Today we've asked Preston James of Trader's Edge Network to share one of his simple yet effective trading strategies. Preston is a self-professed “stock market linebacker” who is proud of the notion that the only reason he graduated college was due to his football scholarship. His interest in trading began at a young age, actively trading his own accounts since 1996.
Specializing in cutting-edge strategies, volatile markets and small trading accounts, Preston's passion for trading has attracted a following of like-minded income traders seeking his help in taking their trading to the next level.
Preston is a noted author and speaker in the field of trading and investing, having published “The 1% Solution” and his controversial “Online Trading Manifesto.” In spite of high praise from legendary floor trader Jon “Dr. J” Najarian and Tobin Smith of Fox News “Bulls and Bears” fame, Preston insists he is “no one special”... crediting only his passion and pig-headed determination as the reason for his trading success.
You probably know this already...but on the very first day of trading, 2011, the S&P 500 index began the year at wherever, and ended the year at exactly that same “wherever”. For a gain of exactly zero. With a ton of swerves and curves in the middle. Nuts!
After the “Lost Decade” (which is the label the decade of 2001-2010 has earned because the market went exactly nowhere during this time), investors are now asking more and more, “how much longer until the stock market shakes off all it’s funkiness?” It’s a great question. But you probably won’t like the answer. According to a recent Barron’s roundtable of the country’s top shrewdest investors, the answer is: at least 5 to 10 years longer. In fact, there’s already a new label floating around called the “Terrible Twenty”. Yep, you guessed it…that stands for a probable 20 years of time where stocks do a whole lot of sideways nothing-ness!
To sum up what the Barron’s roundtable said last week:
With interest rates at essentially zero percent, it’s created tons of liquidity which is what’s driving the extreme volatilities – which we predict will be the norm for the next 5 to 10 years. It’s driven the small investor away. He doesn’t understand the market and all it’s wild moves. He doesn’t trust Wall Street which he considers corrupt and dominated by people with inside information.
That’s a pretty grim reality. And it renders most of the traditional approaches investors have relied on to be frustrating and fruitless. I’m talking about the traditional research into both technical and fundamental analysis.I don’t have to say anymore. You know it and you feel it.
Bottom line is – you aren’t going to get a 100% return anytime soon investing in the broad stock market (like the SPY’s or the Dow Jones Diamonds!)
So what to do? Is there a single best way to make money given all this crazy volatility and uncertainty every day? Something that’s easy and relatively stress free, that works in spite of you?
Hell yes there is. And it’s something I’ve profited from and marveled at during most of the last 13 years. This includes good years in the market and not so good years. But it still works like a charm.In fact, I’m wrapping up a trade right now that was easy and stress free. A bagged profit of over 100% that lined my wallet with some of the market’s“liquidity” - in exactly a 30 day period of time.
That ought to get your attention. And it should because I’m going to tell you exactly how I did it, and how you can start doing it too. Ready? Here goes.
Since I talked about the market already, let’s start right there. The market is impossible to predict in any given year. Why? Because the market is made up of a collection of hundreds of stocks. And everyone knows if stocks fall out of favor, they can have a collective bad year. And vice-versa.
Even the smartest cats in the jungle routinely miss on their market predictions. So forget the market of stocks (the stock market).
And let’s talk A stock. No matter what the economy or mood of the market, there always exists a single company that captures the hearts and minds. Circumstances of time and place put it in the sweet spot of all sweet spots.
But it’s much more than that. It’s the land of unicorns, rainbows and gumdrops. It’s the surreal made real. You know it when you see it. And there’s a lot to see: mobs of buyers, lines out the door, even bi-planes with banners and marching bands (I’ll tell you about the bi-planes and marching bands in a minute!)
There’s no stock “filter”, and there’s not dozens of candidates that shake out into the bottom of the pan. There’s ONE stock. Uno. And forget trying to guess which company out of 10,000 is going to be the magic one to buy and hold. Heck no! That’s not what I’m saying one bit!
What I’m saying is you can sit back and watch it all unfurl. And when you do, there’s an easy, fast way to make big rolls of Ben Franklin's on it. (I’m NOT talking about buying and holding, dividend collecting, technical analysis, buying shares of another stock in the same sector, or anything else like that.) So what is that company today?
