly, as an options trader, I always like to scale out of my trades. When I hit my first target, I’ll take a portion of the trade off. Then, I leave the remainder on with a stop moved up to breakeven.
This is kind of like dollar-cost-averaging. I don’t always know how far the stock will run. So this effectively hedges my bets.
One final thought – this strategy isn’t tied to a specific stock or timeframe. I’ve used it on everything from the SPY to individual equities.
I find that it works best when combined with other analysis components that lead to the same conclusion.
Learn all about my TPS setup
Now, you’ve heard me talk about my infamous TPS setup before. But are you ready to learn it?
Check out my upcoming LottoX webinar where I lay out how I use it to craft short-duration trades using options.
As LottoX members and I work through our live weekly training sessions, I hear one question come up frequently…
Should I trade ETFs or individual stocks?
I’m not going to give you the cop-out answer of ‘it depends.’
Instead, I want to answer it right here and right now.
When I, Nathan Mortimer Bear, choose between an ETF or an individual stock for a trade, I ask myself the following questions:
Walking through these steps answers my question.
And although it might seem pretty straightforward, I know that it can cause confusion.
So, let me walk you through each of the steps, detailing what I’m looking for and how I would apply it to my trading.
To make money right?
Ok, dad jokes aside, we all take different trades for different reasons. Sometimes they’re day trades or shorter duration trades like my LottoX. Other times they’re swing trades or credit spreads like my Weekly Money Multiplier.
And then there are trades I use as a hedge against other positions in my portfolio.
First thing to consider is what type of trade I want to put on. If I’m looking to sell a credit spread, then ETFs may work better simply because the liquidity and choice of weekly options work better than a stock that only trades quarterly options.
Second consideration is the setup I’m using.
These work on different time frames, whether it’s daily or intraday charts.
However, I take each of these trades independently. That means it shouldn’t rely on or be impacted by any other trade in my portfolio.
Furthermore, these are trend-following trades. They work best when working with the market. I also prefer to select ones with a high short float.
Knowing all this, my TPS setup trades work better with individual stocks. However, they can work with ETFs as well.
With trend following strategies, I find more success with individual stocks because I use options.
Statistically, individual stocks have more outlier (big) moves than ETFs. That means that I have a better chance of a payoff with my options.
However, if I’m looking for a hedge against other positions in my portfolio, then ETFs are a better choice. Quite often, I’ll buy put contracts on the SPY or IWM to protect any long positions I hold.
In a nutshell, I need to know what type of trade I want to play and what strategy I plan to use.
I’m an options trader, born and bred. While I trade the actual stocks from time to time, I like to use options.
Any setup that I get has to have enough price movement to make it worthwhile.
Here’s an example of one in ETSY.
ETSY Hourly Chart
A momentum stock, ETSY sees plenty of price action and trading of options. When I find a TPS setup on the chart, I don’t need to worry about the stock moving enough to make money.
However, not every stock works like that. It’s a large reason why I don’t trade penny stocks. They simply don’t move enough consistently compared to their options to make it worthwhile.
Now, ETFs don’t move as much. But, their options are very liquid. More liquidity means better spreads and less money paid to the market makers.
However, there are leveraged ETFs that can get enough price movement to make the trades worthwhile. Many of the major indexes have 2x to 3x leveraged alternatives that also have options.
This one probably has you scratching your head, but let me explain.
Have you ever looked at a setup in a stock like Facebook and seen the same setup in Google and Microsoft?
Similar setups in like stocks mean what I’m looking at isn’t stock specific but sector-based (or even market based).
If that’s the case, unless the stock is an extremely liquid one like Apple or Bank of America, there’s no reason to choose the stock over the ETF.
The reason – ETFs will have more option choices and liquidity.
Learning to trade stocks and options can be a frustrating task.
That’s why I created LottoX to help traders learn the same techniques I use every day.
I want traders to find what makes them successful, whether it’s with my TPS setups or their own variation.