Options Trading – Catalyst Runup Strategy

by | Apr 23, 2019

Stocks are climbing higher as they stretch to reach all-time highs as we approach the heart of earnings season.

If you’re trading large-cap stocks it’s almost like watching paint dry. Fortunately, I have enough strategies in my tool shed that I don’t need to wait for a certain type of market condition to make money.

For example, trading options allows you to make substantial profits off of small moves. Which is perfect when stocks move at a snail’s pace.

Now, despite my success as a trader, I had to go through a leaning phase with options.

(I’ve been able to improve my trading year after year, on Thursday I’m hosting a live event, register here)

That said, I’d like to share with you a trade that I put on earlier today and shared with my Options Rocket clients:

Buy 10 TNDM May 3 2019 $60 calls for $2.95

The idea being pretty straight forward, the company had a strong earnings report that did better than analysts were expecting.

However, that’s just one positive note. When I look for trades, I want to find several reasons (not just one) to get long or short a stock. That said, the biotech sector has shown weakness of late, which I believe caused this strong company’s share to decline.

That said, earnings around the corner…and my guess is this stock pops ahead of the announcement. Read on for my trading plan, how and when I plan to exit this position

Options Trading Strategy for Catalyst Events

Now, when I first started to trade options… I didn’t find success. However, once I applied the same thing I did with my stock trades – analyzing the charts and looking for catalyst events – I started to make money trading options.

One thing I found that matters a lot is timing.

You see, unlike stocks, options have an expiration date. Now, we’re going to be sticking with call options to keep things simple. For example, if you think a stock will go up within a month from now, you could buy call options expiring sometime around when you expect the stock to catch a pop.

Now, call options provide you with leverage, and they give you the right to buy or sell an underlying stock at a specified price (the strike price) on or before an expiration date.

That said, it takes a bit of creativity when you’re buying call options based on patterns on stocks with catalysts.

Moving on.

Let’s take a look at a trade in which I bought options on a stock ahead of a catalyst event.

Tandem Diabetes Care (TNDM) Trade Alert

Now, here’s a look at the daily chart in TNDM.

As you can see in the chart above, the stock filled it’s gap and has some support at that level.

Now, the last time the company had an earnings conference call, it announced some really strong data and destroyed earnings expectations. However, since then, the biotech index has come down a bit… in turn, this caused shares of TNDM to pull back.

So we have the chart pattern in mind… and the stock is already bouncing off the support level (right around the blue horizontal line) and running up into the catalyst event.

Now, the catalyst even is an earnings call on April 30 – just one week away.

This is where you need to buy yourself some time, as well as select the right strike price. So when we saw TNDM bouncing and trading higher into the catalyst.  Now, if you buy the options too early – before the stock has found some support and starts running up ahead of the catalyst… it could get dangerous.

You see, with options, if a stock breaks support and sells off… the call options lose value quickly.

If you think about it, this is just my catalyst runup strategy… but just with options. So with the catalyst runup trade, we pair a chart pattern with a catalyst. The idea is that traders will buy into the event. However, I’m not really looking to play the catalyst here… because these events are extremely volatile.  With options, the volatility is usually priced in (traders have already taken into account the fact that the stock will experience wild swings).

The whole idea here is the buy yourself the right amount of time with options. In other words, you want to select the right expiration date. If you buy the options expiring before the catalyst… you might not get the move you want. If the expiration date is too far away from the catalyst date… you’re probably paying a huge premium.

That said with TNDM, everything aligned, and I think it can get a strong run above $60 ahead of the event. Consequently, I bought TNDM May 3 2019 $60 calls. So the strike price here is $60, and the expiration date is May 3, 2019 – a few days after the catalyst. Again, I’m not looking to hold these options into the earnings conference call on April 30.

Now, I alerted clients about this trade earlier today.

Now, if you’d like to keep the discussion going, you can actually chat with me live this Thursday, I’m hosting a live webinar. We’ll be talking options, this trade, and my latest indicator I call the Mortal Lock, registration is now open, click here.

0 Comments

Submit a Comment

Your email address will not be published. Required fields are marked *