The company to make money on no matter how: weird the world gets, what mood the market may be trapped in, or what turn in the economy happens next…?
It’s Apple. In fact a friend of mine recently shared his investing philosophy about Apple…“Don’t Put All Your Eggs In One Basket Unless They’re Apple Eggs” It’s true, you’d do pretty darn well just pushing your chips into the middle of the table and just holding onto AAPL these days.
At the time I write this, Apple (ticker: AAPL) has been trading around and above $600 per share. Let me share with you a trade I made just a couple months ago: Apple was trading for $426 per share. 30 days earlier it was trading at $382. That’s when I bought it. That’s a $44 move, for an 11.5% gain in the stock.
Why? Why did it move like this so predictably and on cue? From December 18th to Jan 18th? The plain answer is because Apple was getting ready to announce it’s earnings on Jan 24th. And because of how many devices this company sells, the lines people wait in for the newest, latest and greatest things it makes, and the curiosity of the sheer volume of money it could be making…this is what drives the stock price up in anticipation of the earnings date. It did this last December, and the December before that, and the December before that. And in fact, it does this almost in every 30 day period leading up to ALL of it’s earnings announcements! (Sept to Oct 2011 it moved $40 bucks…June to July 2011 it moved $70 bucks).
But you could simply focus on the December to January period. Why? Because Apple is loaded with future news dates and events. For one, there’s the CES Show in Las Vegas that takes place in early January. Next there’s the annual MacWorld show that takes place in later January. Not to mention their earnings announcement wedged in there.
What I like to do is enter Apple approx. 30 days before the earnings event. I like to buy in on a scared day in the market. I like to buy in when nobody’s talking about Apple. And I like to buy a simple call option with a strike price that’s near where the stock is at the time.
But wait a minute? Didn’t you say you were making 100% returns in these 30 days?! Yes I did. And how you accomplish this is with leverage, specifically using a tool called a call option (limited, fixed downside risk, with unlimited upside to gain).
A strategic call option purchased approx. 30 days before Apple announces earnings, costs 1/20th what the stock costs, yet pays off over 10 times the move of the stock. The best part is it’s perfectly legal and no one knows or cares that you line your pockets with profits!
As I like to remind people, a 100% gain in 30 days time like this allows you to do stupid stuff as an investor, for many months, and still be way ahead!
FYI, a rule of thumb with a call option is this: an approx. move of 10% in the stock equals a doubling of the value of the call option.
So there you have it. A killer, compelling, and stress free trade you can do in the market right now. Go ahead…check out a 1-year chart of AAPL…and go back the last 4-5 years – and watch how the stock responds in the 30 day period before every single earnings announcement.
Remember this too: YOU and ME can trade like this, but mutual funds, hedge funds and the other bloated, big-money institutions can’t touch it with a 10-foot pole – they can’t, it’s not possible for them to move enough money around to make it worth their while.
In closing…there’s some other really fun things you can do alongside your call option. One solid thing is what I call a “Money Press”, where you utilize weekly traded options and do a mini calendar spread, selling premium every single week and putting it in your pocket.
You can make plenty enough of this to purchase the call option, enhancing your 100% return even more (when you don’t even pay for the call option with your own money!) The biggest problem you’ll have with what I just laid out is the boredom in between these trades. But I have an answer for that too. You see, there’s one other thing out there that’s AS EXCITING as what I just shared here.
It’s an almost magic, little-known piece of news, and every time it’s announced, the stock goes up 86% of the time over the next 3-6 months…and it’s NOT an earnings announcement.
You can trade this little known piece of news with a call option, just like in this Apple example, it’s that compelling of a driver of the stock.
I hope this installment finds you well today,
P.S. Very important – the idea is to sell out BEFORE the actual earnings date. This isn’t about guessing which way the stock will go after the announcement – this is all about capturing the upside as the weeks unfold leading into the compelling announcement date!
P.P.S. I told you I’d tell you about bi-planes and marching bands. That was the visual when Krispy Kreme was back in their hey-day opening stores left and right. The scene was a mob scene – and for 3 ½ years can you guess how I made money on KKD? If you guessed the 30-day period before earnings with a simple call option, you’d be guessing right!