October 17, 2018

Let the Trend Be Your Friend

It is well known that many stocks follow patterns.  These patterns become all the more evident in the days and weeks before they release earnings.  If a stock exhibits a certain type of behavior before the earnings release, does it really matter why?

Let’s take Microsoft (Ticker: MSFT) for example.

Take a look at this chart:

You will notice that there tends to be a repeating behavior running up to earnings.  MSFT goes up before earnings.  In fact, buying calls one week before the report has been profitable 11 out of the last 12 times.  I want to take advantage of this behavior.

You may want to consider the October 26th weekly expiration 114/115 call spread, buying it for $0.30.  Your maximum risk is what you paid for the spread and your maximum reward is the width of the spread less any premium paid.  Max risk = $0.30, max reward = $0.70.  This yields a risk to reward ratio of 2.33:1.

Here’s a quick video of our discussion this morning:

about the author:

Mike Shorr

Since 1994, Michael has been an on-the-floor market maker, Vice-President of Interest Rate Derivatives for Knight Financial Products and Director of Education and Options Instructor at Trading Advantage. He makes the oftentimes complex world of options and trading accessible to the novice and advanced trader alike. Michael has a Bachelor of Science degree in Statistics and Finance from the University of Illinois Champaign-Urbana. He presently is Director, Trader Education at ProsperTradingAcademy.

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