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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’ve been 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… |
Today we’ll begin the second part of our series on two recent winners in my trading service, The Opportunistic Trader (you can read part 1 here).
We made money on the SPDR Gold Shares ETF (GLD) both long and short in the span of just 18 days…
Altogether, we generated a 210% combined return from our GLD trades. That’s 74% from our call option trade (which we looked at yesterday), followed by 136% from the put option trade we’re going to check out today.
While that’s a nice return by any standard, there was something else equally rewarding…
When we closed out our second trade, GLD was trading right around the same level it was when we entered out first (long) trade in early November.
Now I want to kick off right where we exited that first trade, as it plays a key part in the setup for our second trade.
The reason we exited the first trade (call options) revolved around two key aspects of the chart. So, let’s take a look…
SPDR Gold Shares ETF (GLD)
Source: eSignal
First, the Relative Strength Index (RSI) had gone into overbought territory (above the upper grey line).
And second was the resistance represented by the orange line. As you can see, after multiple attempts to break above the $175 level, GLD simply ran out of upwards momentum.
When you analyze a chart, you really need to think about the importance of the relationship between these two factors (RSI and price levels).
With this GLD chart, even with the RSI increasing (showing increased buying momentum), GLD simply could not rally any higher. It kept on running up to the orange resistance line and running out of steam.
So, that generated one simple question…
If GLD could not break through resistance when the RSI was increasing (upwards momentum), what would it do if that momentum decreased? That was the rationale behind the second trade in GLD.
As the RSI rolled over from an overbought position and started heading down, we entered the second trade on November 17 by buying a put option on GLD. Put options increase in value when the share price falls.
And that’s exactly what we saw…
SPDR Gold Shares ETF (GLD)
Source: eSignal
With the share price falling and the RSI soon hitting the support level (green line at 50%), we closed out our put option position just five days later on November 22 for a 136% gain.
Now, using options meant that we generated higher returns than if we had traded regular shares (in this case, shorting the shares).
However, I want to reiterate a crucial point to my trading strategy…
Remember that our goal is to go into the market and make as many profitable trades as we can. And that means being nimble. We don’t have the time (or capital) to sit there hoping that something might happen in the future.
All too often, traders get too greedy. They go for homeruns or hold on too long… And by doing so, they let profits slip through their fingers when the stock turns and runs the other way.
As a trader, my aim is simply to capture part of the trend and bank those profits. Then, we prepare for our next trading opportunity.
Regards,
Larry Benedict
Editor, Trading With Larry Benedict
Reader Mailbag
Today we hear more kind words from subscribers…
Great newsletter. I love the analysis!
– David M.
And we even hear from some members of my spread trading service, the S&P Trader (you can find out more about that here)…
Hope you are doing well!
I have been a member of your spread trading service, the S&P Trader, since March. I have been reading the updates regularly and trading. You are doing a great job!
I am a small investor with a desire to make big profits, but not greedy to make a killing in one go! I understand to do so I need to earn it, as Mr. Larry says.
– Sundeep S.
I am relatively new to options trading. I have taken Larry’s advice recently on six bear call spreads in the S&P Trader. Just using 1 contract for each spread, all six ended positive!
– Paul R.
There is always a lot of information to digest while reading your essays. Most of time, it’s easy to understand the technical analysis. There are many resources, and they can be googled anywhere, but knowing this analysis is from you, it has credibility.
I’d like to say your market sense is pretty good. Your quadruple witching trades are excellent. The weekly trades are close. Recently, you started sending trades almost daily. I appreciate you doing that.
– Shuli Y.
P.S. Our office will be closed for Thanksgiving until Monday. On behalf of my team over at the Opportunistic Trader, Happy Thanksgiving to you and your family.