As option traders, there are some trade opportunities to profit week after week or month after month on the same underlying. These so-called opportunities can be based on the option market or charts, but usually it is a combination of both. The problem that some traders have is that they “go to the well” once too often meaning that they keep repeating the same strategy because it has worked in the past although the conditions have now changed. The other thing traders often do is to try and get “revenge” on a stock after suffering a loss. If a profit opportunity arises again even after a loss, there is nothing wrong with putting on another position provided there is another opportunity that the trader deems “putting the odds on your side.” Many times, traders will think there is another opportunity but in reality, they are just looking to redeem themselves after a loss and show the underlying who’s boss so to speak!
Let’s take a look at multiple trade opportunities we spotted on Amazon Inc. (AMZN) in my Market Taker Live Advantage Group Coaching class over the last couple of months. Take a look at the chart below.
The first thing we noticed was the 50-day and 200-day simple moving averages. After the stock gapped and closed lower after announcing quarterly earnings at the end of October, it has continued to trade below the 50-day sma and has never closed above it up to the time of this screenshot. In addition, the stock has never penetrated the 200-day sma to the downside as well. In class, we talked about using support and resistance (areas where stocks tend to stop and/or reverse) levels as target and management levels. Moving averages are often considered potential support and resistance levels.
With a neutral to bearish bias for the stock going forward since the beginning of November, we talked about selling call credit spreads above the 50-day sma on a weekly basis when applicable. The premise of the trade idea was that the moving average would keep the stock from moving higher and we would exit the position if the stock ever closed above the moving average. Although it came close to doing so late in December, it never did at the time of this writing which means every credit spread whose sold call strike was above the moving average, would have expired worthless for a profit. Of course, a profit can be realized anytime the spread can be bought back for less than it was sold which is often prudent when managing credit spreads since many times out-of-the-money (OTM) credit spread often have large risk/reward profiles.
A recent example of a potential trade idea that we looked at in class came on January 3rd. With AMZN trading around $755 at the time, we considered selling the 775-strike call that expired that Friday (Jan-06) and buying the 780-strike call with the same expiration for protection in case the stock moved considerably higher. At the time, the 775/780 call spread produced a credit of 0.55 which means the maximum risk was 4.45 (difference in the strikes (5) – premium received (0.55)). The next day towards the close (with just more than two days left until expiration), the spreads value had deteriorated to a value of 0.20 due to the stock trading sideways and not closing above the moving average. A profit could have been realized at that point of 0.35 (0.55 – 0.20) or $35 a spread in real terms.
Was this opportunity available every week since the beginning of November? The answer is probably no because the stock moved further away from the 50-day sma at times and there was probably not enough premium to sell above the moving average that made sense. Can this trade idea be possibly considered going forward? As long as the stock continues to trade below the 50-day sma or even above the 200-day sma, these OTM credit spreads can still be an option so to speak.
If there were continuous opportunities on every underlying we looked at on a regular basis, trading might be a whole lot more profitable for everyone. The key is to not overlook patterns and opportunities that continue to present themselves on a regular basis even after a profitable or losing trade on the same underlying. Just be sure you are not forcing the trade when the opportunity has changed or you are taking the trade looking for revenge because of a previous unprofitable experience.
Senior Options Instructor
Market Taker Mentoring, Inc.