Trading system boasts an 80% success rate with big stock moves following earnings
SmallCapPower | June 24, 2016: SmallCapPower spoke recently with Tony Ponzo of SplitMaster.com, who talked about his success in using options to profit from big stock-price moves following earnings releases.
SmallCapPower (SCP): So today, we’re here with Tony Ponzo of SplitMaster.com. Welcome, Tony.
Tony: Hi, thanks for having me.
SmallCapPower: Can you tell our viewers about your newsletter as well as your role there?
Tony: Yeah, our newsletter is mainly based on events that are happening with certain stocks using options and a combination of options on the underlying stock. We focus on a couple things. For example, LULU will announce their earnings result for the quarter. They will report tomorrow morning before the open of the market. We are looking for stocks that have a history of fairly big moves after they report their earnings. We do not care which direction the stock moves as long as it moves as much or more than we expect. We look to make profit in either direction by trading a debit iron condor.
The term Iron Condor means going into the trade receiving a credit. Our trade is the opposite. We go into the trade with a debt – thus a debit Iron condor. Some people call it a reverse iron condor.
We analyze certain stocks as they come up for their earnings announcement. We have a lot of data going back years. We check how they have moved for the last 10 quarters and how consistent they are. Then we analyze how much traders believe the stock will move this time. We then construct a debit iron condor with the outside wings less than the projected move. We also look for a trade that has a reasonable risk/reward cost. For example, it might be a $2 spread, and it might cost us $1.45 to get into. That means the max selling price is $2. If we can get max out of the play, we then have a .55 profit. ($2 max – 1.45 cost = .55). In order to get max we look for the stock to go above our highest strike or below our lowest strike. However, usually we do not try to get max because until the afternoon of expiration Friday, that is often hard to do. Until the time premium mostly dwindles out of the options it interferes with the true or intrinsic value of the options. But we’ll try to make 35 or 45 cents. If the stock has moved as expected, that usually allows us to exit the play quickly. So tomorrow if LULU, for example, is trading up or down $5 to $6, we should be able to close that debit iron condor that same day with our .35 to .45 profit.
Let’s say the stock goes up, we’ll just close the call side of that debit iron condor as we can get our profit out of one side or the other. And we’ll close just the Puts if the stock goes down. The other side will basically be worthless. So there is no reason to pay commission on the other side.
If the stock has really moved well, we’ll try to sell it for $1.85 to 1.95. Now, 40 or .45, cents, some people might say, is not a lot. But keep in mind that we have members who are trading at 25, 30, 40 contracts. On 25 contracts, a .40 profit equals a $1,000 profit overnight, which is a nice one day gain. Of course, sometimes it doesn’t work, and if it doesn’t, we try to get out the best price we can for the smallest loss that we can. But we’re running between a 75% and an 80% win rate on those, so that strategy has done very well for us.
Another strategy we have is called the Split Strategy. That is the reason why we’re called SplitMaster.com. Way back in the ’90s, we started the company off with splits as our main focus. We have a large analysis on splits. When a company announces a split, we check to see if all the points about that split and the company meet our criteria. If they do, we have specific entry and exit times for the trade. Nowadays, what we do is go into vertical Calls. We’re looking for anywhere from a .40 to a dollar profit on those. Again on 25 contracts as mentioned before, on a .40 profit brings $1,000 gain. There have not been many splits this year or last year, but in the old days, we used to get 5 to 10 split trades a month and they did well. Though we keep that strategy going, since the great economic recession, there have not been nearly as many announcements to work with. But when we have them, they usually do well.
A third strategy we have is called the SPY Debit Butterfly. When the market is nice and calm, we enter a debit butterfly on Thursday before expiration day, and exit as early as we can on expiration Friday.
It usually takes about 2 hours to get out at a nice profit. What a debit butterfly does, is take advantage of the fast dwindling time premium on expiration Friday to build more value in the trade. We go into a 1 1/2 point spread and that usually cost about .45 to .50. With a 1 1/2 point spread, we have a $1.50 max selling price on the butterfly. If the SPY stays fairly tight on Friday, the max selling point is very doable. However, here again, we usually play it conservatively and look for a .30 to .50 profit. With a Debit Butterfly, we buy the lower strike, sell twice (short) as many contracts on the middle strike and buy the higher strike. If the SPY does not move much, the middle (short) strike begins to dwindle in time premium significantly. That means that it becomes cheap to close out the middle strike but the lower strike will stay in the money and create profit. You can go to our site to get much more detail on it, but when the market is calm, this is almost like a magical strategy. In 2013, which was a year with low volatility, we won on the trade 22 times in a row. The market has become much more volatile since then, so we do not make as many of these trades at this time. But when such time that the market finally does become less volatile, we will have a lot more trades to profit on.
