If you started to learn how to trade options, you probably have an idea they let you be creative and provide leverage. Now, if you don’t understand how options work, check out this guide here – it goes over everything from the basics to volatility. That said, I like to use technical patterns with my options trading sometimes. For example, with expensive stocks, it gets difficult to hold onto some size. For example, if you want to buy 100 shares of Amazon.com Inc (AMZN), it would eat up over $100K in buying power…so think of trying to buy 1,000 shares, and about the spreads. It gets pretty difficult. That said, let’s take a look at how to trade options using the breakout pattern.
How to Trade Options – Breakout Pattern
Now, although I specialize in trading biotech stocks…that doesn’t mean I utilize different strategies to make money in the markets. You see, after witnessing Jeff Bishop multiply his money consistently, I thought I’d dabble in this market. After I learned how to trade options, I realized I could be using technical patterns, and buying call options instead of stock. This way, I can leverage my capital and increase my percentage returns.
For example, here’s what I was looking at in Tesla (TSLA).
If you look at the hourly chart above, TSLA had a sharp move from the $260 area to $340. Now, it consolidated and traded between a range of $325 and $360. I see this pattern all the time, and I knew I could use options with this pattern.
Here was my thesis:
“The shares are setting up for a bullish break out of the flag for a move past all time highs. A target of near $400 for the shares make a lot of sense, especially with the trade news with China mostly out of the way.
Additionally, shares are up again today in the face of the market being down 400+ points as I type. That is relative strength and likely a signal that the short sellers are starting to get squeezed.
I don’t really like TSLA longer term, but in the short term Musk continues to execute and promise big things.”
Now, if you’re wondering how the trade played out…
That happened in just three days! Not too shabby…
You see how powerful options can be.
Final Thoughts on How to Trade Options With the Breakout Pattern
There’s one thing to keep in mind with technical analysis…it’s not a science, it’s an art form. It takes some experience to recognize the pattern and understand that they don’t need to be textbook.
For example, if you look at the hourly charts on TSLA, it looked like a bull flag pattern. However, it wasn’t perfect. The consolidation period was a little longer than normal. That didn’t stop me from taking on the trade. I figured with such strong price action, there would be a positive catalyst sooner or later.
You could learn how to trade options using different strategies, and sometimes make money on crashing stocks. If you see other bullish technical patterns, you might want to consider using options. Take note, there is a learning curve, and you shouldn’t go at it alone.
Kyle Dennis runs Kyle Dennis’ Biotech Breakouts (biotechbreakouts.com). He is an event-based trader, who prefers low-priced and small-cap biotech stocks. He’s also using his knowledge and looking to multiply his capital through options trades.