The market’s a little soft today.
But don’t forget what I told you earlier this week: This is to be expected because of the huge upswing we saw last week.
Besides, the action right now is not in the broad market.
It’s in reactions — or should I say Overreactions — to news and earnings.
Investors are not dealing with poor earnings news well. I’ll give you two examples:
When news about Nvidia (NVDA) having some problems with China came out, the stock temporarily dropped below $400.
But just a few weeks later, it’s rallied back to being near all time highs.
Meanwhile, Caterpillar (CAT) reported great earnings — except one small piece of “less good” guidance:
Their backlogged orders weren’t as backlogged as they used to be.
And that sent the stock tumbling. But it’s already on its way back up.
Both of these are great examples of overreactions.
Today we got an overreaction in Eli Lilly (LLY). They got a drug approved and suddenly the stock is down 5% overnight.
Now I’m not telling you to go out and buy LLY. I just want you to do one thing.
Watch the stock. Some of these snapbacks after an overreaction have been remarkable.
But a word of caution: If you decide to play one of these overreactions, you want to make sure to have a stop set.
And when working with stops, always remember this: NEVER put a stop order in on an options trade. Just track the price fluctutation and put in a sell order when you’ve reached your limit.
Stops on options trades are dangerous. I’ll cover that another day.
A good rule of thumb is if you buy a call option and you are down 20-30%, you want to get out of that trade.
In any case, if you decide to play one of these overreactions with a call, I recommend buying an in-the-money call with about 2 weeks till expiration.
But remember you can even do this with no risk if you use this as a learning exercise.
Just watch the stock snap back after the overreaction. Keep an eye on LLY over the next few days.
And while you’re waiting for LLY to potentially snap back…
Check out this strategy I’ve been using week after week to pull money from the markets — no matter what is going on with earnings or news.
Trade well,
Jack Carter
