What an epic way of wiping out yesterday's gain. The only headline I could see that warranted such a large fall was that the most valuable company in the world, Apple, was downgraded by an analyst called Wamsi Mohan.
I will get back to my view on analysts but first let's take a look at the Apple in comparison to the S&P500. Given that Apple represents over 5% of the S&P500 and it's one of the most popular ticker amongst traders, it is no surprise that the two papers are highly correlated (86%). In other words, if Apple moves one direction then there is an 86% chance that the market moves the same direction and given Apple's large representation in the S&P500, the size of the move also matters.
So Apple was downgraded Mr. Mohan... According to one source he's in the top 4% of analysts so people listen to him. Surely he earned that respectable status but I would caution anyone making decisions based on any analyst's recommendation.
Study shows that analysts are only right about 50% of the time and Mr. Mohan is no exception. According to one source he has an accuracy rate of 55% while another source shows 51%. I didn't look into how the accuracy is measured (e.g. what time frame) as I just wanted to illustrate how the market could move irrationally.
What I had lots of success with is selling put options against stocks that were downgraded and dropped a fair bit.
Selling put against AAPL would have been a good choice but I already have a put against it. Just for the record: the Oct $130 put is going for $1.95 at the moment so it will be interesting to see how it performs.
So what's my trade for today?
#KMX (#CarMax) Oct $55 put. I have been bearish with this stock for a long while but did not think that it would go much lower than $90 so I traded it multiple times earlier this year and last year every time it went below $100. Fortunately I did not have a position on for today's earnings as it dropped over 23%. Selling a put at $55 has a calculated probability of profit of 86% but the actual probability is probably 100% given the size of the drop.
KMX Monthly Chart
Trade Type: Short Put
Expiry: 18 Nov
IV Rank: 73.4
Cap Req: $555
Annualised Prof at Expiry: 105%
IMPORTANT: Studying previous trades provide the opportunity to everyone to learn a great deal so I encourage you to click on the links below and digest the info.