Money

Trading the Bulls, Bears and Greyhounds

Earnings season separates the wheat from the chaff, the men from the boys and the athletes from the posers.

It is what I deem the “no excuses” phase of stock selectivity, for it is when every company becomes transparent for all to examine. If the numbers don’t live up to a company’s mid-quarter optimism, its stock gets body slammed harder than a CNN reporter in a President Trump YouTube video.

What seems evident from the tale of the tape is that professional market participants, including high-frequency traders (HFTs), hedge funds and institutional fund managers, glom on to certain names that nail the quarter and correspondingly move the price of these winning stocks rapidly higher to levels that are typically unsustainable over the intermediate term. For the swing trader, though, a three-to-six week sprint higher that reflects more of a greyhound-style rally makes for great option strategies that leverage winning stocks for the short term.

A powerful trading strategy to capture these greyhound rallies is to utilize a synthetic bull-call-spread option trade. This strategy applies both a long-term and a short-term call option to construct the trade. Purchasing a LEAP (Long-Term Equity Anticipation Security) and selling a short-term, out-of-the-money call option is an effective way to capture phenomenal upside appreciation and generate immediate income. The bull-call-spread trades I recommend are on stocks that trade well above $100 per share — the market darlings that dominate the trading landscape.

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