Hey traders,
Earlier this week we looked at the charts for 8 stocks that barely felt last week’s market meltdown.
I told you that this is why we trade trending stocks: because strong momentum has a way of “keeping on”, even in the face of market turbulence.
Today I want to look at one of those stocks, CL, and explain why I trade the way I do.
This is probably the best example I can give you why I choose income trading over directional trades any day of the week.
First, let’s look at CL’s trend:
See that high of 104.15? That was on Monday, August 5th, the day the markets seemed to completely melt down.
Up till then, CL had been in a pretty strong trend.
But here’s the important part: even when you take into account the fact that CL basically topped out last Monday, look at where it’s stayed: firmly above its short-term 20-day moving average (the green line).
And that’s the point I want to make:
When we trade trending stocks, we’re relying on momentum. That’s one part of our strategy.
Stocks in motion tend to keep going in that direction.
But when we combine trending stocks that with an income trade, that ups our odds.
Because with income trades, we’re not just hoping that the momentum continues.
We’re trading in a way that lets us collect income up front… and the stock doesn’t have to move exactly the way we’re expecting it to.
Because with income trades, we’re usually drawing a line in the sand.
As long as the stock doesn’t cross that line by the expiration date, we walk away with a winning trade and keep the income we collected up front.
So let’s look at that CL chart again, this time up close:
Imagine if you had sold a put or traded a spread on CL.
Using my typical advice — sell 7-10% out of the money — you would have sold a spread somewhere below $97.
And you see what CL did?
It slid, but it bounced right off its green 20-day moving average, barely going below $100.
To drive home the point, let me say this: Imagine if instead of selling a put 7-10% out of the money, you had seen CL’s trend and assumed it would keep going up.
So maybe you buy a $106 or a $108 call.
Instead of having a winner on your hands, like you would by selling a put, you would have a loser on your hands that still hasn’t even recovered back to the point you bought in.
That’s the power of income trades: You don’t have to be exactly right. As long as you’re “in the ballpark”, you can still walk away with a winning trade.
Trade well,
Jack Carter
P.S. What if you could get my best trade sent to you every day as an alert straight to your phone at 10am sharp?