When it comes to trying to make money in the stock market, I don’t mess around. For example, It’s not uncommon to casually throw on options positions that have several hundred contracts.

However, I’m not gambling here… I’m waiting for my money pattern to show up before getting on the offensive…

And the results have been nothing short of phenomenal recently…

(My clients receive my trade ideas, trade alerts in real-time, if you think you could benefit from them, click here to get started)

That said, I prefer options because they offer incredible leverage… and you as you can see from the profits above… they pay well too.

People often ask me why I follow the Fed and interest rates so much… it’s because that’s where the money is at. In addition, I’m watching the VIX and the economic calendar for any upcoming catalysts.

But you know what?

Very few things have been hotter than the IPO market this year. However, unless I’m getting in Pre-IPO, I’m not touching these stocks until they become optionable.

Trading options on recent IPOs can be very lucrative.

Why?

Because there is very little price discovery. For example, how do we really know how volatile a stock is going to be after just a few weeks of trading? In other words, there is some educated guesswork involved when the market makers price options on this recent IPOs.

But here’s the thing… When I’m playing options on them… I’m not guessing.

(I stay away from trading IPOs on their first day, however, it’s time to dance when they become optionable… if you want real-time alerts on recent IPOs, click here to get started)

That said, I’d like to share with you more about what the IPO process is all about. And then tell you how I was able to profit off two recent IPO option trades in Beyond Meat, ride-hailing app, Lyft.

Trading Options on Recent IPOs

You’ve probably heard of the term initial public offering (IPO) before… and how people make a ton of money on those trades. However, just because a stock is conducting its IPO… it doesn’t magically mean you’ll make money. Not only that, it’s often hard to get shares at the IPO price.

Now, there’s not much of an edge for me to trade IPOs on the first day… in fact, since we’re not working at a bank or large investment bank… we’re at a disadvantage. That’s why I like to wait until the options on the stock started trading… I know that’s where I could make money because I have a clear edge.

Before I go over how I trade options on recent IPOs… you need to understand what an IPO actually is.

Initial Public Offering (IPO) Explained

An IPO is simply the very first time a stock issued by a company is offered to the public. In other words, people are able to buy and sell shares of the stock once it IPOs. Prior to that, these companies are considered private and only have exclusive shareholders. For example, prior to an IPO, the main investors in the company typically include founders, insiders, families and friends. Additionally, venture capitalists (also known as angel investors), hedge funds, and other investment managers may be invested in the company.

However, there’s only so much money they could raise with just a handful of investors… if a company really wants to grow exponentially, they’ll need to offer shares (or a piece of the company) to the public.

Now, once a company goes through all the IPO process – the excitement starts to begin because traders are now able to invest in companies like Uber Technologies (UBER), LYFT Inc. (LYFT), Pinterest (PINS) and Beyond Meat (BYND)… that’s when you typically see companies up 20%+ in a day.

Well, the reason for the large percentage gain is due to demand for the stock… not only that, the percentage gain is based on the offering price, which is a lot different where the stock trades at on its IPO day.

You see, there’s an offering price.

IPO Offering Price Explained

The offering price is the price at which the underwriter (the investment bank leading the IPO) allocates shares for the IPO to other banks, funds, or brokerages. Now, the shares are priced based on the underwriter’s analysis of the company from a valuation standpoint… as well as the demand for those shares. Typically, the offering price is set the day before the company is supposed to IPO.

Once those shares are allocated at the offering price, the banks or brokerage firms offer those shares to their best customers (it’s really hard to get into that group).

Thereafter, those who bought those shares, as well as the underwriter, will offer shares on the IPO date… and finally, we’re able to trade that stock if we wanted to.

Unless I can get the offering price, chances are I’m not going to trade an IPO on its issue date… because I don’t have an edge, but those who own it at the issue price has an edge over us (they own the stock at a much lower price).

Now, if there’s enough demand for the stock… the stock should run higher and gap up the next. However, that’s not always the case… and beginners will try to buy an IPO at the opening price (the price of the first trade) to try to take advantage of the gap up… only to wake up to them losing money.

You Don’t Always Make Money When You Buy IPOs

For example, LYFT was supposed to be a tech unicorn and one of the hottest IPOs of the year… if you had bought at the opening price and held on… well, you’d be in a world of pain right now.

LYFT offered its shares for $72 (the offering price), but since there was so much demand for the stock… it opened at $87.24 (the first price is was traded by the public).

Here’s a look at LYFT’s performance since its IPO.

With IPOs, unless you have a clear edge… you should probably stay away because you could be a bag holder shortly after.

Trading Options on Recent IPOs Works Well

Now, you might be wondering, “Jeff, what happens if I want to trade the stock?”

Well, you can wait to trade the options.

In order for an IPO to be listed, the stock must trade on the Nasdaq, NYSE, or AMEX. Not only that, it needs to meet certain requirements like having at least 2,000 shareholders and 7M publicly-held shares outstanding. Not only that, IPO stocks can’t have options traded on them until 5 trading days after the IPO date.

However, once the options start trading… I start looking and using my trading approach to figure out when to buy calls, sell puts, or buying puts.

For example, I was actually patiently waiting to trade LYFT. I actually didn’t touch the stock or options until weeks after the IPO date.

I waited for my money pattern to show up, and I sent this out to Weekly Money Multiplier clients:

So I sold $50 puts in LYFT because I thought LYFT wasn’t going to get below $50 at the time… that means all LYFT needed to do was stay above $50… and I’d have a 100% winner. However, since IPOs can be very volatile, you have to know when to take profits (you can read more about my options trade here).

