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 or put 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.
In this lesson, we are going to show you two compelling setups on climactic stocks where we sold far out-of-the-money (OTM) puts as an Income trade.
This were particularly ideal because the volatility was spiked on the put options because of the fear from the prior selloff (and bearish gap), generating a larger credit (potential profit).
Click image below to see a VIDEO Review of the Daily Chart of Coupa Software Incorporated (COUP) and JD.com, Inc. (JD):
As you can see, COUP was in a bearish downtrend and then gapped significantly lower on earnings.
We have specific criteria for trading gaps.
In short, we scan for compelling gaps with a Price Void (a Void means there is insignificant price resistance to the left for longs) and enter based on the intra-day pattern when it meets our bias.
Master Trader Tip: Gaps created by earnings reports are an excellent time to sell options. Volatility is higher during these times and we receive higher premiums for the options sold.
To learn our 7-step process for trading gaps of anything that moves, please see Master Trader Advanced Gap Strategies.
This gap could be traded intra-day for a day trade over a 5-Min. high, but it was also an excellent gap setup for using options for income, particularly since the put option prices were elevated on earnings and the fearful bearish gap to all-time lows.
Once we observed the bullish intra-day price action, and then go through our Short Option/ Spread Checklist.
COUP met our criteria and we recommended selling the $60 puts (which expired in 3 days) for a credit of $.80/share.
Since one options contract represents 100 shares of the underlying, selling 10 contracts would generate $800 of premium being immediately deposited into your brokerage account.
That premium is pure profit if the stock expires worthless above the short $60 strike at expiration – a good bet using MTS Gap Analysis.
The pattern using MTS was a very high-probability setup. The analysis is explained in nightly letter videos for subscribers.
What Puts the Options Trading Odds in Our Favor
Selling options/spreads on earnings stocks is that volatility remains high – particularly for a few hours after the market open – as the market digests the fundamental information on the earnings and other news announced.
Once in a trade, we are in trade management mode, which is particularly important when selling options.
Management updates are sent intra-day by text message to subscribers.
We closed the position into strength the same morning for $.10/share, netting 87% of the Max Gain in hours, and eliminating any further risk in the position
All open and closed trades are documented in the subscriber member area. Intra-day, updates are texted to subscribers.
The VIDEO explains the short puts on JD which generated $500 in premium on a 10-lot.
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