Schaeffer's Investment Research Releases Long-Awaited Special Report on How to Trade Stock Trends

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CINCINNATI, OH / ACCESSWIRE / April 28, 2021 / Schaeffer's Investment Research announced the release of a special report, 5 Rules for Trading Stock Trends, today. Written by Schaeffer's Investment Research Founder and Chief Executive Officer, Bernie Schaeffer, this special report is packed with insights based on Mr. Schaeffer's 40+ years of experience specializing in equity trading. The content of the exclusive special report published by Schaeffer's Investment Research is included as follows:

Schaeffer's Investment Research, Inc., Wednesday, April 28, 2021, Press release picture

5 Rules for Trading Stock Trends

Every once in a great while, you'll encounter that rare chart setup where you pinpoint the bottom of a stock's decline just so, and you jump into the trade just in time to catch the beginning of a major rally. The profits add up exactly as you predicted, and you bow out with a tidy profit while other investors are still recovering from the initial bout of whiplash.

Yes, those types of investing wins are definitely sweet -- but they're also relatively rare, as you may have noticed! Luckily, you can still pad your portfolio with some impressive trend-driven profits, even when you're not the first visionary on the bandwagon.

To learn our top tips for squeezing the biggest possible profits out of stock trends, keep reading.

Riding the Wave with Options

When you hear the phrase "options trading," you might immediately think of highly speculative, risky plays with the ability to deliver big-time profits -- or big-time losses -- on massive stock moves that play out over a matter of days, if not mere hours.

But after nearly four decades in the industry, we can assure you that there's worlds more to options trading than aggressive, heart-pounding, short-term bets. Some of the most memorable "grand slam" trades we've made -- in recent history and beyond -- have been generated by options trades that we left open for months at a time... which means these calls and puts were generating profits through all manner of broad-market mayhem.

And there's no real magic trick (we honestly wish it were a better story!). The powerful profit strategy at work here is simply buying at-the-money calls and puts on strongly trending stocks, with a time frame of three to six months per trade.

You've likely heard the phrase "don't fight the tape," and that concept neatly sums up what we're doing with this approach. Rather than looking for stocks on the cusp of a quick, volatile directional move -- the tactic favored by many novice options speculators -- we pinpoint situations where an equity's established price trend appears likely to continue over the months ahead. Then, we use options to leverage the greatest possible profits out of that price momentum.

Of course, it's not quite that deceptively simple; we don't recommend that you buy just any intermediate-term option on any trending stock. There's a very specific methodology involved that elevates this "basic" option-buying approach into next-level investing success.

#1: Trust that the trend is your friend (but do your homework!).

Market timing is a tough gig -- and momentum is a powerful force in the stock market. Rather than looking to nail those hard-to-find tops and bottoms, why not go with the flow?

Some due diligence on the technical analysis front will help you determine whether a stock's current trend is likely to continue. Before going long on an uptrending security, look for support levels in place to guide the shares higher -- think off-the-radar indicators like the 40-day and 80-day moving averages, as well as trendlines connecting lower highs (not to mention breakouts above trendline connecting lower highs).

Conversely, if you're going short, locate levels of technical resistance to help you determine a prime entry point for a bearish play. Descending trendlines and former support levels that have been broken to the downside can play an important role in perpetuating a stock's directional move over the long haul.

And be aware of potential hurdles that could put the brakes on your stock's trend. This frequently includes "milestone" price points like half-highs, double lows, and round numbers -- including round-number percentage returns from previous highs and lows. These potential pain points may not be deal-breakers in and of themselves, but you should be aware of where they lie before entering the trade so you can react quickly if the price action begins to fall apart.

#2: Confirm that there are still some skeptics on the sidelines.

From our contrarian perspective, this is a mandatory ingredient for any momentum play. A solid trend is certainly nice to look at, but an orderly chart alone doesn't guarantee a profitable trade. You must also ensure that there are still plenty of potential buyers on the sidelines to push the stock higher -- or, for a bearish bet, plenty of possible sellers left to send the shares lower.

Specifically, we look for situations where an uptrending stock is surrounded by skepticism in the form of low analyst "buy" ratings, high short interest, heavily put-skewed option activity, and/or negative media coverage. In our experience, continued strength in the shares will eventually force bears to reverse their stance, thereby unleashing fresh waves of buying pressure in the form of upgrades and short covering.

Conversely, if a downtrending stock is still sporting a glut of "buy" ratings, along with low short interest and a call tilt among options traders, we'd be willing to bet on more downside as these stubborn bulls are finally compelled to admit defeat and close out their losing bets.

In short, by looking for strongly trending stocks where the rest of Wall Street appears to be fighting the tape, we can avoid trying to find those tops and bottoms on the charts. Instead, we find an existing trend that everyone's missing and then wait for the investor sentiment bandwagon to catch up to the security's price action.

