{"id":22084,"date":"2024-08-19T07:30:56","date_gmt":"2024-08-19T11:30:56","guid":{"rendered":"https:\/\/www.jeffclarktrader.com\/?p=22084"},"modified":"2024-08-19T07:30:56","modified_gmt":"2024-08-19T11:30:56","slug":"how-harnessing-volatility-handed-us-a-54-percent-gain","status":"publish","type":"post","link":"https:\/\/stage.jeffclarktrader.com\/market-minute\/how-harnessing-volatility-handed-us-a-54-percent-gain\/","title":{"rendered":"How Harnessing Volatility Handed Us a 54% Gain"},"content":{"rendered":"

Managing Editor’s Note: <\/strong>Today, we’re handing the reins over to colleague Larry Benedict – a market wizard and legendary hedge fund manager.<\/p>\n

He’s been following the recent volatility… He’ll share how he used one hot company’s increasing volatility to make a great profitable trade…<\/p>\n

Here’s Larry…<\/p>\n

\n

By Larry Benedict, editor, Trading With Larry Benedict<\/em> <\/strong><\/p>\n

<\/p>\n\n\n
\"Larry<\/td>\n<\/tr>\n<\/table>\n

<\/p>\n

The huge ramp-up in volatility these past couple of weeks has seen plenty of folks call “time out” and head to the sidelines.<\/p>\n

But subscribers of my option advisory The Opportunistic Trader<\/em> embrace volatility rather than fear it. And they recently banked some outsized gains.<\/p>\n

Better still, they grabbed those wins quickly…<\/p>\n

Like the blended 131.5% gain we made in just eight days from riding the Nasdaq’s big sell-off.<\/p>\n

Or the blended 29.5% gain in five days we picked up from a surging gold price. And a 15% gain in a single day from a bounce in oversold government bonds.<\/p>\n

Today, though, I want to focus on the trade that saw subscribers snare a blended 54.4% gain from Tesla (TSLA)<\/strong>.<\/p>\n

The reason for looking at this trade is simple…<\/p>\n

It’s nice to cover quick, straight-up winners. But this trade initially went against us.<\/p>\n

And it lasted way longer than planned.<\/p>\n

Yet we used options to limit risk and let the chart dictate our actions. So we eventually closed out the trade for a tidy profit…<\/p>\n

Known Risk<\/strong><\/h2>\n

In the chart below, you can see how TSLA traded flat from early May through June.<\/p>\n

During that sideways pattern, the 10-day moving average (MA, red line) and the 50-day MA (blue line) tracked closely together.<\/p>\n

But as June closed out, TSLA began to move higher. And within a week, it had gained over 15%.<\/p>\n

Almost half of that move came on July 1 – the day we entered the trade.<\/p>\n

<\/p>\n

Tesla (TSLA)<\/strong><\/p>\n

\"Image\"<\/p>\n

Source: eSignal<\/em><\/p>\n

But the move higher looked overdone.<\/p>\n

The Relative Strength Index (RSI) was tracking in the overbought range. That’s above the 70% level.<\/p>\n

And TSLA planned to announce expected deliveries the following week. So we set ourselves to capture any surprise to the downside.<\/p>\n

We did that by buying a put option. A put option increases in value if the underlying stock falls.<\/p>\n

But from the moment we entered the trade, things didn’t go our way at all.<\/p>\n

TSLA continued to rally up to its peak on July 11.<\/p>\n

When you see a chart like this, it’s worth remembering why we trade options.<\/p>\n

By buying options, we know exactly<\/em> how much we stand to lose if the trade doesn’t go our way.<\/p>\n

In this trade, we paid $4.68 per contract, which equates to $468. (An option contract is for 100 shares.) So $468 per contract is the most traders had at risk.<\/p>\n

Compare that to short-selling shares instead. In this case, that would’ve led to severe losses…<\/p>\n

Yet TSLA’s surge put the RSI even further in overbought territory.<\/p>\n

And a triangular pattern formed (green lines). So, we decided to give this trade a chance to reverse.<\/p>\n

When a triangular pattern develops along with declining momentum, a stock can often break sharply lower.<\/p>\n

And that’s what we saw… Take another look:<\/p>\n

<\/p>\n

Tesla (TSLA)<\/strong><\/p>\n

\"Image\"<\/p>\n

Source: eSignal<\/em><\/p>\n

TSLA gapped lower, consolidated for a period, then broke lower again.<\/p>\n

This coincided with a firm downtrend in buying momentum (RSI).<\/p>\n

TSLA was near our trade entry point once more. But there was still uncertainty whether this trade would turn around for us.<\/p>\n

