Learning to trade the “Bracket Trade”

January 7, 2018 0 Comments

The “bracket trade” is a trade that I trade regularly both in the swing trading and day trading service. Let’s look a a recent chart of Costco $COST as an example.

On 12/15 $COST gapped up and established a 192.50 – 195 trading range for the day. This was actually on a really good earnings report. Two days later $COST broke the gap to the downside. How do I trade this? Once the gap is broken to the downside $COST was a short with a stop above 195. 195 was the previous high on the gap up; we do not want to be short on any break of a previous high. As an options trader that gap break was money. It was a $6 move to the downside in the stock, with a delta 70 option that is $420 a contract in a day. If you are short $COST via common shares the trade is still valid with a stop above 195.

For long positions the opposite is true. If the stock breaks the gap to the upside you go long with a stop below the bottom gap level. On 5/10/2017 Nvidia beat on earnings and the stock gapped up to 114 and closed the day at 122. The very next day it broke 122. You would be long $NVDA at 122 with stop at 114 area. $NVDA closed Friday at 215.40. How is that long doing if you are in the stock?

With earnings season coming up members can expect many bracket trade alerts in both the swing and day trading service. Keep in mind this system works with both stocks and options.

 

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