Even the Smallest Moves Can Produce Tidy Gains

Last week, we looked at how the SPDR Dow Jones Industrial Average ETF Trust (DIA) had just recorded its biggest monthly gain (up 14%) in 47 years.

A key part of that performance was due to a fundamental change in money flows…

Big tech peaked, and money rotated out of that sector into large-cap value stocks. The acceleration of this move in October saw the DIA outperform the Nasdaq by 3.5 times.

But if the stocks in the DIA got bid up too far, that would leave the DIA vulnerable to a fall.

Likewise, if the spread between the DIA and Nasdaq (which rose just 4% in October) or S&P 500 (up 8% in October) stretches too far, then that spread also can reverse back the other way.

With those factors in mind, we entered a trade aiming to catch that reversal in my options advisory The Opportunistic Trader.

That trade generated a quick 27% return in just four trading days. So today, I’m going to show how that trade played out…

The Power of Mean Reversion

On the DIA chart below, the 50-day moving average (MA – blue line) represents DIA’s long-term trend. The 10-day MA (red line) shows the countermoves within this overall trend.

Take a look…

SPDR Dow Jones Industrial Average ETF Trust (DIA)

Source: eSignal

Mean reversion trades aim to profit from reversals… when an asset turns around and goes back the other way. Think of it like a rubber band stretching and then snapping back.

DIA did this back in mid-August…

As you can see, DIA peaked when the Relative Strength Index (RSI) formed an inverse ‘V’ (red circle) in overbought territory (upper grey dashed line). Then, as the RSI began to track lower, DIA’s share price fell.

We planned to profit from a similar pattern repeating when the RSI again went into overbought territory late last month (second red circle).

With the RSI again forming an inverse ‘V’ at overbought territory, we bought a put option on DIA on October 28. (Note that a put option’s value increases when a stock price falls.)

When buying momentum reverses (as the RSI shows), it’s only a matter of time before the share price retreats too.

Take another look at the DIA chart…

SPDR Dow Jones Industrial Average ETF Trust (DIA)

Source: eSignal

In this case, although DIA traded slightly higher over the next few days after we entered the put trade, the reversal in the RSI eventually led the price to fall.

This enabled us to exit our position by selling our put option on November 3 for a 26.7% gain.

Amplifying Our Gains

That was a decent return in just four trading days, but it wasn’t the only reason we sold…

Typically, price reactions revert after Fed meetings.

The markets had sold off the previous day following the Fed’s 75 basis points rate increase. So we wanted to avoid leaving profits on the table if DIA counter-rallied.

Especially in a volatile market, it’s smart to take quick gains off the table.

And to be clear, we made this profit using options, which enabled us to amplify our gains compared to using shares. That’s why we focus on options in my trading services.

So, with just a 3-4% reversal in DIA, we picked up a nearly 27% gain.

Ultimately, by being nimble and capturing quick reversals, we can pick up tidy profits even from small underlying moves.

Regards,

Larry Benedict
Editor, Trading With Larry Benedict

P.S. If you’re only beginning to explore options, my One Ticker Trader advisory is a great place to start. There, we focus on one single ticker each month. And last week, we just issued our eighth winning trade in a row since we launched in August.

To learn more about how we’ve been winning even in this volatile market, go right here to watch my recent interview.

Reader Mailbag

In today’s mailbag, One Ticker Trader members write in to thank Larry for their trading success…

Hi Larry,

The return on the One Ticker Trader subscription fee of $19 made 32x from all the winning QQQ trades since August 2022. Thank you very much!

– Deborah G.

I’m expressing my appreciation for you Larry! Thank God I found you!

– James C.

Since I’ve been working with the One Ticker Trader, I’ve gone 15 and two with Amazon. This is a game changer, Larry. And I so appreciate your help and knowledge.

– James G.

Good morning opportunistic trader,

Just an update on your recommendation on QQQ… I just bought your One Ticker Trader course yesterday and I’m very glad I did. I’m already up on the QQQ put. I’ve lost a lot of money with other systems.

At the time of writing this email, I was up 20%. I could’ve taken profits, but I will wait a bit. Thank you for helping us small-account holders to grow our accounts. I’ll be purchasing your other courses.

– Joey S.

Thank you, as always, for your thoughtful comments. We look forward to reading them every day at [email protected].