The backdrop: Applied Optoelectronics (AAOI) is a stock that moves a lot in both directions. That kind of price action can be a challenge; despite AAOI’s consistently large volume and room for opportunity, I know a respected trader who stays altogether out of this trade because it can be tricky.
AAOI is a technology stock (the company makes fiber-optic networking products). As a sector, tech has been incredibly extended for a long time now. It needs to come down before it can go back up.
We saw a little bit of a retreat yesterday but might see more, maybe even today.
The set-up: Tuesday, two very bearish things happened to AAOI stock: an inverted hammer candle on a daily chart and the price falling below the 50-day-moving-average line.
What I’m looking for: Two things: 1) Another inverted hammer candle to confirm that this isn’t a head fake in AAOI, 2) tech keeps selling off.
The chart: I have circled three bullish indicators in the stock’s chart, all around $50 per share. That would be my absolutely maximum target for profit on put options. I’m always happy with +10%
In the $50 range, this stock becomes a buy to the bulls given the bullish indicators visible at that level. The bulls took this stock over on May 5 and if they held shares or call options on it, they made good returns; having stocks with repetitive behaviors on the radar helps take the guesswork out of trading.
The play: Assuming I see what I’m looking for, I’ll buy to open August 18th at-the-money put options toward the end of the day, looking for the chart pattern to repeat itself.
Davis Martin is the lead publisher of DailyProfitMachine.com. He trades SPY calls and puts, and swing trades mid- and large-cap stocks and stock options. At the time this was published on RagingBull.com, he had no open positions in AAOI but was planning to act on it as described in this article. He last bought AAOI on June 15, selling a day later for a modest profit.