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Uber Technologies (UBER) traded at all-time highs in October last year.
The ride-sharing giant had been pulled along in the wake of the tech rally. Its shares had more than doubled from the October 2023 lows.
But buying momentum fizzled out. And UBER shares ran out of steam.
UBER rolled over and steadily fell. Then disappointing Q3 earnings caused it to gap lower. Despite beating revenue forecasts, gross booking numbers were down.
Yet in December, signals hinted that UBER’s down move was overdone.
So we waited for the right setup to profit from a potential bounce. And when we saw an opportunity, we pounced…
My Opportunistic Trader subscribers bought call options on December 17.
We closed out that position this week for a 65% gain.
So let’s do a deeper dive into how the trade came about…
Oversold Signals
One of my favorite options strategies is finding a stock that has stretched too much in either direction. It could be a stock that has skyrocketed too fast… or plummeted too far.
We aim to profit when it snaps back the other way. Some people know this as a “mean reversion” trade.
And an overbought scenario saw UBER reverse in October…
In the chart below, the Relative Strength Index (RSI) – a momentum indicator – formed an inverse ‘V’ and dropped from overbought territory. This coincided with UBER’s top and subsequent fall…
Uber Technologies (UBER)
Source: e-Signal
But UBER’s tumble led to the RSI slipping all the way to oversold territory. And that move looked overdone.
So we looked to profit from a bounce…
Of course, just because a stock is overbought or oversold, we can’t assume a reversal is always in the cards. Often, the RSI can stay at its extremes for an extended period when a stock is rallying or falling heavily.
So we needed a more definitive signal…
In this case, the RSI formed a ‘V’ in oversold territory (gray arrow). That provided a trigger for our long trade.
Then we waited for rising momentum to give a tailwind to our position (orange line).
When momentum is steadily rising like this, it will typically push a stock higher.
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And as the chart shows, we made the right call…
After moving sideways for a time, UBER burst higher this month.
Our call options showed a solid profit, and the RSI rose near resistance at the 50% level. So we decided it was a good time to close out for a tidy 65% gain. It was a classic mean reversion trade in action.
Of course, we don’t always get things right. Sometimes even the most promising setups don’t play out as hoped.
Yet options let us amplify our profits – while controlling our risk by choosing our position sizes carefully.
So when we get a quick move like this, we can really capitalize on the opportunity.
And as this trade shows, you can earn outsized profits by capturing a stock reversal with our mean reversion strategy.
Regards,
Larry Benedict
Editor, Trading With Larry Benedict