How To Profit Using A Long-Term Options Strategy
Recently, a student of mine asked me how to strategize for making a long-term options trade using The Profit Machine methodology. If you know me well enough and the method of trading I preach to my students, you probably already know my answer.
For those of you who don’t know, the strategy I use over at The Profit Machine boils down to having a disciplined plan and executing on that plan consistently. It’s about having a set of rules that works and then following it. No magic indicator. Just good old-fashioned discipline and risk management combined with basic technical analysis.
I know it’s not “sexy,” but these rules have led me to tremendous success. Since the start of 2018, I’ve made 304 trades alongside my students who signed up for The Profit Machine — and we turned $5,000 into more than $70,000.
So, if you guessed that my long-term options strategy doesn’t really change all that much, then you’re a true Profit Machine master. The strategy for a longer-term trade is the same as a shorter-term trade.
Now, I know you may have been looking for something a little more in depth than that, but let me explain a little more.
What I Look For In A Long-Term Options Trade
Long-term options trade, or LEAP (long-term equity anticipation securities) as they are commonly referred to, are typically options with expirations months or even years down the line. For our Profit Machine strategy, we are typically holding trades for four to five days, maximum. However, I thought this student’s question was worth examining.
When trading these longer-term options, we are still looking for price levels, but we are going to be looking for a more meaningful price level on a chart that goes back a year or two. Let’s take a look at the figure below and reference a past trade some of my students put on.
The stock we are looking at here is Shopify (SHOP). At the time, I saw a very significant price level (highlighted by the red horizontal line). This level was particularly important to us because, as you can see, the stock tested this level several times. That immediately jumped out to me as a level we needed to break in order to go for a little ride.
The more meaningful the price level, the more certain you can be that the stock will rally upon breaking through that level. Conversely, another rejection at this level could send the stock into a tailspin.
This could be a good time for you to marry technical analysis with fundamental type analysis. Does the underlying company look solid? Does its financial metrics look attractive? These are the questions that you want to ask in order to gauge what the investor sentiment could be.
Basically, since LEAPs are very similar to owning the underlying stock, you want to also treat the trade as such. You wouldn’t invest long term in a badly run company… so why would you want to trade long-term options in one?
That wasn’t the issue with Shopify, as it is a solid business.
So, we had our level. We also looked at the stock’s fundamentals to make sure others drawn to the stock as well.
SHOP: Break Above Meaningful Level Sends Us Off To The Races
As you can see, the stock saw a bullish move to the upside. That also pushed SHOP up through that identified price level on strong volume. Then we were off to the races, and for quite some time too.
This rally continued for a while, as investors piled into the stock.
A long-term options trade is much like owning the underlying stock, so you must treat the trade as a hybrid between the two after you have found the more meaningful level.
By more “meaningful,” I mean a price that has been tested several times over. This represents a psychological level for many investors who are looking to get the stock at the best price. Once investors and traders see the level is broken, they anticipate a rally as that was the best price they could have gotten the stock for.
This belief triggered the rally after investors and traders both saw this level being broken.
One last thing to remember when trading and looking at price levels: Other traders are most likely seeing the same things you are. That means they’re more than likely looking at the same price levels as you. So when they see these levels broken, they’re ready to act.
So the next time you want to make a longer-term options trade, remember, look for more meaningful price levels and make sure you’re trading the stock of a company that is a great business.
If you find yourself asking questions such as this or anything having to do with trading, be sure to out The Profit Machine, where you can join me live every Tuesday morning for more tips on becoming a successful trader. My goal is to make my students better traders in any way I can.
For a more in-depth walkthrough of how to trade longer-term options, check out the video below.