Our fourth strategy we have is to make trade the UVXY. The UVXY is an ETF based on the volatility of the S&P 500. We have signals that tell us when we think volatility is increasing or decreasing.
If we think it’s increasing we buy a vertical calls. Usually we buy a 1/2 spread, which gives a max selling point of 50 cents. That might cost .15 so you can see it has a good risk/reward ratio. But here again we go conservatively, and look for a .15 to .20 profit. Even though that may not sound like a lot of profit, it still represents a 100% return on cost. The trade lasts one to three days.
So those are the basic four strategies that we do, and as far as what my part is on it, I’m a partner with Mike Celeste, who’s listening by phone, and also Pat Ponzo, my wife, and Tony Celeste, Mike’s son. Tony works on the strategies part of it. Mike and I do much of the research too, but we are the ones actually calling the plays with the members. And Pat basically takes care of the books, the billing and so forth.
SmallCapPower: Great, so can you give our viewers an example of past success?
Tony: Well, going back to the old days when we did the splits, back in the late ’90s, we were actually trading the stock itself and then we started going into just buying the calls. But back in 1999, winning on splits was like shooting fish in a barrel. I mean, then, we would trade maybe 10 to 20 single Call contracts on anything just about, Microsoft, you name it, and sometimes we would turn, on one trade, $15,000, $20,000 profit. But those days have gone after the crash of 2000, so we’ve had to get much tighter and precise with our trades. For the last 15 years, we’ve traded mostly options and very little buying of actual stock. With the options and combination options, such as verticals, debit iron condors, debit butterflies, the success rate is right around 75% to 80% each year. This year has been a little bit slow, we’re a little bit below that range but not by much. And it seems that whenever that happens, by the end of the year, it comes right back hitting about an 80% success rate.
SmallCapPower: Are there any sectors that you prefer to trade?
Tony: When it comes to the earnings plays, no, we don’t go by sector. We go by which has the history of the biggest move. And that changes. For example, Apple Inc. (NASDAQ:AAPL) used to give us big moves. Now, Apple’s not moving that much so we’re not playing that anymore. But you have Netflix, for example, is a big mover. Some of these are like GOOGL, CMG, TSLA etc. are huge movers and we go after them.
You have PCLN, for example, and that stock will move like $30, $40 at a time and it is just huge. But sometimes it’s hard to get into the bigger priced stocks because options have wider bid-asks and are kind of wild. So sometimes it’s hard to get into those, but when we can get into those, there’s almost a guaranteed win because they move so much. But, you know, going back to answering your question, no, no sector, just a history of which ones that move big.
SmallCapPower: Great, so where do you see the money making opportunities in 2016?
Tony: Well, each year, we feel that the earnings have been steady for us so that’s always there. Also, when the market gains in volatility, we’ll make trades on the UVXY and when it is in calm mode, we’ll trade the SPY debit butterfly as described before.
We basically analyze the market on a shorter term basis and really don’t try to predict longer term trends. We do what works for us.
SmallCapPower: Okay, so are there any particular stocks that you like at this time that you could recommend?
Tony: You know, we don’t really do that for our members. We do some fundamental investing for ourselves, but right now we are not really excited about any one particular stock or group of stocks. We really concentrate on our trading strategies.
SmallCapPower: This is more like trading opportunities.
Tony: We’re hitting stock events such as earnings – not fundamentals of a stock.
SmallCapPower: Understood, so how can viewers learn more from you in SplitMaster?
Tony: Well, they can learn a lot from going to our website. We have a pretty well-defined site that explains a lot, gives our history and explains in detail how our trades work – such as the debit iron condor. We have a link that goes to a page that is actually several pages that explains the various types of trades with charts and so on. So, I would say the best way to do that is go to our site and look at it. We also have a book that we’ve written that you can find on the site as well, and that is a good training book. It’s called “Never Let Wall Street Steal Your Money Again.” And if you go to the site, you’ll see it, and it really starts from the very basics of options and goes on up through spreads. We don’t talk about butterflies or iron condors there. We kinda stopped the book before we did that, so that’s kinda like a second book that we might come out with one of these days. So those are two places that you could get a real good look at what we’re all about.
SmallCapPower: Sounds great, Tony.
Tony: I was gonna say we’ve been around since 1999, so we’ve been here a long time.
SmallCapPower: Excellent, thank you, Tony. Thanks for taking the time for today’s interview.
Tony: Thanks for having me.