The key to this stellar win rate is a 3-step sequence designed to spot when institutions are about to pile in.
Hey everybody, JD here with your Rational Trader Market Analysis daily.
We’ve had a busy stretch in the Mean Reversion Cash Machine, and we’re closing out the week with one more setup — this time in Restoration Hardware (RH).
Setting the Stage
RH reports earnings tonight, and the option market is flashing a clear signal: premiums are extremely large. When option prices are this inflated, it tells you volatility expectations are sky-high. The market knows something is coming — the only question is which way.
On the chart, RH is trading right around the mean, so unlike names stretched out at Two Sigma, there isn’t an obvious directional lean. That makes this trade a little different from our usual fade.
Looking at the Usual Tools
My first thought was an iron condor. That’s a four-legged spread designed to profit if the stock stays range-bound. You sell an out-of-the-money call spread and an out-of-the-money put spread, and you keep the credit if price stays between the lines.
But when I ran the numbers, the profit dynamics were crummy. The risk/reward didn’t justify the trade, especially with the earnings catalyst looming.
Next idea: selling calls. Premiums are so rich it’s tempting, but the problem is the other side of the equation. If RH does move higher, the risk is open-ended. The reward just didn’t match the danger.
Reading the Institutional Signal
When the textbook mean reversion tools don’t line up, I turn to what the institutions are telling us. And right now, the tape says they expect RH to move higher.
That’s not me guessing — that’s me following the money. When options are priced this aggressively, and when the balance of premiums leans to the upside, you respect that signal.
The Trade: A Call Debit Spread
So here’s the trade I like, expiring Friday, Sept 12:
- Buy the $227.50 call
- Sell the $242.50 call
This spread costs about $7.10. It’s $15 wide, so the max value is $15. That means defined risk, and a strong risk/reward if RH makes the expected move.
A quick refresher: a call debit spread is just buying one call and selling a higher strike call with the same expiration.It caps your loss at the debit you pay up front, but also caps your gain at the spread width minus that debit. Simple, clean, and built for situations like this.
Wrapping It Up
So that’s the play: RH into earnings with a call debit spread.
Not a mean reversion fade this time, but a momentum play aligned with the institutions. Defined risk, rich premiums, and a setup that matches what the market is telling us.
That’s it for today, folks. I’ll be back next week with more Mean Reversion Cash Machine trades.
Talk soon,
JD
The Rational Trader
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