The trade rebounded on August 2. So we decided to close out half our position for a 26.3% loss.<\/p>\n

That reduced our exposure to this trade. But we kept half our position open to take part in any further down move by TSLA.<\/p>\n

And that proved to be the right call…<\/p>\n

On August 5, TSLA opened much<\/em> lower as markets all over the world tanked. Japan led the plunge, with its biggest one-day drop since the 1987 crash.<\/p>\n

Our put option position burst into large profit. And we closed out the remainder of our trade for a 135% gain.<\/p>\n

With the 26.3% loss on the first part of the trade, that equates to a blended 54.4% gain.<\/p>\n

A big part of our trade’s turnaround and subsequent profit was due to TSLA’s big fall.<\/p>\n

But it wasn’t the only thing. A spike in volatility also played into our hands…<\/p>\n

<\/p>\n\n\n\n
\n

Free Trading Resources<\/strong><\/p>\n

Have you checked out Jeff’s free trading resources on his website? It contains a selection of special reports, training videos, and a full trading glossary to help kickstart your trading career \u2013 at zero cost to you. Just click here<\/a> to check it out.<\/p>\n<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

<\/p>\n

Catch Rising Volatility<\/strong><\/h2>\n

The huge stock market fall earlier this month saw the CBOE Volatility Index (VIX) hit its third-highest level ever<\/em>…<\/p>\n

And that caused option premiums to soar.<\/p>\n

We’re not always going to get this type of tailwind. But it reinforces a basic tenet when it comes to buying options…<\/p>\n

We should always aim to buy options when volatility is low but increasing<\/em>. Do that, and it greatly puts the odds in your favor.<\/p>\n

To be clear, options can magnify returns and losses compared to just trading shares instead.<\/p>\n

And because options have a finite life, time decay is constantly eroding the option’s value. If the move you expected doesn’t come and you hold your option to expiration, your position can expire worthless.<\/p>\n

But that’s the known risk you take to generate outsized gains – just as we did with our TSLA trade.<\/p>\n

Happy Trading,<\/p>\n

Larry Benedict
Editor, Trading With Larry Benedict<\/em><\/p>\n","protected":false},"excerpt":{"rendered":"

When trading, always aim to buy options when volatility is low but increasing\u2026<\/p>\n","protected":false},"author":64,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"ep_exclude_from_search":false,"service":"","footnotes":""},"categories":[1],"tags":[],"publication":[10],"person":[58],"newsletter-type":[],"ticker":[],"class_list":["post-22084","post","type-post","status-publish","format-standard","hentry","category-uncategorized","publication-market-minute","person-larry-benedict"],"acf":[],"ai_tts_audio_outdated":false,"ai_tts_legacy_post":false,"_links":{"self":[{"href":"https:\/\/stage.jeffclarktrader.com\/market-minute\/wp-json\/wp\/v2\/posts\/22084","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/stage.jeffclarktrader.com\/market-minute\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/stage.jeffclarktrader.com\/market-minute\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/stage.jeffclarktrader.com\/market-minute\/wp-json\/wp\/v2\/users\/64"}],"replies":[{"embeddable":true,"href":"https:\/\/stage.jeffclarktrader.com\/market-minute\/wp-json\/wp\/v2\/comments?post=22084"}],"version-history":[{"count":0,"href":"https:\/\/stage.jeffclarktrader.com\/market-minute\/wp-json\/wp\/v2\/posts\/22084\/revisions"}],"wp:attachment":[{"href":"https:\/\/stage.jeffclarktrader.com\/market-minute\/wp-json\/wp\/v2\/media?parent=22084"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/stage.jeffclarktrader.com\/market-minute\/wp-json\/wp\/v2\/categories?post=22084"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/stage.jeffclarktrader.com\/market-minute\/wp-json\/wp\/v2\/tags?post=22084"},{"taxonomy":"publication","embeddable":true,"href":"https:\/\/stage.jeffclarktrader.com\/market-minute\/wp-json\/wp\/v2\/publication?post=22084"},{"taxonomy":"person","embeddable":true,"href":"https:\/\/stage.jeffclarktrader.com\/market-minute\/wp-json\/wp\/v2\/person?post=22084"},{"taxonomy":"newsletter-type","embeddable":true,"href":"https:\/\/stage.jeffclarktrader.com\/market-minute\/wp-json\/wp\/v2\/newsletter-type?post=22084"},{"taxonomy":"ticker","embeddable":true,"href":"https:\/\/stage.jeffclarktrader.com\/market-minute\/wp-json\/wp\/v2\/ticker?post=22084"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}