Wide Earnings Spread In John Deere

Hey 5-Star Trader,

“Tuesday Trade” Journal: One of the most important concepts in trading is to review your work, and learn from the good and the bad. Identifying what is working is critical — to do more of it. So, to lead by example, each Tuesday, you’ll get a trade from my trading journal, in which I explain my thought process from start to finish. Trading is all about finding something that works and applying it over and over again. That’s how you find trading success. So study up on this “Tuesday Trade” and let’s get to work.

For “Tuesday Trade”  this week, I want to outline my trade in John Deere DE.

At the beginning of the pandemic, everyone was stuck at home. As a result, we saw many home improvement companies become Covid-19 ‘darlings,’ which is how John Deere came to my attention. Since then, DE has cooled off but still offers great opportunities when the setup is just right. 

At the beginning of November, I was on a search for tickers to trade during the ‘run into earnings’ which is when I noticed the potential in DE. It had a weekly squeeze and the daily chart was breaking up above resistance. I was initially hesitant to get in because DE was already trading higher than normal, but I figured the squeeze could be a catalyst for the breakout above resistance so I got one contract — SELL -1 VERTICAL DE 100 19 NOV 21 360/350 PUT @4.10 limit order (LMT).

I chose to set the spread wide because the breakeven is lower. An option would have been to make the spread tighter for less risk, but with the way, I set my trade up I put my risk at approximately 1.5%.

Pictured below is DE with its weekly squeeze, daily squeeze, and high volume buying the day I got in.

A few days into my trade and there was some news regarding striking that came out about DE. Because of this, DE did move around slightly, but I held. Thankfully, by the end of that trading day, I did get a bounce back and the setup was right back to where it needed to be. 

Several days later and I saw action brewing underneath the surface. The indices were stable, but the S&P 500 (SPY) is right at 4700, a key area of resistance, and the Nasdaq (NQ) was below 16,500, another key area of resistance. In instances like these, it is not unlikely to see a gap down, but I didn’t want to get out of DE quiet yet because I needed a couple more days so theta decay would continue to work in my favor. So I held while keeping an eagle eye on the market’s health.

Over the next few weeks, DE experienced a fair amount of volatility due to corresponding news coming out. Finally, after two weeks, I was close enough to expiration that I felt comfortable getting out for a profit — BUY +1 VERTICAL DE 100 19 NOV 21 360/350 PUT @2.76 LMT.

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