Feeling frustrated right now? Struggling with how to find trades? You’re not alone. It is difficult and nerve-wracking to jump into trades when the stock market is firing on all cylinders and stock prices keep going higher. No one wants to put their capital at risk if the market has hit its peak.
This is where options trading – and one of my favorite strategies – comes in handy.
Consider trading options
If you normally trade stocks, consider trading options. Options cost a fraction of the stock price and offer 8-12 times the leverage of a stock when you get the direction and the timing correct. When you place a trade, you can limit your risk to the amount of premium paid. Hence, you can only lose what you put in.
Plus, when you buy options, you are not getting married to the stock. You are simply looking for a sharp move up or down in price in the short-term. When you buy a call, you are looking for the stock price to pop higher. When you buy a put, you are looking for the stock price to drop.
How to find trades when stock prices are high
When stock prices keep going higher, we like to use a strategy called “buy the dip”. Look at any stock chart, and you’ll see small dips lower when a stock is otherwise marching higher. This is how to find trades when prices are high. Don’t just jump in feet first, though! Look at the dip strategically. Is this a small dip to be bought or the beginning of a more serious drop?
Last week was filled with “buy the dip” opportunities if you paid attention.
When Apple stock took a big dip following Thanksgiving weekend, we bought Apple calls at $5.50 for a January 265 strike. At the time of our purchase, the stock was selling at $258 per share. By the end of that day, Apple closed on a high. Our call was positive right out of the gate.
As the week progressed, the markets enjoyed positive sessions with gaps higher into Friday. This put more momentum into Apple and our calls, and by Friday the stock bolted over $270. Our calls were now worth $11.30. That is more than a 100% gain in our trade in just a few short days. If you had purchased one stock instead, you would have experienced a 4.6% gain.
In just four days, we gained a 20:1 leverage ratio on the stock. If the trade hadn’t worked out, our losses were capped at $5.50 per contract.
Tell me what you would rather have: A trade that gains 100% in value in four days, or a trade that gains 4.6%?
As exciting as that trade was, it’s important to recognize that trading is not a game of perfect. Timing and execution don’t always work out this well. Next week I’ll discuss a trade that didn’t work out as planned and what we did with it.
