Managing Editor’s Note: Tonight, tech investor Jeff Brown will unveil his latest invention… an AI tool he calls “Perceptron.”
This tool looks for patterns in one of the most volatile markets around – cryptocurrency. Yet instead of getting whiplashed by the highs and lows, you can zero in on 60-day profit windows.
Even better, this AI can find opportunities whether the crypto market is going up, down, or sideways. It has been able to spot chances to turn $5,000 investments into $6,950… $9,090… $11,800… and more.
So if you want to learn more, don’t wait… Just go here to find out the details.
And then read on to learn how options can help us in volatile markets…
When volatility heats up, some folks call it a day.
They sit on the sidelines, fearing huge losses, and wait for things to settle down.
But that means missing out on profitable trading opportunities. And that’s a mistake I don’t want my readers to make…
Using options, you can jump on lucrative moves. You can also tightly manage risk.
I wrote yesterday about generating gains from Bitcoin – a notoriously volatile asset.
Today, I want to show how we used options to generate a handy return on another volatile stock – Tesla (TSLA).
We ended up with a 54.4% blended return from trading the tech-focused automaker…
A Known Risk
In the chart below, TSLA traded flat from early May through June. That sideways pattern appears with the 10-day Moving Average (MA, red line) and the 50-day MA (blue line) tracking closely together.
But as June closed out, TSLA began to move higher… Within a week, it had gained over 15%.
Almost half of that move came on a single day (July 1) – the day we entered the trade.
Tesla (TSLA)
Source: e-Signal
TSLA’s sharp move higher looked overdone. The stock appeared vulnerable to a correction.
The Relative Strength Index (RSI) was tracking in the overbought range (above the upper gray dashed line).
And TSLA would announce expected deliveries the following week. That’s a key metric the market closely watches.
So we set ourselves up to capture a surprise to the downside. We did that by buying a put option. A put option increases in value if the underlying stock falls.
But from the moment we entered the trade, things didn’t go our way at all.
Instead of reversing, TSLA continued to rally up to its peak on July 11.
This is a key reason I trade options. I always know exactly how much I stand to lose if the trade doesn’t go our way.
In this trade, we paid $4.68 per contract. An options contract is for 100 shares, so that equals $468 for each contract ($4.68 × 100 = $468).
So no matter how high TSLA rallied, the most we could lose was that $468 for each contract we traded.
Compare that to short-selling shares instead. That would have led to severe – potentially unlimited – losses.
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Recouping Losses
Returning to our TSLA trade… The RSI was even further in overbought territory. And a triangular pattern was forming (green lines).
When a triangular pattern develops along with declining momentum, a stock price can often break sharply lower.
So we decided to give this trade a chance to recoup its losses.
And that is what we saw… Take another look:
Tesla (TSLA)
Source: e-Signal
TSLA gapped lower. It consolidated for a period… then broke lower again. This coincided with a firm downtrend in the RSI.
We had recovered a big part of our losses on August 2. So we decided to close out half our position that day for a 26.3% loss.
That reduced our exposure to this trade. Yet we kept half our position open in case Tesla made a further down move.
That proved to be the right call…
The following Monday, markets all over the world tanked, and TSLA opened much lower.
Our put option position surged to a large profit. We closed out the remainder of our trade that day for a 135% gain.
Together with the first half, that ultimately equated to a blended 54.4% gain.
This is how options can be such a powerful tool.
Remember, options can magnify returns and losses compared to trading shares.
And you have to get the move you’re looking for in good time, or else your position can expire worthless.
But that’s the risk you take to generate outsized gains… just as we did with our TSLA trade. And vitally, we never stood to lose more than the $468 per contract we shelled out to open the position.
This is especially valuable during periods of high volatility.
So instead of avoiding bumpy periods in the market, I recommend using options to limit risk while also profiting from the big moves in stocks.
Happy Trading,
Larry Benedict
Editor, Trading With Larry Benedict