Whether you’re trying to make some (extra) cash or growing your account there will almost always come a period of time where you want to take on a little risk to accelerate those profits.
With options, this risk comes in the form of leverage. On opex (options expiration) this leverage is further compounded as you get the opportunity to own ever more leverage for less premium. This premium doesn’t come without a price. More often than not this premium expires worthless and you wonder why you even bothered.
There are those times where you are blessed by the fortune gods and granted an opportunity to make serious bang for your buck. This typically occurs when the confluence of Friday expiration meets a catalyst that provides you an opportunity to leverage wonderfully for sizable returns.
Personally, my first experience with “Friday Lottos” occurred nearly five years ago when the stock ripped nearly five percent to close out a Friday. I was a member of a chat at the time and “made my name” that day by turning ~$250 into north of $15,000 in just over 45 minutes. I’ll admit, I didn’t truly know what I was doing back then and the probability of what I was doing coming to fruition was infinitesimal. In fact if memory serves me correctly, I believe I bought a strike $1 farther out of the money than I should have and could have made more by buying the closer strike.
Since those days, I’ve had my fair share of trials and failures alike. Mostly failures. That said, I’ve learned that when opportunity presents itself alongside a catalyst it is typically worth the risk to try your luck so long as you are only risking an amount that you are willing to lose.
I’d like to take a moment to show the above in action and show three (successful) scenarios when buying yourself some leveraged lottos would have resulted into significant returns.
Before I dive into the details, I want to stress these types of trades are complete risk trades. For all intents and purposes these trades are lottery tickets. You don’t want to put real capital to use and you don’t want these types of trades to be the primary types of trades you take in your account. These trades should account for a small portion of your overall trading and should not be anywhere near the bulk of your trading. Secondly, I want to stress that taking many trades like this will most likely results in real losses. Lottos are only lottos when they are a small percentage of your overall trades and account. The moment you start taking lottos more frequently than you should is the moment that you will start to suffer real losses.
The most effective use of a lotto comes when there is a catalyst behind it. Without a catalyst the odds of profiting go down significantly.
The first scenario I want to highlight is a derivative lotto. This is when a competitor company/stock issues some news that has a material impact on itself and other stocks/competitors. In this case, I’d like to highlight the AMD backlash after the INTC headlines that broke on Friday.
On Friday morning, INTC issued a statement suggesting that their chip supplies are tight and that they were investing a record in capital expenditure in 2018. Specifically the comment went as follows:
"The surprising return to PC TAM growth has put pressure on our factory network. We're prioritizing the production of Intel Xeon and Intel Core processors so that collectively we can serve the high-performance segments of the market. That said, supply is undoubtedly tight, particularly at the entry-level of the PC market. We continue to believe we will have at least the supply to meet the full-year revenue outlook we announced in July ($68.5-70.5 bln vs Capital IQ consensus of $69.54 bln), which was $4.5 billion higher than our January expectations."
To address this challenge, they're taking the following actions:
"We are investing a record $15 billion in capital expenditures in 2018, up approximately $1 billion from the beginning of the year."
"We're making progress with 10nm. Yields are improving and we continue to expect volume production in 2019."
"We are taking a customer-first approach. We're working with your teams to align demand with available supply. You can expect us to stay close, listen, partner and keep you informed.
As you can imagine, this headline sparked some incredible buying in INTC stock. Shortly after 11am the stock took off like a bat out of hell and rallied nearly 2.5% in short order (pictured below).
As you can see, INTC took off shortly after the headlines broke and did not stop until it hit its major downtrend.
If you were fortunate enough to catch the headline the moment it happened, the obvious trade would have been to buy INTC that very moment. If you were like most however, you likely missed that rush to buy and the risk premium would not have been in your favor.
That said, if you’re familiar with the space and read the statement you got a little insight that gave you a pretty easy derivative trade. In the statement, INTC stated the following:
“We're making progress with 10nm. Yields are improving and we continue to expect volume production in 2019."
With that statement, the headline in INTC sparked buying across the sector with the exception of AMD which many believed had been gaining market share on INTC due to INTC’s missteps in the 10nm chips.
As you’d expect, AMD’s stock started to break exactly as the INTC news hit the wire. Unlike INTC though, it gave you a perfect trade setup if you knew what to look for. You didn’t have to catch the first five minute trade in order to capitalize on AMD. AMD’s stock had been stuck in a wedge since breaking higher yet again on September 12th. Upon first reaction of the headlines, AMD’s stock had found support at the bottom trend of the wedge. It continued to oscillate in an intraday bear flag for nearly 15 minutes before subsequently beginning its free fall.
Above you see the first reaction to the INTC news followed by the subsequent break of the the wedge.
In an instance like the above, we have a very defined range, a catalyst to drive the price of the stock, and a technical breakdown that gives us an opportunity to capitalize on the confluence of events. Unlike INTC and the others, AMD gave two opportunities for capitalizing on the “bad” competitor news.
At around the time of the breakdown, AMD’s 31.5 weekly expiration puts were going for 0.12-0.17. If you felt like this was an opportune moment to take a gamble you could have (hypothetically) filled your lotto puts prior to the break down. If you wanted a little more confirmation (like I did) you could have filled the break for ~0.22-0.25.
