There are many strategies when it comes to playing puts. The following is just one idea that has been effective for me. It is a very simple strategy, but requires much patience. My favorite thing about the strategy is that it minimizes risk and gives nice gain potential. Remember, this type of a play is difficult for some, because you are buying puts as a stock rises. It is important to remember that stops are an important part of the strategy.
Below are the following steps on what to look for entry:
1. Find a stock that missed their last earnings quarter and lowered earnings guidance for the future.
2. Watch for the stock to rally strong…generally 15-20% up tick in a week or two. (this generally occurs with little or no news pertaining to the stock)
3. Look for strong volume…2 times the normal amount. This normally occurs as the stock is hitting resistance.
4. Look for a confirming red candle the following day and a stochastics oscillator in an overbought position.
After entry into this type of position, several rules are suggested.
1. If a new high is created, it is time to take the loss and exit the position.
2. Taking profits on the way down is advisable to offset the high volatility in the position.
3. After the stock closes below the 5-day EMA…look to exit after the stock begins to close above the 5-day EMA again.
Below are a couple examples of this strategy in effect.
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