Friday, August 2, 2024

Real Money, Real Trades: One Of My Favorite Strategies

Having a tried and true proven trading method is one of the best tools an investor can have to yield continued profits and consistent gains. So today, I’m going to share with you one of my favorite strategies.
 
   
     
   
   
Real Money, Real Trades: One Of My Favorite Strategies

Today, I want to highlight one of my favorite strategies.

I nicknamed it “Profit Pairs” because we are always trading two stocks in combination. I like to think of the stocks as “Linked Assets” and we trade them in both directions at the same time.

How are they linked? Well, we’re always LONG one asset in a particular sector and SHORT another asset in the same sector.

In simple terms, we find a stock with great positive momentum and a stock with downward momentum, both in the same sector and we take a long position in the bullish stock and a short position in the bearish stock. 

You see, the strategy makes a good hedge in the market. 

If the sector goes UP, we are LONG the stronger stock.

If the sector goes DOWN, we are SHORT the weaker stock.

If the sector stays neutral, both stocks should continue their trend and we have the opportunity to make money on both.

Let me give you an example: 
 
 
Let’s use Tesla and Rivian to make this point. Two companies in the electric vehicle sector. With RIVN being in a clear downtrend back in 2021 and TSLA being in a clear uptrend… This would be an easy Profit Pair.

At pretty much any point throughout the year that you were SHORT Rivian and LONG Tesla, you would have made money.

In fact, both sides of the Profit Pair would have been profitable almost the entire year while being hedged at all times.

Now, when I say “hedged” I don't mean you can never lose. But what I do mean is that you’re in a position where major changes in the sector you’re trading in will have an extremely high probability of impacting the pair together…

Because you’re always trading two stocks in the same sector.

And that’s why I like to think of it as a hedge. Because we’ve seen how past traditional hedges have betrayed investors before, especially in 2022 with bonds and gold. 
 
 
Gold and bonds are supposed to protect against the broad market but would have done you very little good during the last broad market failure.

That’s why I don’t trust traditional hedges. Instead, I like to zero in on a specific sector because macro news for a sector is so much more likely to impact both assets in a pair. And if macro changes don’t affect both assets, then it’s not a hedge at all.

Let’s go back to my Tesla and Rivian example. 

What if the government proposed legislation to ban electric cars? Wouldn’t you think both Tesla and Rivian would be impacted? Of course.
 
 
Remember, we would have made serious money on both Tesla and Rivian in 2021. But in 2022, Tesla quit dominating and began losing value… So, the long position on Tesla would have started losing. But the beauty of Profit Pairs is that the Rivian position (where you’d be short) would have made up for the losses.

In fact, a typical option on Tesla would have lost around 20% while the option on Rivian would have gained around 400%. 

That right there is why I like to think of it as a hedge. 

We were insulated from the market while also being able to turn a massive profit along the way. 

Just this week we used this strategy in the Utility market.

We found one of the strongest stocks in the sector (NEE) and played a long call option.
 
 
And then one of the stocks with fading momentum (CEG) and played a put option.
 
 
In just the last two days, these stocks ripped just like we hoped and the “pair” combined for a massive gain in just 2 days:
 
 
Now, of course, most pairs won’t work out quite this nicely. Many times, the entire sector will move in one direction and the long side will have to overcome the short side or vice versa…

But when you get both sides continuing the divergence, Profit Pairs can be one of the most explosive strategies out there.

Right now, with the market on shaky ground, you can also do a variation of this same concept.

The broader SPY is holding up a lot better than tech heavy QQQ... The SPY has shed less than 5% from July 10 while the QQQ is down over 10%.

One way to play that is a QQQ PUT and a SPY CALL.

It’s the same concept as the “Profit Pair” but instead of doing it with one sector, you’re playing the market as a whole.

If the market rallies aggressively, your calls should overcome your puts. If the market tanks, your puts should overcome your calls. And if we keep getting this divergence between the two, you could have a steady trade on both sides.

- Nate Tucci 
   
 
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