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Today, I want to discuss a particular type of stock that I personally prefer to trade due to the amount of leverage and returns that can be provided on these particular trades…
I’m talking about tech stocks and specifically, trading options on tech stocks.
The technology sector is one of the most attractive landing places for most investors since traders can position themselves to experience the largest gain for the smallest dollar amount of risk.
One thing you’ll notice about tech stocks in particular, is that institutions and hedge funds tend to sell their boring tech stocks, like International Business Machines Corporation (IBM), and buy new tech IPOs such as Spotify (SPOT).
For example, let’s take a look at Spotify…
Notice the blue line in the graph above? That’s the trend-line and the red line at 150 is called resistance.
Here, I’m going to use my Knock Pattern rule to shatter that resistance in order to explode or increase the volume of Spotify’s stock.
If you’re not familiar with my Knock Pattern strategy, here’s the lowdown…
Think of the Knock pattern as knocking on someone’s front door.
You walk up to the door and knock once. Nobody answers, so what do you do?
You come back for a second time and knock a little harder. On the second attempt at the line of resistance, or the door, no one answers.
After the second attempt, you’re frustrated. You really wanted to get in and knock that door down.
Now, you’re back for a third attempt. You finally break the door down, shattering that resistance and causing the price of the stock to explode higher.
This is the type of gain and the exact time traders should be in options to achieve that maximized return!
However, once that stock explodes, the media will pick it up, making every trader feel the need to buy that particular stock and call options.
Options are all about supply and demand… When demand goes up, implied volatility goes up, causing the prices of options to elevate or go higher. This is when traders should sell their options.
Take another look at Spotify…
As you can see, Spotify is breaking out and there’s already a demand for these particular options.
What you should do in a situation like this? It’s simple, pick a strike of where you think Spotify will go.
In this example, I’m going to look at the 150 strikes. However, I’m going to give these options a 30-day minimum in order to avoid the hassle of Theta decay.
What we’re going to do now is look for a cheap option at the 150 strike price. The July expiration 150 call options are about 3.30 but… don’t let the market makers get you. Try to acquire this call option at mid market, or 3.20.
I’ve put in the order. That’s one Spotify call option. Therefore, my max risk on the trade is $320.
Now, as long as Spotify remains above 150 plus the premium I paid (3.20), my breakeven is 153.20. Any time Spotify moves above 153.20 buy the July expiration, my call option will start to go up in value and I will start to make profit.
Let’s say that within the next few weeks Spotify goes from 138 to 145, which means that these July 150 call options are going to start around $5.00 or $6.00.
I’m already doubling my money as the price of the stock starts to get closer and closer to that 150 level before expiration.
This is how you can maximize gains by trading tech stocks and as you can see, trading call options on tech stocks provides a massive amount of leverage and profit, all while risking the tiniest amount possible.