Karpel’s Corner: Building a bullish trade in a frustrating market

Welcome to Karpel’s Corner. This is where I throw out my thoughts on the markets and share some of my favorite strategies. I keep it market-focused, and never miss an opportunity to teach trading strategies and commentate on the latest trends affecting the financial markets. Hope you enjoy today’s post!

This is a frustrating market.

The latest bounce has rendered the bears beaten and despondent. The perma-bears could wake up at the end of the month if the S&Ps break 1900 and we continue to see a lack of leadership by the Small Caps. It’s too extended to pile in and buy a pullback. And, apparently, there are no natural sellers around that are willing to sell.

So, what is a smart trader to do? The answer: High probability spread trades.

I have been using long-term diagonals on names that we have given a long-term bullish score of 10 and short-term score of 9 to 10.  Let’s use Apple ($AAPL) as an example: We have scored it at 10 for the next 50 days. The stock is trading at $97.50 and implied volatility has popped recently, ~30 percent off the 52-week low. So, I am going to look for a bullish strategy that has limited risk. I also want a high probability of success for the risk capital I am putting to work. Therefore, I’m going to look at the September 95 to 97.5 call spread, which I can get filled at $1.40.

The break-even on this spread is $96.40, which is $1.10 below where the market is trading today. This gives me room to be wrong. While doing the September expirations gives me a decent amount of time to be right.  My probability of any profit is ~63 percent–a solid bullish trade.

The final key ingredient for success is prudent capital management.  I would only use about 1.5 percent to 2 percent of my available buying power at the time of the trade. This is the very approach I take every day when choosing a trade.

One last piece of advice: Make sure you manage all your expiring August options before closing today.

 

See you next time at the Corner!