I suspect most subscribers to trading and investment newsletters stick with just basic stock trades, even if they have some knowledge of and experience with option trading. For option trades to be successful, it takes more ducks in a row, more planets lining up, than with just stock trades. But sometimes option trade setups come along that are hard to ignore.
Back on March 10th before the market opened, I informed Seasonal Forecaster readers of a good setup in the retail stock Skechers (SKX).
“…it has a good seasonal pattern for the next 7 weeks, a good track record of earnings and revenue growth, and the stock has just broken above previous highs and is falling back gently to test support.”
At the close of the 9th, Skecher's chart looked like:
That 7-week seasonal pattern looked like:
Only 1 loss in 15 years, and average gain of 18+% a year! In a minute I'll come back to why the 7 week period is important.
SKX rebounded on the morning of the 10th and went on to gain 10% before entering a mild pullback last week. Our SKX trade is currently up 7.2%, and the alternate SKX July 60 Call trade I suggested on the 10th is currently up 44%.
Friday's rebound has the feel that another ‘leg up' is starting. So the obvious questions are how does Skechers look now, and what are the trade possibilities?
Checking fundamentals, the company has been steadily improving and drawing the attention of a larger number of institutions:
Buying the stock here, as either a new position or an addition to a current position, certainly makes sense. With an 8% or 12% stop-loss the risk would be limited, and it seems there is a lot of upward potential.
Does the updated seasonal chart still show a strong track record of gains in the near future? Once again, we see that there is a sudden rise around the 3rd week of April in average gain. On the 3/9/15 seasonal chart above, the 3rd week of April is between the 7 and 8 week period. This is when Skechers' Q1 earnings are typically announced. This year they are expected to come out on April 22nd, after the close (unconfirmed).
So from today through the earnings announcement expected in the 3rd week of April, SKX has typically gained from 9 to 17%. Yes, there were a few years with losses or minimal gains. But the majority of years had gains that would not only make stock traders smile, but would make option traders absolutely giddy.
How would I structure an option trade? May options might be sufficient, but July's are more actively traded. I could go with an out of the money call, maybe the July 75 (currently 4.10 Bid, 4.30 Ask, a delta of 45, and an Open Interest of 620). If I did that, because the probabilities are lower, I'd do only a very small position.
What I usually prefer is an in-the-money call, like the ‘Alternate trades' I often present in my newsletter. I'd go with the SKX July 65 call, currently 9.4 Bid, 10.0 Ask, and 173 Open Interest, because the delta is 72. Picking a call with a delta around 70 yields the best combination of potential profit and decent probability.
What could the July 65 call return if SKX produced another 9% or so gain by the earnings release date on April 22nd? The SKX July 65 call could theoretically have a gain of 46% on April 22nd if SKX was up 9% (to 78.14).
If you wanted to trade this a little more conservatively you could aim to close the long call position just before Skechers announces earnings. Or you could take a chance on holding it through earnings for higher gains. Notice that the track record of gains levels off right after the earnings announcement. It would make sense to close any option trade right after earnings, as soon as upwards momentum falls off.
While the ducks are nearly all in a row, and the planets nearly all aligned on this trade, it never makes sense to ‘bet the farm'. Only small trades should be done on speculative strategies like this one.
Of course, there's much more you need to know and many more stocks you can capitalize upon each and every day. To find out more, please click on the following link: www.markettamer.com/seasonal
Copyright (C) 2015 Stock & Options Training LLC
Unless indicated otherwise, at the time of this writing, the author has no positions in any of the above-mentioned securities.
Gregg Harris is the Chief Technical Strategist at MarketTamer.com.
The content on any of Market Tamer websites, products, or communication is for educational purposes only. Nothing in its products, services, or communications shall be construed as a solicitation and/or recommendation to buy or sell a security. Trading stocks, options, and other securities involve risk. The risk of loss in trading securities can be substantial. The risk involved with trading stocks, options and other securities are not suitable for all investors. Prior to buying or selling an option, an investor must evaluate his/her own personal financial situation and consider all relevant risk factors. See: Characteristics and Risks of Standardized Options (http://www.optionsclearing.com/publications/risks/riskstoc.pdf). The www.MarketTamer.com educational training program and software services are provided to improve financial understanding.
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