How These Five Events Can Lead to Triple-Digit Profits

Once you start looking for option trades on your own, the most important thing you need to do to find trades with triple-digit profit potential is to read the most current news. The market and stocks in general move up and down over time, and the key is to identify these cycles.

The first thing you have to do is “categorize” the news as bullish or bearish. If it’s bullish, you may want to buy call options. If it’s bearish, you may want to buy put options. You will learn to decipher information to form your own opinion. For every Wall Street analyst who likes a stock, there’s another who hates it.

After deciding if you are bullish or bearish, the next step is to look at a historical chart of that stock over a period of at least one year or longer. If shares are trading near a 52-week high, ask yourself these questions: What is driving the stock higher, and can it continue? In contrast, if a stock is making new 52-week lows, you know there might be a problem.

This is where you want to target your option trades. Look for stocks that are ready to break out or break down. You can also trade the “ranges,” but your best profit potential lies in stocks that are breaking out or breaking down. Oftentimes, these moves coincide with big news events about a company.

Earnings, biotech and drug news, mergers & acquisition news, stock buybacks, and major contracts awards. These five events can dramatically affect a company’s stock price based on bullish or bearish news.

Earnings announcements are also great setups but there is extreme risk to these types of trades. The bulk of earnings announcements hit the market in mid-January, April, July and October, and the results directly impact stock prices. Companies are also expected to provide their outlook for the coming quarter or the coming year for their business. However, sometimes they don’t because of the current economic climate, financial audits, and other issues that may have occurred during the quarter.

Don’t assume that if earnings are higher, the stock will trade higher. And don’t assume if earnings are lower the stock will trade lower. If a company’s earnings don’t quite measure up to Wall Street’s expected numbers, it is still possible that the stock can trade higher on other developments (contract awards, new products, etc.). Predicting the right option trade on an earnings announcement is an art in itself.

Another good way to digest the news is by following upgrades and downgrades of a stock. When a Wall Street analyst makes a recommendation or changes the rating of a stock this is called an “upgrade” or “downgrade.” A stock’s price can move substantially when this happens. Upgrade and downgrade information is available from most financial websites. The total number of analysts who follow each stock is also listed.

The most common stock rating labels are “Buy,” “Hold” or “Sell.” Sometimes you may see “Strong Buy” or “Strong Sell,” or “Overweight” (bullish) or “Underweight” (bearish).

Biotech and drug stocks are some of the most volatile, as their prices can crash or soar, based on clinical trials and possible blockbuster status. There are often three stages to getting drug approval from the FDA with tests done in Phase 1, 2, and 3.

Following a drug company’s results and the release dates can be helpful in planning option trades. However, investors also need to be careful as option premiums can become inflated due to the expected price moves in both directions.

Once a drug is approved, or has a good chance of getting approval, you can run the numbers to see if it has blockbuster potential. You will also examine the company’s balance sheet or look up research that has this information.

Following stock buybacks and buys and sells of corporate executives and insiders can also be lucrative as it shows how they feel about the company’s longer-term growth prospects.

We like to look for CEO’s or insiders that are buying millions of dollars in their company’s stock as it shows confidence. A single small purchase might not move a stock, but repeated or substantial buys often attracts attention.

CEO’s or insiders that are selling stock could be doing so for diversification but also because the business might not be doing as well as it should. Selling stock is seen as a lack of confidence and large or unexpected sales may raise concerns and trigger sell-offs.

Major contract awards can significantly impact a company’s stock price, often in the short term and sometimes in the long run, depending on several factors. Positive impacts on a stock price would include future revenue and profit growth, competitive advantages and analysts upgrades. All of these factors could spur momentum or speculation that could drive share prices higher.

There are some negative impacts to consider with major contracts, however, that could cause the stock to go down over time. This would include execution risks, low profit margins, and debt or dilution concerns. Another factor that could cause shares to pull back is that contract win was expected and was already priced in.

Mergers & acquisition news can have dramatic effects on a stock’s price and can be analyzed once the news is announced. It is important to note the effect on a stock’s price depends on whether the company is the acquirer (buyer), or the target (seller) and the terms of the deal.

The company being acquired typically sees a nice increase in its stock price and often approaches the offer price. This is known as the premium effect but there can still be regulatory or deal risk. Sometimes, a stock can trade below the offer price as Wall Street or investors believe other bidders might come in or the offer is rejected.

On the flip side, the acquiring company’s (buyer) stock usually experiences a decline due to concerns over the cost of the deal, integration challenges, or debt financing. There is also dilution concerns.

When it comes to stocks and the market in general, we use these five major events: earnings, biotech and drug news, mergers & acquisition news, stock buybacks, and major contracts awards to look for price action. We use charts, past earnings reports, sector analysis, and the overall trend to help shape bullish or bearish setups.

Since options are time-sensitive, you have to look forward in your trading and try to figure out where the stock will be by the time the options you are considering are set to expire. You also have to give yourself enough time for the trade to work in your favor.

These are just some helpful tips to improve your option trading strategy. You should also have a balanced portfolio and only trade a fraction of your portfolio with options as the risk is much higher. You can also sell options on stocks you own to collect income and to reduce your cost basis. This is known as covered call writing.

In any event, the more you learn about options, the better you will understand how they can be helpful in your trading strategies.