#3: Buy time on sale.

When you're playing stock trends, go ahead and spring for that longer-term option. It might cost a bit more than its weekly or front-month counterpart, but you'll be buying valuable time for the expected stock move to play out in full -- and circumventing the potential risk that you cut yourself off at the knees, profit-wise, due to a period of short-term volatile trading in the broader market.

When in doubt, we suggest that investors default to the old "Add 3" rule of options selection. So, instead of an option with three months to expiration -- a fairly typical time frame for many speculative players -- go ahead and add three more months to make it a six-month option.

As a general rule, the time component of an option's premium is always "on sale." Due to the statistical basis of the options pricing model, the cost to buy a six-month option is not double the cost to buy a three-month option. Instead, the mark-up for the extra time value will typically range from about 30%-45%.

And by purchasing that additional time at a "discount," you can comfortably ride out any choppy price action or minor adverse moves in the underlying stock. The projected price swing has more time to develop and play out as you expected -- which means you don't need to sweat over a minor bout of seesaw price action or panic as the stock undergoes a brief period of consolidation.

Plus -- even with the extra few months' worth of time value thrown in -- you're still paying a minimal upfront cost for the option relative to a comparable stock purchase. This means you'll be reaping the benefits of leverage, which allows you to collect percentage returns many times greater than your initial investment.

#4: Consider at-the-money option plays.

At-the-money options -- that is, puts or calls with a strike price roughly equal to the underlying stock's price -- are an appealing alternative to buying shares directly. One option contract affords you control of 100 shares of the underlying stock, but the cost to buy the option (the "premium") is only a fraction of what it would take to purchase an equivalent number of shares on the open market.

Since your cost of entry is dramatically reduced at the outset, you stand to reap much greater percentage rewards on a move in your favor than if you had traded the stock directly -- an options benefit known as "leverage." When your technical forecast calls for the continuation of an existing trend, it makes sense to maximize your profit potential by playing at-the-money options instead of shares.

But at-the-money options aren't just a savvy alternative to buying shares -- they're also our preferred trading tool for this particular approach to playing trends, even relative to their in-the-money and out-of-the-money option counterparts. Check out our quick explainer on at-the-money options and leverage below to find out more details.

#5: Don't sweat the small stuff.

Yes, this self-help cliché applies to intermediate-term trading, too. When you're playing trends, it's important to remember that stocks don't move in straight up-and-down lines. Within a broader uptrend, there will be modest dips and periods of sideways price action -- "backing and filling," essentially -- as the shares consolidate gains and prepare for their next move higher. The same is true of stocks in bear mode, which are often known to experience the occasional sharp relief rally or "dead cat bounce" on their way down the charts.

With this in mind, there's no need to panic over a minor adverse move so long as the overall trend remains in place. (After all, if you've heeded our prior tips, your longer-term option offers you the luxury of patience!) To ensure your forecast is still credible, simply verify that the technical support and contrarian-friendly sentiment backdrop remains intact for your focus stock, as described in our prior tips. As long as there's been no material change to your analysis, relax and let the trade continue to develop.

And -- as always, when trading options -- stick to your predetermined profit and loss targets to help you remain disciplined in the event of any hiccups in the share price. "Locating your exits" in advance, so to speak, can go a long way toward heading off emotional trading decisions in the heat of the moment.

To learn more, visit https://www.schaeffersresearch.com, call 800-448-2080, or email Customer Support here.

About Schaeffer's Investment Research:

Schaeffer's Investment Research is a privately held publisher of stock and options trading recommendations headquartered in Cincinnati, Ohio. Founded by CEO Bernie Schaeffer in 1981, the company is celebrating 40 years at the forefront of the thriving options industry. From Schaeffer's flagship Option Advisor newsletter to their expertly curated array of real-time trading services, Schaeffer's has got options for every investor.

About the Author, Bernie Schaeffer:

Listed options began trading in America in 1973 when the Chicago Board Options Exchange (CBOE) rang its opening bell. Bernie Schaeffer launched The Option Advisor ® in 1981, as the equity options market started to truly accelerate and grow at an exponential rate. Bernie recognized the opportunity immediately to join this exciting industry and to provide individual investors with assistance in navigating this new, fast-paced derivative market with the help of a successful trading professional like himself.

Bernie and his team of expert traders are highly regarded by major media outlets for a unique and well-known approach to the market. They have regular media appearances on CNBC, Fox Business, Bloomberg, and PBS' Nightly Business Report. They are also frequently quoted by The Wall Street Journal, Barron's, Associated Press, Thomson Reuters, and Yahoo! Finance.

As founder and CEO of Schaeffer's Investment Research, Bernie has won numerous awards and accolades over the years, including: