Your Question About Allocation

As I mentioned last week, we’re in the midst of a trading lull, so there aren’t any new trades on the docket.

However, we’ll be out of the quiet period soon! On January 19, 20 and 21, there are a few companies on our list that are scheduled to report earnings. If they meet our parameters for trading, we could be adding them to our portfolio about two weeks afterward.

Remember, our Earnings Drift Alert system often gives us an entry date of two weeks after an earnings announcement in order to collect the best gains.

In the meantime, please read last week’s dispatch if you haven’t had the chance yet. I’ve decided to add a new type of trading based on stock splits to our system. This additional strategy will give us more exciting opportunities to profit from company events.

In fact, based on a decade of historical data, I’ve discovered that if we traded on stock splits that met specific parameters — we would’ve experienced an incredible win rate between about 70% and 90%.

Click here to read more about this strategy. I’m excited to start incorporating it into our service.

Now, before I leave you for the day, I just want to answer an allocation question I received in the inbox.

Randell W. asks:

In the Earnings Drift Alert service, which would be the best allocation per trade strategy since the cost of the options varies quite a bit?

1)  Buy contracts in multiples of two.

2)  Allocate a set dollar amount per trade and then buy the corresponding number of contracts.

My answer: Randell, I always say that buying in multiples of two is best. With a strategy based on a set number of dollars, you could end up with an odd number of contracts, which would require you to make certain choices when I recommend selling half a position at a 100% gain.

You’ll either sell one fewer contract than necessary, but you will not have recouped all of your original investment … or you’ll sell one more than necessary to recoup all of your initial investment, plus a little more, but that then limits your potential on the second half of the position.

Now, in practical terms, this isn’t such a bad problem to have, since you will be profitable either way ultimately.

I just recommend multiples of two for the efficiency of the strategy.

But, really, it’s up to what you are most comfortable doing. Either way, you will be profitable when I recommend selling half, because the remaining half will have stop-losses in place (in the event the option price retreats) — and that will likely assure your entire investment turns at least a small profit.

Until next week, good trading…

Jeff Opdyke
Editor, Earnings Drift Alert