Here’s how I spot hot stocks BEFORE Wall Street pours money into them.
Hey everybody, JD here with your Rational Trader Market Analysis daily.
Right back at it, riding the Mean Reversion Cash Machine wave.
Before we jump into trades, let me point out the big picture: the market is still overbought, and in these conditions, the bias leans to the downside.
That makes the “magnet of the mean” our guiding light for finding trades that can ring the cash register.
I’ve got two setups for you today, both ahead of earnings tomorrow morning.
Trade #1: Home Depot
A few days ago, Home Depot (HD) was well above two standard deviations from its mean. It’s come back some, but option pricing made a call credit spread less attractive. Instead, I’m going with a debit put spread.
That means I’m buying the $397.50 put and selling the $392.50 put.
The net cost is about $2.60 on a $5-wide spread. In plain English, that’s a shot at doubling your money if the stock slips less than 1% — about 70 basis points — by expiration.
That’s all it takes to ring the register on this one.
Trade #2: Medtronic
Next is Medtronic (MDT).
Same story — overbought market, trading close to two standard deviations above its mean, with earnings due tomorrow morning.
Option premiums weren’t juicy enough for a credit spread, so again, I’m again looking at a debit put spread.
Here, the setup is buying the $93 put and selling the $91 put.
My cost is under a dollar, and the spread pays out $2 if Medtronic drifts just 1.2% lower.
Defined risk, clear payoff, and only a modest move required.
Wrapping It Up
Both of these trades lean on the same principle: in an overbought market, the pull back to the mean is strong.
Home Depot and Medtronic don’t need to crash for these spreads to work — just a small move lower can hand us 100% returns with the way I’ve structured these trades.
That’s all I’ve got for today, folks. Good luck with your trading. As always, I’ll be back tomorrow with another video.
Talk soon,
JD
The Rational Trader
