Why I Like To Trade In The “Pig” Range
As a group, traders aren’t particularly great writers.
(And I should know. I’ve been an editor for dozens of highly respected gurus over the past 12 years.)
Some are a little boring. Others are long winded. Quite a few jump straight from A to Z without explaining how they got there.
But somehow, this same group is also responsible for some of my favorite “pearls.”
A rising tide lifts all boats.
The trend is your friend.
Buy when there’s blood in the streets.
Markets can remain irrational longer than you can remain solvent.
There’s a time to go long, a time to go short, and a time to go fishing.
Be fearful when others are greedy, and greedy when others are fearful.
Man, can these guys turn a phrase! This is fantastic, colorful writing that gets an important point across in a memorable, often very visual, way. And there are hundreds of them. (If you’ve got a good one, I’d love to hear it!)
Here’s my favorite…
Pigs get fat, but hogs get slaughtered.
I can’t remember where I first heard that gem, but I can assure you, I’ll never forget it. It’s got everything a good bon mot needs — short, memorable, impactful, solid visual, humor… and, most important, a good message.
It’s good to be a little greedy… but too much greed will be your downfall.
It reminds me a lot of the recommended range that we use in Income Trader.
The range is the optimal price level for entering the trade, determined by pricing models and equations that calculate the fair value of the option.
Amber once called it her “Goldilocks” zone, but I’ve always thought of it as the “pig” range.
You see, with options, the premium level tends to increase along with the risk of exercise.
When the option is trading below the lower limit of the range, we’re not making enough money to justify the risk of the trade. Based on variables like the stock’s volatility and the amount of time until expiration, we need to make at least this much to make the risk worthwhile.
Not enough “pig” below the range.
When the premium is above the recommended range, it can indicate the option has a higher level of risk and a greater chance of being exercised than when I analyzed it. And while “exercise” is not always a deal breaker for our strategy, the goal of Income Trader is to maximize returns, and one of the ways we do that is by using our limited capital efficiently. To do that, I want most options I recommend to expire worthless, which minimizes the amount of capital needed to implement our strategy.
In short, too much “hog” above the range.
But within those two price points, we have a range where we maximize income while minimizing risk. It’s the perfect sty for some fat, happy pigs.
Just greedy enough to fatten our portfolios… but not enough to get slaughtered.
Today, we’re going to pig out on some Alphabet (GOOG) puts.
Please pay special attention to that ticker. We’re trading the Class C shares, which are non-voting shares. They trade at a similar price to GOOGL, but the two are not exactly the same. The stock we have a signal for is GOOG.
Alphabet, formerly Google, is a top-notch internet company. It’s the king of search; a massive name in cloud infrastructure (world’s No. 3 provider); and owns the mega video-sharing site YouTube, which is the second most-visited site in the world. The company just went through a 20-to-1 stock split a few weeks back, which means its price is finally low enough for it to be an Income Trader candidate. (I prefer not to trade stocks priced above $300, as they require a huge amount of capital per contract.)
Unlike many tech companies, Alphabet is trading at an extremely reasonable valuation of only 20 times forward earnings, which means it’s unlikely that we’ll see its price tumble if the market dips.
The stock is also on an ITV “buy” signal, which is also a bullish indicator.
Today, I’m recommending a put option protected by meaningful technical support. Even as the market slipped this summer, GOOG never closed below this level. As always, these options will expire long before the company is scheduled to announce earnings, so we shouldn’t have any big company news to contend with.