A Tuesday Trade Edition: One of the most important concepts in trading is to review your work, and learn from the good and the bad. It’s critical to identify what’s working — to do more of it. Each week, you’ll get a trade from my trading journal, in which I explain my whole thought process from start to finish. Trading is all about finding something that works, and applying it, over and over again. That’s how you find trading success. So study up on this “Tuesday Trade” and let’s get to work.
For this edition of the Tuesday Trade, we’re going to focus on a ticker called Cloudfare (NET). Since it’s a new IPO, there isn’t a ton of data because it only goes back to September.
However, just because it isn’t a well-known ticker doesn’t mean I won’t trade on it if the setup is there… especially during my favorite time the “run into earnings.”
Here’s a solid five star setup in NET…
For this particular ticker, I gained interest over the last couple of months because it was setting up to be a five star setup. And as you know, five star is my bread and butter! Because it’s a recent IPO it can have some pretty decent movement.
But that wasn’t the only reason I went forward with this trade…
You can see a ton of squeezes on the chart setting up, and as always I consult my indicators too. You can see positive volume on the Turbo VZO and a Fib level. These all combine to form the perfect five star setup.
When I took this in the Options Live Trading Room however, there was some hesitation on when to get out. Why? This guy stayed in the squeeze for what felt like forever (“forever” meaning about 3 weeks). Whenever something is in a squeeze that long, people start to get impatient. Which is why the Turbo VZO is so great because it was still showing that it was in consolidation and that the key area of support was holding.
So all ‘n all we stayed in the trade for about a week and a half. During that time it didn’t really move. It moved up and down a little here and there but overall it stayed in consolidation… until finally, boom it broke out.
Now remember how I said this was a ‘run into earnings’ trade right?
Well it’s important to remember that our analysis has told us that if you’re dealing with a recent IPO, it typically trades higher going into earnings. That’s why we trade BEFORE earnings…
This is the move happening before the report. So what happens is people hear about these companies, and they hear they’re going to report so well on earnings. So they want to buy it right before earnings. However we know that this is their train of thought. So we buy the options on the stock before all those other people come in and try to buy it the day before earnings!
That’s an important piece to remember for the next time we’re looking on when to get in for a trade.
Now for the trade details (*cough cough* profit)…
I bought two calls for $3.10 a piece sold for $5.80 — almost a double profit. I’ll always take those odds. Typically with trades like this I enter about a week or two before earnings and then I get out before the report.
Since this was a long call, I only spent $620 total (for two contracts) to make about $540. That’s nice and low risk. When I ended up getting out it was up about 12%, and it actually continued higher after I was out. So some members rode that wave a little longer than I did.
This is an example of a well-rounded, five star setup on a recent IPO, and my hope is that this helps show that you don’t have to trade the big, bad, commonly known tickers to make solid profit because big movement happens all around the market.