On Oct. 21, Tupperware (TUP – Get Report) gapped higher on positive earnings news. The next morning we proposed that a timely options trade would be profitable because the stock would correct lower from the earnings rally.
By Monday’s close, the stock’s price had fallen to $57, confirming our thesis.
The trade recommended 19 days before was the purchase of the November 60 put option at a cost of 2.05 (including trading fees, the cost was $216). As of Monday’s close, the put had risen to a bid of 2.95, or about $286 after deducting $9 for trading fees. This is a net profit of $70, or 32.4% based on the original net purchase price.
This is yet another example of price behavior after better-than-expected earnings announcements. A stock’s price jumps higher and then retreats. On the chart, this bearish turn was forecast in several ways: a squeeze alert, a somewhat rare three-session signal, was followed by an upside gap. The likely bearish turn was further confirmed when the relative strength index moved into overbought territory for the first time in six months. A large volume spike (second biggest spike in six months) sealed the Tupperware deal. With this many reversal signals and confirmation, the trade was selected with high confidence.
Timing of options trades based on chart signals and confirmation is a highly reliable system for swing trading, and far outperforms the better known reliance on implied volatility trends.
This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.
Besides blogging at TheStreet.com, Michael Thomsett also blogs at the CBOE Options Hub and several other sites. He is author of 11 options books and has been trading options for 35 years. Thomsett Publishing Website