(Think alerts like these could boost your trading performance? Click here to get started.)

Moving on.

If you haven’t heard yet, Beyond Meat (BYND) has been a really hot IPO – shadowing UBER and LYFT.

Now, you actually could’ve used the money pattern to trade BYND options.

For example, if you look at the hourly chart on BYND… you can clearly see where you could’ve bought calls.

Notice the stock hit a high of $85.45 shortly after its IPO date… thereafter, it pulled in near the $60 level (which is a support level). That support level held, and BYND just start to ramp higher. Now, if you were watching this chart, you could’ve actually bought call options on BYND once the blue line crossed above the red line.

Now, I didn’t take that trade because there was so much volatility in the market, and I was trying to keep a balanced portfolio… another long trade and I would’ve been more exposed to dips in the market.

I actually waited for the market to catch a bid before I bought calls in BYND… the trade was short and quick, and with just a small move in the stock, I was able to lock $4K on the trade.

Had I bought the stock, I would’ve had to put down over $170K just to buy a little less than 2K shares to generate that same profit.

You see, with options, it provides you with leverage… and when you buy calls, your risk is defined… that’s why I like to trade options on recent IPOs, rather than buying the stock outright. I don’t need to have a large capital outlay and I have a clear edge with options.

Source: WeeklyMoneyMultiplier.com | Original Link

I find most of my success trading options by swing trading them. I typically rely on my money pattern for clues on which stocks to place bearish or bullish bets on with options.

Nathan Bear, my partner in WMM, has a slightly different approach to trading options… but boy is he good at trading them too…

Heck, on Friday he was knocking down triples like Steph Curry in the NBA Playoffs.

(Nathan Bear has been on fire ever since he’s joined Weekly Money Multiplier, if you’d like to receive his alerts, as well as mine in real-time, then click here to get started with us)

(You can find mine and Nathan’s real-time trade alerts, live training sessions, trading updates, and so much more at Weekly Money Multiplier. If you’re not a client yet, click here to get started) 

But what I like the most about Nathan’s trading is he likes to mix it up. For example, he day trades options, swings them, and even does volatility bets.

He’s teaching clients how to trade some of the best risk/reward option strategies out there like the butterfly. Now, if you don’t know how powerful the strategy is, check out this lesson on the mechanics of the butterfly.

Butterfly Strategy Explained

The butterfly strategy is another tool to keep in your kit when you’re trading options. Now, the butterfly strategy could be constructed either using both calls or puts, but we’ll be focused on using them with call options today.

Before we break down the strategy, let’s get an idea of how a butterfly works and when you want to use the strategy.

Here’s a look at how the profit and loss (PnL) of the strategy would look on the expiration date of the options.

If you can tell from this, you would want the stock to trade in a tight range, and your profit point is reached when it reaches a certain price.

That in mind, traders use this strategy when they anticipate low volatility in a stock within a specified period.

Now, let’s get into how you would construct this strategy.

The setup involves:

• Buying a call option at strike price A
• Selling two call options at strike price B
• Buying a call option at strike price C.

Ideally, you want the stock to be around strike price B. Now as you can see, your maximum profit would occur when the stock price is just below strike price B. The maximum profit potential is simply strike price B minus strike price A minus the net debit paid.

Additionally, your maximum loss is limited to the amount you paid to open the position.

Now, it may be confusing for you at first… but let’s break this down further.

Breaking Down the Butterfly Strategy

I find it helps to think about this as two components – two strategies that make up the butterfly. Rather than thinking of the trade as buying a call option with a strike price below where the stock is trading… selling two call options at a strike price right around the current strike price… and buying a call option at a strike price higher than the current price… think of it as just two trades.

What am I talking about here?

Well, if you think about it the butterfly strategy (using call options) is just a long call spread and a short call spread.

Now, let’s get a refresher on how the long call spread works.

The long call spread involves buy calls and selling calls. Here’s a look at the profit and loss (PnL) diagram of the long call spread on the expiration date.

Basically, you want to buy a call with a strike price at or below where the stock is currently trading… while selling a call option with a strike price above the current stock price.

For example, let’s say a stock is trading at $50. Well, to open a long call spread, you would buy a call option at say $49, and sell a call option at $53. This means that you’re bullish but have an upside target.

Now, the other component of the butterfly strategy is the short call spread. Here’s a look at the profit and loss chart at expiration.

With this trade, you would sell a call at strike price A, buy a call option at strike price B. Now, generally, the stock would be below strike A.

Look closely at the PnL charts of the short call spread and the long call spread. When you combine the two, it starts to look like the butterfly strategy right?

However, the long call and short call spreads converge at a strike price B.

Combining Long Call and Short Call Spreads

For example, let’s say you think Apple (AAPL) will trade in a range around $205. Here’s a look at how the first component (the long call spread) would look.

With the long call spread, we’re selling 1 option contract with a strike price of $205, and buying a call option with a strike price of $195.

On the other hand, you have the short call spread.

With the short call spread, we’re selling 1 call option with a strike price of $205, while buying 1 call option with a strike price of $215.

Remember, the short call options converge at $205 (an area where we think AAPL) would trade around.

Now, what happens when you combine the two?

You’ll see a risk profile (PnL at expiration) like this:

Pretty simple when you break it down, right?

Well, if you’re interested in learning more options trading strategies or just need a refresher… check out my eBook – 30 Days to Option Trading.

Source: WeeklyMoneyMultiplier.com | Original Link