Good morning, traders…
I walked through a live trade setup in yesterday’s Options Income Trader lesson.
The scanner flagged it, the chart looked clean, the sector’s been strong. Everything lined up.
Two of my students saw the exact same setup. They both wanted in.
One trader entered on a breakout at the highs. It felt better psychologically to buy calls as the stock was rising.
The other trader waited for a pullback. This took bravery. It required not listening to “pullback panic.” It didn’t feel easy to buy calls when the price was dropping.
The first trader got a 1.7-to-1 risk/reward. The second trader got a 4.5-to-1 risk/reward.
It’s obvious which one of these entries was best…
But you know which one 95% of amateur traders take?
Yeah, the one that feels easier. All because chasing strength feels more psychologically comfortable (even when it’s mathematically worse).
You might be regularly entering trades at the wrong levels (with the wrong risk/reward) … and not even know you’re doing it.
This Split-Second Decision Can Be The Difference Between 1.7x And 4.5x Gains…
This is the 5-step process that led to the setup in question (pay close attention to Step #4)…
Step 1: Scan The Scanner
I pulled up the OIT scanner first thing yesterday morning.
The following names were flagged:
- Unity Software Inc. (NYSE: U)
- Moderna Inc. (NASDAQ: MRNA)
- ON Semiconductor Corporation (NASDAQ: ON)
- Sprott Uranium Miners ETF (NYSE: URNM)
- Entegris Inc. (NASDAQ: ENTG)
- Exxon Mobil Corporation (NYSE: XOM).
From there, we filter…
Step 2: Sort The Wheat From The Chaff
U dropped on earnings. Weakness first. (Wrong pattern.)
MRNA was trading sideways. Chop. (Wrong pattern.)
URNM gapped down. Weakness. (Wrong pattern.)
ENTG showed strength, then weakness, then chop. (Wrong pattern.)
That left two: ON and XOM.
Both showed morning strength. (And both had the right pattern.)
Now you have a decision to make:
How do you decide between two good-looking setups?
You look at the sector.
ON is a semiconductor stock, so I pulled up the SPDR S&P Semiconductor ETF (NYSE: SMH).
Chop, volatility, multiple -3% red days. The sector’s been all over the place.
XOM is an energy stock, so I pulled up the Energy Select Sector SPDR Fund (NYSE: XLE).
I saw strength on strength in a clean uptrend. Then I was more intrigued…
The point being: Sector strength matters. A rising tide lifts all boats.
When a sector’s trending, Smart Money flows into the entire basket through ETFs, mutual funds, and pension funds.
Being in a strong sector, XOM has a much better chance of following through than ON.
And the winner is: XOM.
Step 3: Plan Your Trade
The scanner showed heavy flow into the Feb 20 $157.50 Calls. People started buying at $1.27. The stock was at $155.85 and pushing higher.
What’s next?
We’re building a plan with three components:
Entry, Stop, Target.
Entry levels:
- $155.25 (VWAP) = Least risk
- $155.50 (support level) = Medium risk
- $155.85 (current price) = Most risk
Stop: $154.65
Target: $156.50+
You decide which entry fits your style.
But please, whatever you do…
Decide BEFORE you enter.
Step 4: Measure Your Risk/Reward
Let’s do the math on two different entry scenarios.
Scenario 1: Patient entry at $155.25
- Risk: $0.60 per share (about $0.20 on the option)
- Reward: $1.25 per share (about $0.90 on the option)
- Risk/Reward: 4.5-to-1
Scenario 2: Chase entry at $155.85
- Risk: $1.20 per share (about $0.45 on the option)
- Reward: $0.65 per share (about $0.75 on the option)
- Risk/Reward: 1.7-to-1
Do you want a 4.5-to-1 risk/reward or a 1.7-to-1 risk/reward?
“When you put it like that … yeah, I’m gonna wait.” – You
When you actually do the 12 seconds of math required to see this, you arrive at a more informed (and less emotional) decision.
With a 4.5-to-1 risk/reward, you can afford to be wrong more often.
If you consistently take 4.5-to-1 risk/reward on high-probability setups, you can be successful even if you’re wrong 60% of the time.
I’d rather take fewer high-probability trades with excellent risk/reward than more trades with tight risk/reward.
Wouldn’t you rather have a handful of great employees than a bunch of bad employees?
Step 5: Trade Your Plan
XOM kept running and never gave us the pullback.
That’s trading.
I wasn’t chasing XOM at $156+. I had my levels. I had my plan. I had my alerts set.
And my entry didn’t come…
If the stock hits your entry level with your predetermined risk/reward, you execute.
If it doesn’t, you wait for the next setup.
- Use my scanners.
- Find the best names.
- Plan the trade.
- Measure risk/reward.
- Execute.
Every single time.
But although XOM didn’t trigger…
I did make triple-digit overnight gains last week (twice) using this exact process.
But let’s be honest…
Reading about the changes I made and actually implementing them yourself are two completely different things.
That’s why I’m hosting the Simpler Options 2-Day Virtual Bootcamp, February 17th-18th, from 12:30 PM to 5:30 PM EST.
Day 1 (Tuesday, February 17th): My team and I will show you step-by-step how we take high-probability options trades that have been winning over 80% of the time, even in the most volatile markets.* You’ll see the exact process we use to identify these setups.
Day 2 (Wednesday, February 18th): We’ll help you determine the specific types of options setups that fit your own unique lifestyle and personal goals with trading.
If you want to learn how I adjust my strategy based on market conditions to find triple-digit wins* in choppy markets…
Click here to reserve your spot.
Happy trading,
Ben Sturgill
*Past performance does not indicate future results