Date Published: 2017-03-08
Successful option trading is not about grand statements -- it's about small adjustments planned well before the trade that can make the difference between winning and losing. There is a way to profit in the option market in Adobe Systems Incorporated (NASDAQ:ADBE) that actually takes less risk as it outperforms.
Adobe Systems Incorporated (NASDAQ:ADBE) Tendencies
Adobe has a history of beating earnings -- that's what we probably remember -- but the reality is, the few times it missed have been a massive disruption to option trading.
If we sold out of the put every week for the last 3-years in ADBE, it looks like a nice winner.
It feels like a 43.9% return is good, even great. But it misses the greater truth we noted above about earnings. Here's what happens to that return if we simply avoided earnings -- that is, we did the exact same short put strategy, every week, but when earnings came along, we just stopped trading and let the event occur:
We can do this with the tap of the mouse:
And here are the results, with the risk reduced strategy on the right and the old version on the left for ease of comparison.
That 43.9% return has spiked to 78.2%, but it's more than the added return. What we really did was avoid the risk of earnings -- and in that vein, we have added to returns while reducing risk.
THIS ISN'T LUCK
If our analysis is correct, avoiding earnings in ADBE while selling weekly puts should have worked for the near-term as well.
It turns out that this is exactly what we find. Here are the results, side-by-side, for the last year:
We see nearly triple the return by simply avoiding risk. We are focusing on the systematic adjustment to the strategy that took less risk and created more wealth.
What Just Happened
The key to option trading is quite simple -- understanding the dynamics of the stock you're looking at allows you to adjust the option strategy to reflect those dynamics. Here is the ADBE stock chart for the last year, but we highlighted earnings dates and the stock moves that came from them -- green represents moves higher, and red represents moves lower.
As we noted, there's no doubt that ADBE has popped off of some earnings reports, but it has also seen some dips. It's the recognition of that reality, before we place any trades, that has meant all the difference in the world. This is how people profit from the option market -- it's preparation, not luck.
This could have been any company -- like Apple or Amazon, or any ETF and any option strategy. It could have been earnings, or a stop loss, or any other number of small, intelligent risk adjustments.
To see how to do this for any stock, for any strategy, with just the click of a few buttons, we welcome you to watch this 4-minute demonstration video:
Tap Here to See the Tools at Work
Thanks for reading, friends.
The author has no position in Adobe Systems Incorporated (NASDAQ:ADBE) at the time of this writing.
Trading futures and options involves the risk of loss. Please consider carefully whether futures or options are appropriate to your financial situation. Only risk capital should be used when trading futures or options. Investors could lose more than their initial investment.
Past results are not necessarily indicative of future results. The risk of loss in trading can be substantial, carefully consider the inherent risks of such an investment in light of your financial condition.