|Weekly Newsletter 06/13/14|
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Trading In-The-Money Options from the Cup and Handle Watchlist
Join us for a webinar on Jun 16, 2014 at 6:00 PM MDT.
Stocks in a volatility squeeze that breakout from a cup and handle pattern can provide significant gains if traded as in-the-money options. This webinar will cover the theory behind this strategy and how to put it into practice.
After registering, you will receive a confirmation email containing information about joining the webinar.
See more below
The NASDAQ Composite attempted to break resistance on Monday but slipped back setting the trend for the week with the three major indexes closing for a loss. With tensions rising in the middle east, we are unlikely to see a change in direction in the short term. Our trend indicators remain positive but that is because there is always a short lag while they detect a change in trend.
|Weekly Breakout Report|
The number of breakouts fell substantially, reflecting the downward trend for the week.
|New Features this Week||Additional Value that we added this week|
No new Features this week.
|This Week's Top Tip||Tips for getting the most out of our site|
Why the Cup and Handle with Squeeze works for Options Trading
We know that stocks that are in a cup and handle pattern have a strong potential to move higher if they break through their breakout price. For this reason alone, CwH breakouts offer a potentially rewarding call options play. When we add the "squeeze" into the mix the potential for exceptional profits is multiplied. Here's why.
As you probably know, options pricing is often done using the Black-Scholes model. Inputs to the model are
(see: http://www.investopedia.com/university/optionvolatility/)It follows that if "historical volatility" is low then the expected future volatility (known as implied volatility) is also low. In other words, option price is a function of volatility.
Stocks in a squeeze are experiencing low "historical volatility", so the options price of a CwH stock in a squeeze will be lower than an equivalently priced CwH stock not in a squeeze.
A breakout from a squeeze results in a quickly changing implied volatility and a consequent jump in the call option price. By taking a call position at the time of the breakout we can profit substantially from this change in price. While the underlying stock price may only move 5%, the change in the option price can be many multiples of that.
Our webinar "Trading In-The-Money Options from the Cup and Handle Watchlist" will explain how to execute call option trades from the cup with handle watchlist. Topics covered:
|Market Summary||Overview of market direction and industry rotation|
|Top Breakout Choices||Stocks on our Cup-and-Handle list with best expected gain if they breakout|
|Top Second Chances||Stocks that broke out this week and are still in buyable range|
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