Monthly Archives: May 2014

280% profit in one weekend?

How do you find these high probability huge profit trades?

Yes, there are times when you can find rare profitable trades in high probability and low risk. It takes perseverance and patience. ┬áScanning the charts day after day without finding any good situation can be boring and tedious but once in a while it can be very profitable. Look for example at the cart below. It is of Apple – one of the most followed stocks and companies on earth. Surely there are no surprises there, right? The experts and MBA’s are watching and reporting endlessly on this stock and every good and bad detail is already priced in to the stock.

Well, it turns out that the markets are not perfect and they comprise of many different people. Real humans with needs and aspirations. Not all of them are always trading and not all of them have time to read every analysis on their favorite stock. This is what causes the price to swing wildly sometimes and over react to news, good and bad.

Is it possible to gain so much in the dangerous world of stocks and options?

I look for what’s called a “Double Bottom Divergence in the MACD-H” or DBD for short. In simple words, this is when the stcok has lower lows, marked in blue on the chart below while at the same time the MACD-Histogram has the matching lows go higher. The MACD-H lows are marked in blue too.

To make the pattern even more significant, look at the volume at the same time frame. Volume peaked around the first low in price and while it increased and peaked again in the second low, it was still lower than the volume of the first low. The general consensus is that volume peaks at significant price moves.

The pattern predicts with a high probability that the trend is about to change. The indicator is leading the new direction and if the MACD-H is going up, soon the stock price will too!

How do I protect myself from crashing and burning all my hard earned and saved money?

As always, you should risk a small enough sum to protect yourself in case you’re wrong. Or better to frame this as being right at the time of entry while the set up is statistically significant, not certain. So I recommend using 2% of the account.

Boring? Perhaps, but believe me it’s really exciting being 30% ~ 60% up on the account at the end of the year including all transactions, won and lost and after all fees are paid.

In order to make this more interesting and better than buying and selling the plain stock, using options increases the leverage greatly.

You just have to know how to easily select the right option for the situation.

In this case, a close to expiration, near-out-of-the-money option was selected. It’s ticker is: AAPL140530C00610000

What all this gibberish means is easier to understand by adding some space and punctuation in the symbol.

AAPL 2014/May/30th Call $610.000

Oh, now it’s more readable. this is a call option on Apple stock with an expiration in a week and a strike at $610 which was out of the money on Thursday May 22nd.

The cost of the option was $3.80 and since each option represents 100 shares, one option costs $380.

So, if your investment account is $19,000 that represents a 2% risk. And don’t underestimate the risk – since this is close to expiration and out of the money – there is a large risk of it being worthless in a few days!

But since the less well known pattern is in our favor we buy a small position and wait for the weekend to pass.

It was a long weekend and the markets were closed on Monday. But on Tuesday, the stock was at $620 making the option in the money and it showed no weakness so staying another day was worthwhile. the stock reached $625 and the option was above $14.60

So selling the option at $1,460 was a huge profit. Let’s see:

$1,460-$380 = $1,080 before transaction fees of profit.

This represents more than 5.5% profit on a risk of maximum 2% on the account as a whole. This makes it sound more boring than the %200 and more when looking at the single trade but this “boring-ness” is a good thing, this is the foundation of a real business as opposed to just gambling.

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AAPL

Click the image to see in full scale.