Trading Big Price Expansion and Retraction Moves.

Picture a bungee jumper flying off a bridge.

She falls further and further, while the elastic bungee cord continues to stretch.

Once the cord is fully extended, what happens?

She pops right back up.

Markets can behave similarly. Whenever price moves to the extremes, just like a bungee cord, prices will normally tend to revert to the mean.

Fundamentals can drive price spikes, like earnings reports, or re-stated earnings, for example.

Let's take a look at the food delivery service, GrubHub (GRUB).

Click to Enlarge

GRUB got hammered on their earnings report. It got demolished, falling from $59 all the way down to $32, nearly 50%.

This begs a couple of questions.

1. Is the GRUB bungee cord stretched as far as it can go, thus propelling GRUB back up? or...
2. Did the GRUB bungee cord break, sending the company falling to certain death?

I chose the former, not because I love the earnings report, but services like GrubHub, UberEats and DoorDash are all the rage for stressed out consumers that are too lazy to cook at home or get in a car and go out for food.

So, I bought the following Options Trade on October 30:

3 Contracts GRUB $40 Dec20 CALL at $1.25 per share. $375 at risk.

My Exit Targets are:

1. $39.62 - Return to the 8 EMA (aka "T-Line") Possible 100% Profit
2. $42.00 - Return to Weekly/Monthly Pivot. Possible 200% Return
3. Everything Else 500% + Return

On the other hand, if GRUB continues to dive, then I will scale out for a loss.

Update November 5: As of this writing, GRUB is on its way up, trading at $1.42 for a 14% profit.

A Wild, Wacky, Incredibly Stupid, but Ultimately Profitable Options Trade.

I've recently started trading Equity Options thanks to being asked by my company to work with Rob Booker.

Thus far it's been a great time. I haven't made a ton of money. Better still, I haven't lost any money, despite taking a few losses. Still very much to learn.

About a month ago, I was reading a report on seasonality and Options. The author mentioned that Kansas City Southern (KSU), a freight company has a strong tendency to appreciate in price going into the Fall months.

So, I pulled up the Weekly Chart for KSU. Shy of 2008 and 2012, the author was right.

I decided to err on the side of caution and paper trade an At-the-Money (ATM) Call Option on KSU.

I really liked the idea of trading into stocks that have a strong seasonal track record. Disney, for example, traditionally spikes starting in May. Makes sense. Kiddos are out of school, and it's peak season for Disney business.

So, I entered the trade, and that's where the adventure began.

Mistake #1: I Made a Really Poor Entry, and Traded Too Large

First, instead of fine-tuning my entry by looking at the charts, I just placed a trade. Turns out that the market was in consolidation and I bought the top, leaving plenty of room for the trade to go against me.

Secondly, I traded way too large. The Calls were $2. A single lot controls 100 shares, or $200. But Think or Swim's Demo platform defaults to 10 contracts, and I forgot to change it to 1 contract.

So, now I have $2,000 tied up.

And guess what happened?

KSU dove down to the lower Keltner Channel. Almost overnight, I'm down $1,600 dollars and I'm not feeling good about myself.

This is where emotions set in. I was ready to close out the trade and eat an expensive mistake, but then I gave the charts a nice long look. I arrived at four conclusions:

1. I'm at the lower Keltner Channel. Odds are in my favor that the market will cycle back up.
2. I took this trade based on an author's report on seasonality. Historically there was a high probability that KSU stock would rise in price. Stay in the trade. See what happens.
3. I took this trade in September. It expires in December. Markets cycle. Chill out.
4. I'm still an idiot for my poor execution when placing the trade.

Sure enough, KSU  moved back up to break-even. No harm, no foul.

Mistake #2: I traded right through the KSU Earnings Report

That's a crap shoot. A total gamble. If their earnings disappoint, I'm back down $1,600 or more. I did not pay attention to their upcoming earnings.

As it turns out, KSU crushed their earnings, and the stock skyrocketed. Now, I'm up $3,600 overnight and I cashed out for a very handsome profit.

There was nothing good about the way this trade was executed. It was sloppy, and I got lucky.

Mean Reversion in My Live Account

After an enormous gap-up, stocks usually pull back before continuing to climb.

So, I placed 2 ATM November 15  PUT Options at the $146 Strike Price. I paid $2.85 for a total of $570 in my Robinhood account.

The trade was placed to today, and it has been up as high as 30% intraday. I believe this trade has room to run for greater profit.