Avid readers know I’m a huge fan of trading journals. Not only do they help you become a better trader, but they can highlight opportunities you didn’t even know existed.
It happened to me just the other day. Sipping my coffee one morning, I examined my trades for the past few months. After a few minutes, an idea came into focus…
A little TPS sprinkled with a put credit spread delivered the winning combination!
Earlier this week, I sent Weekly Money Multiplier members the following chart.
PG Daily Chart
It may not look like much to you. But to me, this is pure gold. I see a TPS setup that formed with an excellent entry right off the lower Bollinger Band.
You’re probably scratching your head, wondering what the heck I’m looking at.
Let me explain how I identified this trade and why it works.
Even a few members of Weekly Money Multiplier saw this chart and weren’t entirely sure about how it fits into my TPS strategy. So let me walk you through what I see.
First, let’s mark up the chart a little bit.
PG Daily Chart
For starters, I don’t think anyone would argue the stock is in an uptrend. Proctor & Gamble pushed higher through all of 2019. So we’re all in agreement here.
Next, it’s obvious that the speed of that trend slowed around October. Check out where the stock took a dip before finding support. That recovery has been drawn out for the last few months in a slow grind higher.
Now, you’ll notice at the bottom I highlighted where a squeeze started. This happens when the Bollinger Bands begin trading inside of the Keltner Channel indicator. In my experience, that leads to explosive price moves (not that I need one for this trade to work out).
Lastly, I want to point out the wedge chart pattern. While this isn’t the cleanest pattern I’ve come across, it’s good enough for what I’m looking for.
Using the Bollinger Bands
I recently wrote an article about how I use Bollinger Bands in my trading. For those of you who haven’t read it, let me give you a quick recap.
Bollinger Bands create a range of two standard deviations based on a rolling timeframe of closes. Two standard deviations mean that based on the historical closes, there’s a 95% chance the close should land in that range. So, when any chart hits the upper or lower band, that’s a great signal it’s overextended itself.
Typically, I’m looking to enter trades between the 8-period exponential moving average and the 21-period exponential moving average. Entering at the lower Bollinger Band is a more conservative play.
The put credit spread
When I get a stock like P&G that doesn’t move a ton and continues to grind higher, I don’t want to just buy call options. They won’t pay me out enough. Instead, I can use that bullishness to work for me. That’s why I like the put credit spread.
A put credit spread involves selling one put option at a strike below the current price and buying another at a lower strike price, both for the same expiration. You receive a credit for this transaction known at the premium. The maximum amount of profit possible is the credit you receive up front. If the stock is above the strikes at expiration, you keep it all. Your maximum possible loss is the distance between the strikes, minus the credit you receive.
- I sell the PG $122 put strike that expires in two weeks
- Then, I buy the $121 put strike that expires in two weeks
- I receive $0.25 per contract for this trade
- My maximum possible profit is $0.25 x 100 shares = $25 per spread
- The maximum possible loss is $122 – $121 – $0.25 = $0.75 x 100 shares = $75 per spread.
Note, you can exit the spread early if you want at a partial profit. This can actually lead to a higher win-rate!
Here’s what makes this trade a really high probability. First, option sellers have a statistical advantage over buyers. That’s inherent within the options market.
Second, I’m playing this credit spread when I have a signal that the stock is oversold both on the chart and statistically speaking. That gives it a higher likelihood of not heading lower.
Lastly, I combine my TPS setup, which normally leads to explosive moves higher. When I put all these pieces together, I have an excellent chance that this trade works out in my favor.
You can learn exactly how I read through my journal to come up with trades just like these. I talk about it extensively in my upcoming webinar you can join for free.