Have you ever wondered if anyone can actually predict reversals? Welcome to Lesson #7 of the Ultimate Credit Spreads Trading System Course, where we will explore the Elastic Rejection Strategy. In our final course step, we’ll explore a mean-reverting strategy for profiting from market overextensions.
Identifying Overextension with the Trading Band Indicator
To begin, we need a tool to identify when a stock is overextended. Enter the Trading Band Indicator, which is marked by yellow bands. When a stock rises above this indicator, it is considered overextended. Conversely, when it falls below, it is outside of the trading range. You can gain free access to this indicator through the 10 Credit Spreads Membership, which also includes a hat, shirt, and a 50% discount on your first month.
Choosing Optimal Entry Points
Timing is crucial when applying the Elastic Rejection Strategy. You should only enter trades on days when the stock exhibits strong upward momentum. Look for robust green candles as a sign of a strong move. This is especially important because you’ll be betting against the trend, and entering on a strong green day increases your chances of success.
Setting Up a Call Credit Spread Trade
The heart of the Elastic Rejection Strategy is setting up a call credit spread trade. To do this, you’ll need to calculate the entry point by multiplying the closing price by 103. For example, if the close is $454.19, your entry point would be $468. Round to the nearest whole number. This is the level at which you want the stock to remain below to generate profits.
Your credit spread trade involves selling the option with the strike price at your calculated entry point (e.g., $468) and simultaneously buying the option with a slightly higher strike price for protection (e.g., $469).
Selecting the Right Expiration Date
Optimal expiration dates can vary, but historical data suggests that around 19 days is a good timeframe to choose. This allows the market sufficient time to potentially revert from its overextended state.
Minimum Credit Requirement and Risk Management
Before placing your trade, make sure you meet the minimum credit requirement, a critical factor for long-term profitability. Protecting your upside is vital when betting against the trend. Implement effective risk management strategies, such as setting stop-loss orders, to safeguard your capital if the trade goes against you.
Win Rate and Annualized Return
The Elastic Rejection Strategy boasts an impressive 87% win rate, making it a potentially lucrative approach. Additionally, it offers a solid 9% annualized return. Even though this return may match the market average, the strategy’s ability to consistently profit when the market is overextended sets it apart.
The Elastic Rejection Strategy is a valuable addition to your credit spreads trading toolbox. By understanding its principles, identifying optimal entry points, and managing risk effectively, you can increase your chances of success in the world of credit spreads trading. Remember always to trade responsibly and within your risk tolerance, and consider your financial goals when implementing this strategy. Mastering the Elastic Rejection Strategy opens the door to profitable opportunities in the ever-changing financial markets.
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Thanks for reading 🙂
Austin Bouley
CEO & Chief Strategy Officer