On the break down, AMD’s next level of support set itself up at around 30.5 with round number support sitting at 30. In this example, the risk reward premium told you that if you bought lottos, you were willing to take the risk in order for these puts to potentially triple in value (if not more). Additionally, with a scenario like this, you’d know almost instantaneously if it worked out or not. In this case the trade worked and the options nearly returned 5x their original value in a matter of 10 minutes.
Below you’ll see the daily breakdown along with the trade that worked on AMD. You’ll notice the breakdown highlighted by the blue trend line and the blue arrow, the daily chart breakdown, and the trade netting roughly 4.5x it’s initial value in a matter of 10 minutes.
In the above, a simple $110 bet would have resulted in ~$480 when it was all said and done. Not bad for ten minutes!
In the above, we went over what a derivative trade would look like when a derivative catalyst takes precedent. Now I’ll go over what happens when you get a direct catalyst and how powerful that result can be. In this instance, I will focus on FB.
Shortly after the AMD trade we were blessed with another catalyst driven trade opportunity when FB announced that nearly 50Million users information may have been compromised.
I want to point out that FB had been acting notably week all day Friday after rejecting its major trend tests the previous day. (Shown Below)
As you can see above, FB rejected its previous uptrend and the new downtrend simultaneously the previous day. As stated above, FB had been acting weak all day Friday as well. In this particular case, FB broke its ORB range shortly prior to the headline and presented an opportunity to take a short position. In our case, we took flyer lottos on the 165 strike prior to the announcement specifically to try and capture any further downside after the range had broken. Again, in the case of lottos, you are to risk what you are willing to lose and no more. Approximately 15 minutes later FB announced that their data had been compromised providing further opportunity to leverage the trade. (See Below)
Since FB has been a “weak” stock since their disastrous earnings report it has been in “shoot first, ask questions later” mode. With yet another downside catalyst, the stock presented further opportunity to leverage positions and potentially give further downside. As is often the case with stocks, when selling takes hold they usually take the elevator down. In the case of FB the drop was precipitous. In a matter of five minutes, puts that were worth a quarter were north of $2. Next week puts that were going for <$1 had more than doubled. On the catalyst break, we leveraged our positions and added to our puts and were fortunate enough to profit extensively. The blue arrow below signifies where the leveraging took place.
As you can see, I was able to leverage my small put position and turn it into a sizable lotto that resulted in nearly 10x in a matter of four minutes.
Put into perspective, a $100 resulted in over $1100 in a matter of five minutes.
The last setup I want to cover is pretty basic. After a catalyst drives a stock up or down a range will be set. When the catalyst is after hours the same rules will apply. So during market hours it is important to take note of both ranges. The first range being the range that occurs during market hours and the second being the range from the premarket.
Once one range is broken, it will typically create enough room to test the other range (assuming that second/premarket range is higher or lower than the intraday range). Once the premarket range is snapped further room to the upside/downside is generated (depending on the direction of the break). This sounds complicated, but it’s really kind of simple. On Fridays i like to draw out my support/resistance lines and account for premarket ranges. I especially like doing this after a catalyst occurs.
Let’s take a look at the above in action with the help of TSLA. On Thursday afternoon, the SEC charged Elon Musk with Fraud and the headlines sent the stock into a spiral. TSLA closed north of 300 on Thursday plunged to a low of 265 prior to bouncing around. In its fall the stock broke a multiyear uptrend. (Pictured below)
To start the day, TSLA rallied off the open and made a few attempts at reclaiming its multiyear trend line. As the day went on and the stock failed to reclaim the line it was important to note the daily ORB low and the premarket levels. To start, you could have bet against the 275 level with the notion that the stock would continue to reject the trend line and that would have been a safe idea. Secondarily, and more easily, you could have waited for the days lows to break and understood using the premarket lows (265) would be tested and in the event of the premarket lows breaking you would have further downside.
In our case the second of the two is how we played TSLA. We simply waited for the daily low to be broken and took our bet understanding that 265 would be our next level of interest. A breakdown of that level would potentially result in a 260 test. Fortunately for us, that is exactly how it played out.
As you can see from the above pictures, A break of the premarket lows of 265 accelerated the stocks flush (highlighted by the blue arrow). You can also see the stock rejecting the previous trend on the daily. Finally you see the logic in advance of the move. The break of 265 flushed the dip buyers and gave an opportunity to nearly triple your money quickly. If you’d front ran the 265 break and simply entered on the ORB breakdown you would have been able to collect nearly six times your money.
Put into perspective, a $144 bet resulted in nearly $400 in a matter of 10 minutes.
I want to stress one last time that though these trades did work out that is typically not the case. That said, it’s important to know your levels and understand when it is prudent to place bets such as these as they can be a great way to grow your account quickly. It is also equally important to note when that sort of trade is not appropriate. For example, if I am down to my max loss threshold on the day or close to it, I don’t typically want my final trade(s) to be lotto trades. Using this type of common sense and understanding the situations presented can go a long way to help you grow your funds.
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