Jan 2020: BKNG $1900 – $1915 Bull Call Spread | Mean Reversion Trading Using Options

Jan 2020: BKNG $1900 – $1915 Bull Call Spread

Stock

BKNG

Trade Structure

$1900-$1915 Bull Call Spread

Trade Date

01/28/2020

Expiration Days

02/21/2020

Trade Rationale

Jan 2020: BKNG $1900- $1915 Bull Call Spread. With the ongoing Coronavirus scare, travel stocks like BKNG have been pulling back. With all our indicators indicating that this might be the end of the pullback, I am testing the waters with a $1900 - $1915 Bull Call Spread.

BKNG_1900_1915_Bull_Call_Spread_Open | Mean Reversion Trading Using Options

Trade Selection Criteria

Overall market movement

The markets have been pulling back due to the ongoing Coronavirus scare

CHECK

No Earnings or Significant News

Earnings are behind us and the next earnings will be after our expiration cycle. Earnings scheduled for 02/26/2020. Note: I did choose a smaller expiration cycle for this trade to avoid earnings

CHECK

Bollinger Bands outside Keltner Channels

Bollinger Bands are way outside Keltner Channels. As you can see in the chart, BKNG dropped like a rock in since 1/10/2020. Since, I am aware of the stocks “personality”, this is highly unusual and even though Coronavirus may affect the stock but this extreme pullback is uncalled for. Perfect time for a mean reversion trade

CHECK

RSI Analysis

RSI crossed above 30 after being in the oversold zone for some time, indicating a trend reversal

CHECK

ADX Analysis

ADX is not very clear. It seems flat or slightly rising. However the DI- line is showing a sharp turn which indicates exhaustion of the current downwards trend.

CHECK

Trade Analysis

This trade worked out perfectly as all other BKNG positions I put on to add to my position. I will still say that I don't like putting on trades with less than 30 days to expiration, but with this one I was forced to do it to avoid earnings. In the end, it worked out great! I do want to draw your attention to the beauty of this trade. BKNG dropped $100 within 3 days after I bought my bull call spread. If I had bought a naked call option, theta (time decay) and delta would have annihilated me at this point. But spreads are very resilient. You don't lose money immediately if the stock price goes against you. On the flip side, you don't immediately start showing large profits when the stock price goes in your direction. In my experience, this is great, because you don't experience the Adrenalin rush of losing or winning, which in turn helps your emotions stay stable. And if you have any kind of experience with trading, you know that it is not about the strategy, winning in trading is a game of your mind.

BKNG_1900_1915_Bull_Call_Spread_Close | Mean Reversion Trading Using Options

Trade Outcome

Winner

Profit/Loss

$603

Beginning Account Balance

$16,537

Ending Account Balance

$23,200

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To follow along the strategies we use in the $25K challenge, we recommend that you get the strategy book which explains the whys and wherefores of our method. Get it here=> https://amzn.to/2MUOCE5

4 Comments

G S on February 12, 2020 at 11:43 am

I like this but as you realize now the stock went right to the Nov low and Aug gap ~ 1826
I think indicators are fine but you can improve further by incorporating support and resistance.

Nishant on February 12, 2020 at 11:51 am
Yes, no amount of indicators will give you a sure shot win. I use indicators along with my own experience to put on my trades. I do eyeball support and resistance too. But as you will see, sometimes even with all indicators lining up, you still don’t win. However, as long as your winners are greater than losers, you will keep growing your account, which is what my goal is.
Reply

Briandu on February 12, 2020 at 3:07 pm

Hi Nishant
I read your book many time, I have some questions?
1. Can I use all of this indication to buy call option? B/c my options level can’t buy vertical
2. I am small account Can I used this indicator to buy stock below 10?
Thanks

Nishant on February 13, 2020 at 1:08 pm
- Since my indicators basically give you entry points to put on a trade, you can use them to buy stocks, calls or anything else, but buying calls will be more expensive for you than buying spreads. eg. buying 1 ATM BKNG CALL may cost $8000 but a spread will cost only $250. Think about it. Buying calls and puts are very dangerous and causes 90% of the traders to get wiped out. If yoIu have a small account, you should in fact trade spreads only. I don’t know which trading platform you are on, but you can simply fill up an application on most platforms and apply for access to trading spreads.
- If you trade spreads, then you can trade stocks which are trading at $2000 and still pay only $250 for a spread. So, using spreads allows you to pay the same amount whether it is a $100 stock or a $10000 stock. It doesn’t matter. It kinda levels the playing field. If you want to follow my trading methodology, I trade stocks trading above $100 as I need big movements in the underlying. $10 stocks just don’t work with my strategies.
- Also, if you kindly leave a review for my book, I will greatly appreciate it
Reply