'Earn' Your Trading Stripes This Season

'Earn' Your Trading Stripes This Season
by Bryan Perry 05/05/08

Earnings season officially kicked off today with Alcoa (AA), which is traditionally first to report. But if other companies follow the leader, well, we could be in for a rough go of it. Although its numbers improved since last quarter, it didn't come near the year-ago period's figures.

Even though its profits were down 54%, surprisingly the stock didn't take too much of a beating -- closing down just two points from the open. It's almost as though Wall Street is simply bracing itself for what could turn into an unbearably long reporting season.

LOOK FOR INDIVIDUAL BULL, BEAR MARKETS

In this uncertain market, it seems like "anything goes." A strong name like Apple (AAPL) reports its best quarter ever and then gets killed on conservative forward guidance. Meanwhile, Lehman Bros. (LEH) can write down some more losses and its stock goes up.

Pundits are up in arms about whether we're in a bear-market rally or whether a market bottom has been formed. Let the "experts" battle it out, because it doesn't matter either way when you're a trader -- especially when you're an options trader.

Until the market figures out what it's doing, plenty of individual stocks are in their own bull or bear markets, and those are what you want to have on your radar because they are enjoying movement independent of what the broader market is doing.

GO FROM AT-THE-MONEY TO IN-THE-MONEY

Presently, the day traders and swing traders are ruling the court because short-term trading has been the right recipe for consistent profits. But for everyone else who can't be stationed in front of their trading screens, there's plenty of hope.

Until a time comes around again when we're able to extend our holding periods for long-side trades, the strategy is simple: Keep it short and sweet. That is, we're finding the strongest names that are managing to make a pop when everything else seems ready to drop, and we're taking home some sweet returns in just a few days.

While my typical strategy in Tactical Trader is to play near-the-money options that are poised to offer stable returns over a matter of weeks or months, in this kind of market, traders have to adjust their thinking to score some quick gains.

The "tactical" part of this service's name applies as much to our strategies as it does to the nautical term of "tacking," which means to change a vessel's course of action. Every market offers opportunities to make money, but traders must adapt their approaches because just like the ocean, the market can be serene one minute and a swirling trap that can sink you the next.

My goal as of late has been to grab any and all profits when they come, and that's meant closing trades in a matter of days -- but short-term profits spend just as well as long-term ones.

PRICELINE.COM (PCLN) TAKING OFF

We got a spectacular short-term win in Priceline.com (PCLN). The trade was a pure play on discount online travel going into the summer season. On March 28, the stock was showing a powerful chart, which put in a right flag on hugely positive money flow that portended a spike for the stock price.

I viewed the chart as one of my very favorite breakout formations, and one that I wanted in my technical toolbox via the PCLN April 120 Calls (PUZDU).

The call options were out-of-the-money and higher-risk than I normally play because they hedged on expectations for Priceline's earnings report.

We bought the out-of-the-money calls on the potential for a short-term move of 10 or more points from $119 where it was trading (Now it's jumped to the $125 range). The stock broke to a new high of $131.75 just four days prior on March 24, and it was sitting right on short-term support at $118.

We bought the April 120 Calls at $6.80 and just two trading days later on April 1, we sold them at $10.60 and bagged a 56% profit.

Had I insisted on following my usual course of looking for longer-term holdings, we would have missed out on a sweet and easy win. Because we were open to changing our tack, profit was ours.

It's a good reminder to all traders that this is different kind of market than many of us are used to but that doesn't mean you have to get used to losing money.