Market Health

Are Options a Safe Investment?

Predictability.

That’s what we all want as investors… particularly in times like these when the market feels unhinged.

Before we make a trade, we want to know that we’re not going to get burned… that we’re not going to leap into a stock only to watch it die… along with our dreams of financial independence.

Predictability – or the lack thereof – is why so many smaller retail investors get pushed to the sidelines.

Volatility – the maddening ups and downs – makes them feel like passengers in a car with a drunk driver at the wheel.

But what if you could remove some of the guesswork?

What if you could target companies only when their shares are most likely to go up?

And what if you could do it over and over again, from one month to the next?

At that point, you wouldn’t be at the mercy of anyone, really. And the game wouldn’t be “rigged,” as so many investors routinely lament.

Trading for Success

Imagine if you knew the success rate of a trade before you put even a dollar in.

That’s the big draw of bond investing, isn’t it? Before you invest, you know there’s a pretty good chance that you’re going to make money.

The only question is how much.

In contrast, equity investing is often looked at as a 50-50 gamble. The stock will either go up (hooray!), or it’ll go down (boo!).

But you can increase your odds and your potential upside by using options.

You just have to look in the right places. And you have to take a disciplined approach.

Right now, we’re in the later innings of earnings season.

Some strategists hate earnings. They’re hesitant to trade around earnings because they feel it’s too volatile and unpredictable.

But I love it.

And unlike the rest of Wall Street, I take a vertical approach to earnings instead of a linear one. This makes me more confident in my expectations as well as my strategies for scoring big gains using options, based on earnings moves.

Let me show you what I mean. We’ll use Nexstar Media Group (Nasdaq: NXST) as an example. America’s largest independent broadcast television operator will report first quarter earnings today. As of this writing, earnings have not yet been released.

Shares have pulled back 15.5% from their 52-week high of $192.84. But it’s a midterm election year, and it’s poised to be a wild one.

Now, if we pull up a standard earnings breakdown for Nexstar, we’ll see the company has beaten earnings expectations the last four quarters.

But that tells us very little. Shares dropped more than 4% on 2021 fourth quarter earnings… though that’s not outside the norm for the company in that quarter.

Now, here’s where the secret I’m going to share with you comes in…

Almost every company has some earnings reports that are cheered by investors and others that are jeered. And the same quarterly reports tend to get the same reaction every single year. This relates back to the cyclical nature of businesses.

I don’t care about the linear approach to earnings – i.e., “Nexstar has beaten the consensus the last four quarters.”

You’re making a mistake if you invest on that data.

All I want to focus on is how Nexstar shares have done on first quarter earnings reports. And here I see that shares of the broadcast operator have tumbled only once on this release since 2016.

  • 2016: 2.93%
  • 2017: 3.59%
  • 2018: 2.49%
  • 2019: -1.59%
  • 2020: 10.33%
  • 2021: 0.51%

That’s my vertical approach to earnings. It lets me make apples-to-apples comparisons.

It also gives these trades unparalleled predictability. I know that shares of Nexstar have moved higher 83% of the time on first quarter earnings since 2016. And the average one-day move on this report is 3.04%.

This allows me to feel confident about targeting some near-term out-of-the-money calls, like the May 20 $165 options. A move above $168 would potentially reward me with a one-day double-digit gain. Any higher, and I could double my money.

In my vertical approach research, I also see that two of the weakest years – 2019 and 2021 – were not election years.

With midterm elections ahead, our year-over-year comparisons should be favorable. And that means we should see a nice pop.

An Options Strategy for Security

I’m always looking for the best chances for success, especially with options.

And I do that using a seasonal and cyclical trading strategy.

I target companies that are at low points and about to see their momentum shift. I know how they move on earnings because of their business cycles. I also know which earnings reports to avoid and which ones to trade.

Other strategists can get timid around earnings and slink away from the volatility. But I’m armed with research and knowledge.

I understand that there are consistent, predictable winners that will be the keys to my success… and I have Oxford Club portfolio performance awards to back this up.

You don’t always have to be looking for the company that is going to be the “next Apple” or that is going to “revolutionize the way we live.”

But you do have to understand that the path to sanity and profits in this whipsawing market is through predictable trends, like the way a company’s shares move on earnings. And you have to understand how to unlock the potential upside with options.

Here’s to high returns,

Matthew

Last Price:

Daily % Change:

Last Update:

Follow