How To Profit Using A Longer-Term Options Strategy – March 2, 2022
For a long-term trade, or LEAP (long-term equity anticipation securities) as they are commonly referred to, traders are typically trading options with expirations months or even years down the line. For our TPM strategy we are typically holding trades for four to five days, maximum. However, I thought this student’s question was worth examining.
When trading these longer-term options, we are still looking for price levels, but we are going to be looking for a more meaningful price level on a chart that goes back a year or two. Let’s take a look at the figure below and reference a past trade some of my students put on.
This trade was not one I made personally; however, it was a trade I wrote about for my “Today’s Big Stock” newsletter.
The stock we are looking at here is Shopify (SHOP). At the time, I saw a very significant price level (highlighted by the red horizontal line), and pointed it out to my students. This level was particularly important to us because, as you can see, the stock tested this level several times. That automatically jumped out to me as the level we needed to break in order to go for a little ride.
The more meaningful the price level, the more certain you can be that the stock will rally upon breaking through that level. Conversely, another rejection at this level could send the stock into a tailspin.
This could be a good time for you to marry technical analysis with fundamental type analysis. Does the underlying company look solid? Does its financial metrics look attractive? These are the questions that you want to ask in order to gauge what the investor sentiment could be.
Basically, since LEAPs are very similar to owning the underlying stock, you want to also treat the trade as such. Much like you wouldn’t invest long term in a badly run company, you wouldn’t want to make a longer-term trade in one either.
That wasn’t the issue with Shopify, as it is a solid business.
So, we had our level and we had taken into account the fundamentals of the business to let us know whether there will be others drawn to the stock as well — investing or trading, doesn’t matter.
As you can see, the stock saw a bullish move to the upside, pushing us up through that identified price level on strong volume. Then we were off to the races, and for quite some time too.
On a macro level, this rally continued for a while. It was supported by investors piling into the stock to get a piece of a quality company.
A longer-term trade is much like owning the underlying stock, so you must treat the trade as a hybrid between the two after you have found the more meaningful level.
By more “meaningful,” I mean a price that has been tested several times over. This represents a psychological level for many investors who are looking to get the stock at the best price. Once investors and traders see the level is broken, they anticipate a rally as that was the best price they could have gotten the stock for.
This belief, coupled with the feeling of FOMO (fear of missing out) triggered the rally after investors and traders both saw this level being broken.
One last thing to remember when trading and looking at price levels: Other traders are most likely seeing the same things you are. That means they’re more than likely looking at the same price levels as you. So when they see these levels broken, they’re ready to act.
So the next time you want to make a longer-term trade, remember, look for more meaningful price levels and make sure you’re trading the stock of a company that is a great business.
Author: Christian Tharp, CMT