Keeping It Simple Is Stupid

Hey Traders,

One of the key lessons I hope you’ve taken from the last few weeks is that many times, what seems like the “obvious” trade is just about the worst trade to make!

If you were paying attention during our special Hedge Fund Secrets Revealed presentation, you heard Frank Gregory talk about how important it is to really chase the story of a trade … 

To keep digging once most other traders have said “aha! I found it!”

That’s the powerful mindset behind the Deep Information trades that Frank and Andrew will be making in their new Capitol Gains program

And here’s a couple reasons why you should think twice before making a “no brainer” trade yourself.

Don’t Get Crushed By An Earnings Win

First, let’s revisit one a topic it feels like I have been talking about non-stop for weeks now

Trading earnings.

I want you to take a moment to imagine this with me …

You’re new to trading (or maybe not so new …).

It’s earnings season.

You have a good feeling about a mega-cap … let’s say, Apple (Ticker: AAPL).

Analysts are forecasting strong earnings, and you think AAPL is going to come in hot.

So … obviously you should buy AAPL calls ahead of time, right?

Whoa whoa whoa. Have you learned nothing in the last two weeks?!

Especially when it comes to mega-caps … a solid earnings report means nothing.

Of course, a negative earnings surprise can be devastating, as Amazon (Ticker: AMZN) showed us yesterday …

Chart courtesy StockCharts

But just because AAPL meets – or even beats! – expectations does not mean the shares will pop.

In fact, even if AAPL outperforms, many times, the shares will drop.

Because everyone expects AAPL to outperform.

So the outperformance has already been priced in.

And if you’re holding AAPL calls through earnings, not only do you run the risk of those calls falling further out-of-the-money, but you also run the risk of a post-earnings volatility crush, as the implied volatility (IV) being priced into options evaporates.

Another example?

Well, oil stocks have been on the rise, with burgeoning demand and rising oil prices.

I mean, look at ExxonMobil (Ticker: XOM) over the last 11 months:

Chart courtesy StockCharts

Pretty solid post-pandemic recovery!

So with earnings around the corner, surely some of the gas giants will be headed for a post-earnings pop, on stronger-than-expected earnings?

Well, you’re right about the solid earnings part, at least. Both XOM and Chevron (Ticker: CVX) delivered outstanding earnings reports, and signaled positive expectations about continued post-pandemic recovery.

And check out how XOM was rewarded:

Chart courtesy StockCharts

CVX performed similarly.

“Okay then, play puts around earnings?”

Not so fast.

Check out Twitter’s (Ticker: TWTR) post-earnings-beat trading session:

Chart courtesy StockCharts

And again, I cannot stress the importance of paying attention to the IV of an option. 

Even if your option ends up in the money, it could still lose value as all of the implied volatility is flushed out post-earnings.

Common Knowledge Is Too Common

Okay, okay, you’re sick of me talking about earnings.

Another way traders try to play “obvious” trades – that they might not even realize is “obvious” – is trying to play the news … but not digging deep enough.

For example, let’s say you heard about President Biden’s plan to fund hundreds of EV charging stations around the country.

An “obvious” trade might be Tesla (Ticker: TSLA). After all, more charging stations = more popular electric vehicles = Tesla, right?

The thing is … these obvious trades just tend not to produce results. TSLA shares really haven’t reacted much as the infrastructure bill has been front-and-center the last several weeks …

Chart courtesy StockCharts

When it comes to trading the news, it’s about thinking several steps ahead. Take your trade idea, and keep going with it. Expand on it.

Electric vehicle charging stations? Who makes those? Who sells them supplies? Where do those suppliers get their resources and raw materials?

Follow the trade down the rabbit hole, and then you might find the trades other traders are missing.

More Like IP-No

And finally, ahead of Robinhood’s (Ticker: HOOD) debut in the options pits this upcoming week, I want to caution you about trading IPOs.

I think too many people buy in to the “I wish I had bought AAPL when it was trading at $3 in 1997!” mindset.

Sure, buy and hold to your heart’s content. Maybe you have the next AAPL on your hands.

But what I see time and time again is people buying into an IPO, the shares tanking, and then these investors selling at a loss.

Buying AAPL at $3.00 in 1997 wouldn’t have been a great move if you then sold it off during the 2001 Dot-com bubble bust.

And are you really willing to hold on to your HOOD shares for five, ten, twenty years?

Or maybe you’re thinking about playing options. 

In that case, I would caution you that in many instances, these post-IPO options have huge amounts of volatility priced into them, and no historical volatility for comparison.

This is because market makers don’t truly know what to expect, so they price in that risk accordingly, and you’re footing the bill.

So whether you’re bullish or bearish on a name like HOOD, being the first to hit the pits may just mean you’re overpaying for volatility.

However, if you simply must trade an “obvious” trade, you should strongly consider trading a more advanced spread trade, which will help you hedge your trade and control your risk. Something like a strangle or a butterfly can help you limit your outlay, and profit from a move in either direction.

Of course, that’s easier said than done …

Alternatively, you could let Frank and Andrew do the digging for you to discover the “not so obvious” trades.

Remember the TSLA example? They played Ford (Ticker: F) for a 155% win by anticipating Biden’s electric vehicle agenda.

You can get the full story on that here.

Your Only Option,

Mark Sebastian

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