Learn How to Profit on Bearish Patterns With Put Options
Master Trader teaches many price patterns for trading stocks and options.
Did you know that Bottoming and Topping Patterns set up in different forms and trends?
Most are traps to the uneducated trying to pick tops and bottoms. Don’t be a victim and be whipped around.
At Master Trader, we have several criteria to define quality setups based on the structure of the price pattern.
The Structure of the price pattern will speak to us about the relationship between buyers (demand) and sellers (supply) and the likelihood of reversals and trend continuation.
Using Bar-by-Bar Analysis, you will know what any price pattern signals — even one that can tell you to do nothing.
In this Trade Review we are going to show you how a recent Master Trader Directional Option trade using Master Trader Strategies (MTS) generated 89% return on capital (ROC) in six days with less risk and capital than trading the stock.
The same logic obviously applies to bottoming patterns for Breakouts.
With all Setups, we need a Price Void (insignificant resistance to the left for longs, or support for shorts), as you will see here.
Below is a daily Chart of NIVIDIA Corp. (NVDA):
NVDA was in a bullish uptrend on all time frames, which is defined by two or more higher pivot highs and higher pivot lows.
Notice the three moving averages we use on daily charts (20-, 50-, and 200-MA) were all up, so the daily, weekly, and monthly charts were all in uptrends.
Master Trader teaches many price patterns in uptrends, downtrends, and sideways trends.
Since our bearish option trade was fading the strength of the uptrend, it is very important to look for some Shock candle(s)/patterns (i.e., a “Gotcha”) which suggests a warning sign of a continued move higher.
On 11/22 (first marked arrow), NVDA was a bullish continuation candle at all-time highs. The candle at the day’s high was a bullish engulfing Wide Range Bar (+WRB), Bullish.
However, it closed the day with a bearish engulfing bar with a Topping Tail (TT), which was a Breakout Failure.
The message was that Sellers took control when the candlestick completed.
Now a TT (or BT) is not a Setup or reason to trade; rather, it’s additional information to add to the overall pattern analysis on Multiple Time Frames (MTF).
We put NVDA on our interest list to see what developed subsequently since the semi-conductor sector ETF (SMH) was also becoming extended.
NVDA stayed in a trading range for a few days until 12/3 (second arrow marked) which was a closing Breakdown candle below Support. It was also now under the 20-MA, and negated some prior bullish green candles, Bearish.
Because of the Price Void below (insignificant Support to the left), we recommended to our subscribers a bearish option trade under the candle’s low.
The analysis is explained in nightly letter videos for subscribers.
The focus of the Advisory Swing and Options Letter is long or short stocks or other instruments.
Call or put options are also used with Master Trader Strategies (MTS) when the options are liquid, which is the case with NVDA, a Wall Street darling.
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 recommending buying a Bear Put Debit Spread (long one put option and short another lower strike put to lower the net cost) on the bearish Breakdown Setup.
Although the short puts limit our potential gain, the premium received on it lowers our cost basis, increasing the probability of profit on the trade.
Since one option contract represents 100 shares of the underlying, buying 1 put contract would cost a mere $770 (versus the huge margin needed for shorting a $300+ stock) – a great strategy for smaller accounts using MTS.
Our Directional Options Course teaches the proper trade selection for the bias of the underlying. As you can see, here we recommended buying the $310/285 in-the-money (ITM) bear put debit spread.
Once in a trade, we are in trade management mode.
Although it retraced a bit after entry, that was an opportunity to add to the position, as it made another lower high (LH).
We simply trail stopped over a prior day’s high as it accelerated lower towards the 50-MA, which was our subjective target.
As you can see, we booked $687 on 1 put spread contract, generating an impressive 89% return in six days – something almost impossible to do if you were just shorting the underlying.
Management updates are sent intra-day by text message to subscribers.
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