How Small Profits Quickly Snowball Into Larger Gains

One of the key tools of my trading strategy is mean reversion.

Meaning, I look for stocks (or indices) that have overshot in either direction… like a rubber band that’s been stretched too far.

Then, I aim to profit when they revert the other way… like a rubber band that snaps back.

The good news is that we can use this mean reversion strategy during multiple time frames.

Whether you’re looking at a daily, weekly, or even an hourly chart… the pattern remains the same. A stock overextends, and then reverts as buyers (or sellers) push it back from its extremes.

Today I’m going to show how I used mean reversion in my trading service, One Ticker Trader, in November 2022.

We traded options on the SPDR Dow Jones Industrial Average ETF Trust (DIA).

In less than 24 hours, we generated a 23.5% return – marking our ninth winner in a row at the time. (We’ve since racked up our tenth and eleventh straight wins.)

Let’s check out how the trade played out…

Lots of Countermoves

In the chart below, the 50-day moving average (MA – blue line) represents DIA’s long-term trend.

As we can see, the short-term 10-day MA (red line) crosses it several times.

Take a look…

SPDR Dow Jones Industrial Average ETF Trust (DIA)

Source: eSignal

During each of these swings in the 10-day MA, there were lots of smaller countermoves too. And it’s these smaller countermoves that can offer opportunities to generate gains.

Leading up to our trade, the 10-day MA had bullishly broken above the 50-day MA on October 21.

However, the Relative Strength Index (RSI) showed us DIA was overbought at ‘1’ on October 28.

With DIA overextended at ‘1,’ sellers then pushed it down. But an upswing in buying momentum caused it to rally again.

This time, the RSI made an inverse ‘V’ at ‘2.’ Once again this showed DIA was overbought. The RSI was setting up DIA for another potential reversal.

However, there was another signal showing momentum had turned against DIA.

Take another look at the chart…

SPDR Dow Jones Industrial Average ETF Trust (DIA)

Source: eSignal

While DIA was making higher highs (upper orange line), the RSI was making lower highs (lower orange line). This is a common pattern prior to a change in direction.

So on November 8, we took out a short position on DIA. We bought a put option to capture any potential reversal. (Note that a put option should increase in value if a stock price falls.)

The next day, DIA opened lower and dropped throughout the day. That allowed us to sell our put option on Wednesday for a tidy 23.5% profit.

And while a nice little profit is always welcome, it wasn’t the only reason we sold…

We Don’t Leave Profits on the Table

With inflation figures due for release on November 10, we didn’t want to run the risk of leaving profits on the table.

And it’s a good thing we sold. DIA rallied strongly off lower-than-expected consumer price index (CPI) data.

Our quick trade demonstrated exactly why I focus on just putting a “P” (profit) on the page rather than getting greedy or swinging for the fences.

And by using options, we supercharged our return.

But even if we had used shares, our DIA trade analysis proves that – by capturing smaller moves within large countermoves – there are plenty of opportunities for nimble traders.

Our One Ticker Trader subscribers are learning that these small profits quickly snowball into something larger.

As I mentioned above, we’ve now had 11 wins in a row, adding up to an accumulated return of 171% since we launched last August.

If you haven’t already joined us on these trades, I’d love to explain more.

You can go right here for more details about our strategy.

Regards,

Larry Benedict
Editor, Trading With Larry Benedict

Reader Mailbag

In today’s mailbag, One Ticker Trader members thank Larry for their success with his trade recommendations…

Larry, I can’t thank you enough for your amazing services including all the wonderful research, the to-the-point and precise education (newsletters), and the trade recommendations stemming from all the wisdom and experience you have!

I just had a $5K day! It’s just super to see green in my account after seeing red for so long. I’m ramping on my options trading skills, and I’m so eager to learn/trade with your mentorship.

– Mehdi S.

Hey Larry, I’ve been following your weekly newsletter Trading with Larry Benedict, for about one year now. I’ve made three trades and closed two quadruple witching trades.

I cannot buy puts in my account on the SPX, so I used SPY instead. I bought four puts for $1.20 and sold them three hours later for $2.47. Cha-ching. First $500 into my account on first trade.

Next, I did the bull put spread… this time on the SPX for seven contracts for $2.21 credit. BAM. Expired worthless on the same day, and an additional $1,550 into my account. Hell yeah, baby! Dude, you’re the best.

– David B.

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