Profiting on the Bearish Gap That Bullies Setup
At Master Trader, we trade stocks, futures, and options using our objective approach, and which applies to all time frames.
The Advisory Swing and Options Letter focuses on long or short stocks and options using Master Trader Strategies (MTS).
Call (bullish bets) or Put (bearish bets) options are also used for when the options are liquid.
We purchase options and spreads as Directional trades to profit from our directional bias with a higher probability of profit and less capital requirement.
We also Sell options and spreads as Income trades where we profit through Time Decay (Theta).
In this lesson, we are going to show you a compelling Setup on a bearish exhaustion Gap on a Climactic Buy Setup that was being dumped in fear and panic on bearish earnings and in a bearish retail sector.
Using MTS, we sold far out-of-the-money (OTM) puts as Income trades – all highly profitable.
Click below to see a VIDEO Review of Gap Types and DICK'S Sporting Goods, Inc. (DKS):
A Climactic Buy Setups (CBS) is when the underlying falls rapidly in a fluid manner, getting way extended from the 20-MA (blue line). DKS was a CBS on both the daily and weekly time frames.
We then look for a bullish reversal using MTS to sell the far out-of-the-money (OTM) Puts once we have bullish stabilization.
When stocks and ETFs get extended like this, it leaves what we call a Price Void (i.e., there is insignificant price resistance to the left for longs).
Master Trader Tip: CBS’ created by fear and panic are an excellent time to sell Put options and spreads using MTS. Volatility skyrockets during these fearful times and we receive huge premiums for the options sold which quickly turn into Profits as the stock stabilizes/bounces, and through Time Decay, and Volatility contraction.
The VIDEO discusses the trade Setup (called a Master Trader Bear Gap that Bullies in this case), Puts sold, and management strategy.
Remember that one options contract represents 100 shares of the underlying, so selling 10 contracts of this trades would generate $700 of premium being immediately deposited into your brokerage account.
That premium is pure profit if the stock expires worthless above the Short $56 Strike at expiration (2 days in this case) – a good bet using MTS Analysis.
The CBS is a counter-trend trade, which means we are trading against the trend but only when prices have become extended from overhead price resistance.
We sold expensive out-of-the-money options in this trade — a “No-Brainer” trade.
However, we could have also made a short-term Directional Options trade with liquid options, or bought stock.
The CBS patterns using MTS were very high-probability Setups. The analysis is explained in nightly letter videos for subscribers.
Once in a trade, we are in trade management mode, particularly important when selling options.
Management updates are sent intra-day by text message to subscribers.
In this case, we closed the position into morning strength at $.10/share, quickly booking $600 (86% of Max Gain) and avoiding further risk.All open and closed trades are documented in the subscriber member area.