The stock markets are very efficient at pricing companies and information. However, Sometimes they overreact to data, allowing traders to profit from the situation.
In this use-case, we will use the SamurAI scanner to find potential trades on stocks that have a significant drop, and we can analyze and possibly trade them.
Since we are in a bull market, we will build a naked put scanner that looks for a 5% drop intraday and provides a good return on the risk. We picked the naked put strategy since it is a high probability strategy, and it is easy to manage (roll, wheel, etc.) and alter (turn into a spread, pick different strike, etc.). How to do that is not in the scope of this article, but feel free to reach out if you have questions.
We will integrate this with the Monitoring system to get emails when relevant trades appear intraday, and we don't need to monitor the markets constantly.
In this Usecase we are taking advantage of several benefits and edges:
- Monitoring system - we will get alerts when the time comes. So you don't need to waste time watching the market.
- High probability - Selling OTM put has a high probability of profit and less risk than owning the stock.
- Trading with the trend - It is essential to trade with the trend. Even if you are not 100% correct, it is easier to adjust, manage and be profitable when trading with the primary trend.
- Taking advantage of market over-reaction - We are initiating the trade only AFTER extreme drop. So our risk is lower, and if we are right and the market overreacts. We will profit more.
- High IV - Usually, after an extreme move, the IV increases. But as research shows (Blog): When IV is high, it is an excellent time to sell options.
- Profitable companies, high returns, etc. - We can incorporate more filters to take advantage of different parameters like company growth, high EPS, Good returns, etc.
Strategy: Naked put.
The best filter to use is your custom watchlist VIA the universe feature (read the article here). This means that every alert you receive will be relevant for you, and it is HIGHLY recommended. The following stock filters are if you don't have a watchlist.
- Market cap - More than $1B
- EPS Growth Next 5 years: Positive
- Stock score fundamental: Above 5
- Stock Score Growth: Above 6
- Total Options Volume: Above 5000.
- Stock Change: Below -5% (or any extreme measure you want)
- Future PE on strike: from 0 to 60 (to make sure the company is still expected to be profitable and not too expensive)
- Expiration 7-40 days
- Moneyness: below the stock price
- Probability of profit - Above 70%
- Return (annualized) above 20%
- Return: Above 1%
- Breakeven point: Below -5%
Once finished, click Scan, Click Save, click the 'Watch' icon, and click confirm. Now you will receive emails when new trades appear.
We use stock change (more than -5%) as the trigger for an extreme move. We can change it to a different threshold (such as -10%) or change it to weekly (for example, weekly change more than -20%).
We look for profitable and growth stocks to reduce the time we analyze them after they appear on the scan. And also - if we are wrong in the timing of the trade, the growth makes it easier to justify high prices, and we make it easier to manage.
We are looking for an above 20% annualized return as we feel it is a good return to justify the risk. Of course, you can change it to fit your risk tolerance.
- Don't swing on every pitch - This scan will provide you with good opportunities. But you don't need to take all of them. Instead, try to find the best trades that fit your risk profile and offer diversification.
- Understand the reason for the drop -It is best to understand why the stock drops and trade only if you feel this is a temporary setback (market overreaction) or there should be new pricing for the stock.
- Look for confirming reasons to trade - For example, the sold strike is below support, the company still expects to grow fast, Analysts are still bullish, etc.