In a Roller Coaster Week, We Bagged Our Biggest Win This Year By Larry Benedict, editor, The Opportunistic Trader Fair to say, this week has been a roller coaster ride… On the positive side, we bagged our biggest win year-to-date with a 113% gain on the SPDR Dow Jones Industrial Average ETF Trust (DIA). We topped that off by making a 54.5% gain on half our position in Apple (AAPL)… followed by selling half of the Nvidia (NVDA) puts we entered yesterday for a gain of 58.1%. But unfortunately, things didn’t go our way with our quad witching trade this week. Despite averaging a 59.4% gain per trade since June 2020, we closed this trade out today at a loss. It was also disappointing to see our put option trade on the United States Oil Fund (USO) stopped out for a 42% loss this week. And finally, we closed out the remaining half of our position in the ProShares Bitcoin Strategy ETF (BITO) for a loss. Happily, in this case, our win on the first half of this trade balanced this out to a blended gain of 19.1% overall. We’ll cover this trade in full next week. We’ve got a lot to go over today. So let’s first turn to our latest trade on chipmaker NVDA… Betting on Nvidia Downside Yesterday, I sent you instructions for a put option trade on NVDA. We sold half of our position this morning. As I mentioned above, that allowed us to pocket a 58.1% gain on this half of the trade in just one day. The goal for the remaining half is to capture what I expect to be a further reversal to the downside. Let’s look at the rationale behind the trade. Nvidia (NVDA) 
Source: eSignal (Click here to expand image) You can see just how rapid NVDA’s rise has been this year. From its January low to its peak yesterday, NVDA gained 197%. Of course, NVDA has been the go-to stock to cash in on the artificial intelligence boom. A succession of big earnings beats has also underpinned that strong rise. But I’ve been expecting all the hype around NVDA to get too far out of whack… That looks to be happening now. We saw the first signs of that yesterday with NVDA’s huge intraday reversal. After opening strongly on the day, NVDA soon reversed and closed sharply lower. That tells you buyers are becoming thin on the ground. And NVDA’s 10:1 stock split has also played a part in the excessive hype. (As a reminder, this stock split simply means if you had one share before the split, you now have 10. But your overall investment is still worth the same since the stock price is adjusted by 1/10th to reflect the new shares.) I put that simply down to human nature... People are more comfortable bidding up a $120 stock versus a $1,200 one. That factor caused NVDA’s rally to accelerate even more quickly. (Yesterday, NVDA briefly traded above $140.) But it also leaves it more vulnerable to a pullback... And that’s what we’re aiming to capture with this trade. On the chart, you can also see a telltale pattern that often leads to a reversal. That’s the divergence (green lines) between NVDA’s stock price and the Relative Strength Index (RSI). Take another look:
Source: eSignal (Click here to expand image) When a stock price is rising sharply (upper green line) but momentum isn’t keeping pace or is flatlining (lower green line), that will eventually pull the stock price lower. I’ll next look for both the RSI and the moving average convergence/divergence (MACD) to track lower (red arrows) as evidence of a bigger down move emerging. In the latter’s case, that would mean the blue MACD line crossing down below the orange signal line, with both tracking lower. Now let’s turn to our June quad witching trade… The June Quad Witching Trade This week marked one of four times during the year with a quadruple witching day. That’s when quarterly contracts on index futures, index options, stock options, and stock futures all expire on the same day. Trading weeks that see quadruple witching days are notorious for delivering volatility. Traders thrive on volatility, and some of the biggest trades of my career were around quad witching days. We’ve seen solid gains historically, with our last two quad witching trades returning gains of 40% and 49%, respectively. And coming into this week, conditions were aligning for a pullback in the S&P 500. As I’ve written about recently, fewer stocks are supporting the rally, with companies like Nvidia lifting the index to new highs. In doing so, the S&P 500 also reached its most overbought level since late January. You can see that in the chart below, with an arrow by the RSI in the bottom panel. 
(Click here to expand image) Unfortunately, we were too early in putting this trade on. The S&P 500 rallied Monday and Tuesday before pulling back following the Juneteenth holiday. The decline on Thursday and into Friday morning wasn’t enough to bring this trade back, and the S&P 500 opened Friday morning still above the exercise price of our puts. As a result, those puts expired worthless. While it’s always disappointing when a trade doesn’t work out, we do strictly limit our risk when we buy options. The premium we paid to make this trade was $390 per contract. So that’s the maximum loss on this trade. We’ll aim to improve our performance during the next quad witching trade in September. A Win and a Loss Next, let’s check out two of our closed trades this week, beginning with USO… Trade: USO July 19 $76 Puts (stop loss $1.00 below entry price) - Bought on June 10 for $2.40
- Sold on June 20 for $1.40
- Loss of 42%
- Holding period: 10 days
Earlier this month, we banked a tidy 39.7% gain in just two days by backing a rising oil price. With this trade, we were aiming for the reverse… As I covered in last week’s update, I anticipated a reversal lower in momentum to push USO’s price down. Momentum did stall briefly. But it then turned higher this past week, pushing USO sharply higher as well. That triggered our stop loss. As always, any loss is disappointing… But the key here is that we stuck to our stop loss and averted a far bigger loss on our trade. And finally, let’s wrap up on a high note with our big win on DIA… Trade: DIA July 19 $391 Call - Bought on June 14 for $3.00
- Sold on June 20 for $6.40
- Gain of 113%
- Holding period: 6 days
We nailed this trade right from the start, as you can see in the chart below… SPDR Dow Jones Industrial Average ETF Trust (DIA) 
Source: eSignal (Click here to expand image) DIA’s low at “A” coincided with the RSI making a “V” and rallying from oversold territory (lower gray dashed line). That is a bullish signal. The RSI then formed another “V” on June 14 (black arrow) at a higher level. When the RSI makes a higher low like this, it means momentum is building (orange line). And that’s usually positive for a stock. That second “V” in the RSI also coincided with DIA making a higher low (another bullish signal). We used this to signal our trade entry on June 14. As you can see, DIA kept rallying after our entry. And with our position up 113% in just six days, we decided to lock in our profits and close out our trade. It’s been a busy week. And I’m expecting plenty more action ahead. As always, I love to hear from readers. If you took part in this week’s trades, you can share your experience – good or bad – at feedback@opportunistictrader.com. Happy trading, Larry Benedict
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