Most traders waste time (and money) chasing popular stocks.
This strategy targets big wins on the ones they ignore.
Hey everybody, JD here with your Rational Trader Market Analysis daily.
Yesterday we put on that Salesforce trade, and it worked out exactly the way we thought it would. The stock reported, and it stayed well below our short strike, so we booked full profit.
That’s the beauty of these Mean Reversion Cash Machine trades:
These setups keep working, and it’s not by accident — it’s because they lean on math that’s been around for 200 years, as I spoke about in this video.
Why Two Sigma Works
When I say “Two Sigma,” I’m talking about two standard deviations above or below a stock’s mean price.
In plain English, it’s a statistical marker that tells us when a stock is stretched far from its average. The farther you stretch, the stronger the pull back toward that mean.
It’s sort of like the way a rubber band snaps back harder, the further you stretch it.
Now, some people look at these trades and think, “Wait a second, you’re risking $5,000 to make $500?” That’s true.
But think about it this way — would you bet on Tom Brady’s Patriots to beat the worst team in the league if the payout was only 10 cents on the dollar?
Of course you would. Because the probability of success is overwhelmingly in your favor.
That’s the way these trades work. They’re not about lottery tickets… they’re about stacking high probabilities.
Trade #1: Lululemon (LULU)
Our first setup today is on LULU, which reports earnings after the close. Here I’m putting on a reverse iron condor.
Quick refresher:
A reverse iron condor is a four-legged option trade designed to profit from a big move in either direction. You buy a call and a put at the same strike, then sell another call higher and another put lower.
Basically, you’re betting on volatility — the idea that the stock will make a big move — not on which direction it might go.
For LULU, here’s the structure I like:
- Buy the $202.50 call
- Buy the $202.50 put
- Sell the $212.50 call
- Sell the $192.50 put
That trade costs about $9.20 to enter.
For full profit, we need a move between about 4.5% to 5.3%.
Given how this stock has traded around earnings in the past, I wouldn’t be surprised to see a double-digit swing.
Trade #2: DocuSign (DOCU)
The second setup is on DOCU.
This one is trading close to Two Sigma as well, but instead of buying volatility, I’m fading an upside move by selling a call credit spread.
Here’s the trade:
- Sell the $85 call
- Buy the $90 call for insurance
- Both expiring Friday.
That nets about $0.60 of credit.
As long as DOCU stays under $85 through expiration, we keep the premium.
With earnings out and the jobs report hitting tomorrow, I don’t see this stock breaking through that level.
Wrapping It Up
So that’s today’s lineup: a reverse iron condor on Lululemon to play for the post-earnings swing, and a call credit spread on DocuSign to fade a stretched name.
Both are defined-risk, high-probability setups built on the same principle that’s worked for centuries: when price gets too far from the mean, it usually comes back.
That’s it for today, folks. This is JD — take care, good luck with your trading, and I’ll see you next time.
Talk soon,
JD
The Rational Trader
