Dear Fellow Trader:
I outlined my favorite “perfect” stocks for December on Friday. These companies have F scores of 9, high Z scores, and low buyout multiples. These metrics tell us that the companies have strong financial management, little debt worries, and produce very strong earnings for a very cheap price.
The list is below.
Today, I’m going to do what I promised on Friday evening. I’m going to pull back the curtain and tell you how to properly trade these names. In fact, I’ll even give you a trade to take advantage of this list.
Let’s dig in.
The Purpose of the Market Is to Sell
I do not like buying options, man. “I do not like them, Sam-I-Am.”
OK, that didn’t rhyme. But you get the point. Buying call options – in my view — puts traders behind the odds — especially if these contracts are out of the money.
Selling options gives you a better probability of profit. And the sweet spot for me is at least an 80% probability of profit within a 45-day period.
That brings me to the preferred trade. It’s called a “credit spread.”
I sell a put option and then buy a put option at a lower price for protection on the same expiration date. The credit that I generate is the difference between the money I generate for the put, and the money I pay for the other put.
I am looking to make somewhere between 15% and 20% on my money during the trade. It starts like this… Let’s look at a stock above that has a more active options chain: Halliburton Co. (NYSE: HAL).
The December 29, 2023, $35 put sells for $0.40. And the $34.00 put sells for $0.23. If you sell the $35 put and buy the $34 put, it produces a credit of 17 cents.
You would require $0.83 cents (x100) to create a margin of $83. If both contracts expire worthless, you will generate a 20% return in 25 days.
If you sell that $35 put, and the stock falls under that level, you’ll be assigned the stock. But the most you can lose on paper is the $83.00 — if the stock drops to $34.00. That’s better than buying 100 shares of HAL today, and risking more than $300 on paper if the stock goes against you.
That said, the probability of profit is very high on this trade, and you simply need to manage your risk. If you find that the trade is down the same amount as the target (20%), cut it and move onto the next trade. This is an important consideration.
Here’s the beauty of the trade:
- If the stock goes up, the value of the spread goes down. As a result, we make money.
- If the stock just trades sideways, the value of the spread will decay. As a result, we’d make money.
- If momentum is positive and the stock pulls back, we’d be happy to own it at a lower level. But if momentum goes negative, we can just cut our losses and look for an opportunity to reenter this position.
Over at Executive Payouts Unlimited, this is our bread and butter trade. But we use one additional metric outside of F and Z scores to maximize our potential.
Chat soon,
Garrett Baldwin
*This is for informational and educational purposes only. There is an inherent risk in trading, so trade at your own risk.
P.S. Tesla Has a Unique Element Most Stocks Don’t…
And it’s giving folks the chance to target money-doubling returns starting each Thursday afternoon!
I know that sounds crazy, but as you’ll see here…
There’s a market anomaly that makes this possible…
One that has been studied by Princeton, Vanderbilt and even the SEC…
And has been spotted on Tesla’s stock 23 different times in the last year…
The profits and performance shown are not typical, we make no future earnings claims, and you may lose money. The trades expressed are from historical data where the average return was 63% with a 6 day hold period and a win rate of 68%.
Market Momentum is GREEN
Momentum remains Green, despite today’s dip in the Nasdaq. The markets are gearing up for job reports this week, so stay tuned, and keep your stops in place.
*This is for informational and educational purposes only. There is inherent risk in trading, so trade at your own risk.
