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Larry’s note: Welcome to Trading with Larry Benedict, the brand new free daily eletter, designed and written to help you make sense of today’s markets. I’m glad you can join us. My name is Larry Benedict. I’ve been trading the markets for over 30 years. I got my start in 1984, working in the Chicago Board Options Exchange. From there, I moved on to manage my own $800 million hedge fund, where I had 20 profitable years in a row. And, I’m featured in the book Market Wizards, alongside investors like Paul Tudor Jones. But these days, rather than just trading for billionaires, I spend a large part of my time helping regular investors make money from the markets. My goal with these essays is to give you insight on the most interesting areas of the market for traders right now. Let’s get right into it… |
As the largest stock in the market, hedge fund managers and retail investors watch Apple (AAPL) like a hawk…
With a market cap over $2.6 trillion, it’s in hundreds of exchange-traded funds (ETFs). So whatever Apple does next will have a big impact on the rest of the market.
So when Apple is falling, it’s likely the rest of the market is falling too…
When we checked out Apple just a couple of weeks ago, that’s exactly what happened.
The stock fell along with the broader market in January. It then formed a base and bounced (which helped along with strong Q1 earnings).
I wasn’t watching Apple for a ‘buy the dip’ trade. Instead, I was looking to use the price action and volatility around Apple as the basis for a trade in my advisory service, The Opportunistic Trader.
I wrote that Apple’s first test for its uptrend to restart was to reach (and break above) the orange line (A) on the chart below.
As you can see below, after reaching that level at ‘A,’ the counter-rally in Apple petered out (forming a lower high) and the Relative Strength Index (RSI) ran out of upwards momentum…
Apple (AAPL)
Source: eSignal
I know that I talk about price levels a lot… But I can’t stress their importance enough.
If a stock runs up to a price level and fails to break higher, then there’s a high probability that it will rebound lower over the following days…
And that can be a great setup for a trade.
And it recently happened with Apple…
Having failed to break above that level at ‘A,’ with a falling share price (along with declining momentum in the RSI), we bought a put option on Apple on February 11.
(Remember, a put option increases in value when a share price falls.)
Despite trying to rally at the beginning of the week, Apple ended the week lower.
The broader market looked oversold at the time (before the escalation in Ukraine), and the yields indicated that the number of rate hikes from the Fed looked less than what the market expected.
As a result, we sold our put option on Apple on February 18. In the span of just a week, we pocketed a 43% gain.
I want to emphasize that by using options, we generated a higher return than simply shorting the shares instead. And with options, the expiry clock is always ticking.
This trade is a great example of why it’s important to be nimble in this market… Especially with so much uncertainty around.
Holding onto a trade even for an extra day or two can turn a winning trade into a loss.
When the market is as volatile as it is now – with added uncertainty from the invasion in Ukraine – blindly buying the dip or trying to ride out a loss can be a sure-fire way to tear up your money.
We saw an opportunity with Apple to make a quick trade with a reversal off the price level. With those profits in our trading account, we prepared ourselves for the next trade.
Regards,
Larry Benedict
Editor, Trading With Larry Benedict
P.S. With all the volatility surrounding the market, it’s important to have a sound strategy. Fortunately, over the last 35 years I’ve seen all sorts of market conditions…
In fact, I had one of my best years ever in 2008. It’s largely due to a unique strategy I use to take advantage of extreme volatility. By using the strategy, I was able to make $3.7 million in 2008 with a single trade for my clients back when I was running my hedge fund.
If you’re interested in learning more about this strategy, and the one ticker you can use to trade it for massive gains, click here.
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