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.
As COVID-19 continues on… there are of course many companies affected negatively, but what about those companies that are actually doing better??? Like online-based companies, that haven’t had to change too much of their daily routine.
Like an online tutoring, education-type company named Chegg (CHGG).
For this edition of the Tuesday Trade, I want to dive into CHGG. And show you why this trade was so successful because if COVID-19 continues, these types of setups will also continue.
Here’s a 7x high short interest profit setup…
Now why CHGG?
Obviously because of the pattern, but also because it’s a COVID-19 stock (like I said earlier). Originally, CHGG started out as a company that rented textbooks for college students. I personally used this company when I was in college. But they’ve grown over time and have added all these additional pieces — like tutors, online educational tools, and more.
Knowing this about the company helped my analysis when I actually took the trade because I had a deeper understanding of the underlying aspect within the macro condition. So when I took the trade in the Options Gold Room at market close on Monday, May 4th, I hadn’t looked at this ticker for a while (someone actually wanted me to look at it, so I said “sure, why not” — obviously, now I’m happy that I did). Some of you might remember taking it with me as it was only a few weeks ago.
When I initially took a look, I recognized this setup right away — it’s a favorite of mine: a high short interest setup.
How did I know this was a successful setup?
You had a ticker trading higher directly before the earnings report, and it was right at a previous all-time high right before the report. But the kicker? It had high short interest. Whenever a ticker is near all-time highs with high short interest that means there’s a potential for the short sellers to have to cover at the same time. This can create an explosion in price.
What are you looking for to indicate that this might happen?
- A pattern + high short interest
- A catalyst
When there’s high short interest that means there’s a high percentage of people shorting the stock (most likely these people are funds), and if they’re wrong what happens? They’re going to be losing money, and they’ll have to buy to cover to get out of the stock… and that makes it go flying.
Basically with an earrings trade like this you want low risk — I ended up buying long calls.
Prior to earnings (with the help of the setup I taught in my “Short Interest Secrets” class) I paid only $2.20 a contract and I got two contracts, as it was a lotto, earnings trade. Then what ended up happening was overnight it went from $1.10 to $7.50 — so I closed the trade for $7.80. This is about a 7x profit — almost an 8x!
It was a very low risk setup that ended up making me about $1300 when I only spent $220.
Our members in the Options Room really enjoyed how this trade played out, so I wanted to share a few of their comments:
“@danielleshay Nice call! You are my new hero.” – Ron A
“@danielleshay – thanks for CHGG! Good for three years’ subscription to Options Gold Room!” – Bill R
“@danielleshay ty for the chgg trade. Needed a multi bagger in my life.” – Russell B
And one of those comments was actually a question: “How did you know it was going to explode on the open?”
Frankly, I didn’t know. But I had a hunch.
Where’d I get this hunch?
From the pattern initally, and because of the macro conditions with the underlying aspect of CHGG being an online education company that’s probably doing well during this… but since it was just a hunch, I only bought a few contracts. Obviously, if I knew for certain it’d take off, I would’ve put my entire account into this (LOL). But that’s generally not how options work.
So I managed the trade in the morning, and when it gapped up we had a lot of volume and momentum present. As the momentum started to wane however, I went ahead and took profits.
Now before I wrap this Tuesday Trade up, what indicators made this possible?
Frankly, I wouldn’t have been able to manage this trade nearly as well if it wasn’t for my TrendStrength Turbo Candles. They’re absolutely critical as you can see with this screenshot:
See how the candles are green, green, green, and then they lose their volume dot (momentum). Well that indicates that the volume is starting to fall off — and that’s where I took my profits.
And with that, until next Tuesday…