Whether you're a novice investor or seasoned trader, there is
a single rule that can separate you from most investors.
During my days on Wall Street, I've watched experienced floor
traders lose their shirts by ignoring this investment
The best part is that following this powerful rule will result
in bigger profits and fewer losses. And every investor can
easily put this into action. If you're a long-term buy and hold
investor or an options trader, this one rule can make all the
difference between your investment success and probable
This is the rule of "mean reversion."
Now that may sound boring…but let me quickly explain this in
the most simple of terms.
Mean-reversion simply put, is the idea that a security's most
extreme moves (up and down) will eventually reverse, and move
back towards the average. The more extreme the move, the more
likely it will reverse.
The best part is you can actually measure the extremity of the
move, and then profit with a huge degree of reliability by simply
investing on the likelihood that the extreme move will
I always teach investors to make decisions based on
probabilities. If you do so, you'll make money over the long
Let me share a recent example to highlight the importance of
mean reversion. After all - even if you've never traded or
used stock options - this all-important rule can help you better
time your purchase of stocks for the long-term.
shares have been on the rise recently.
In fact, the tech behemoth shares jumped more than 5% in the
As you can see in the chart below, Apple shares took a dive
during the month of June.
But for most professional investors and options traders, the
sharp decline was a blessing.
Because most options traders - myself included - are
contrarians at heart.
As award-winning journalist and investor Jason Zweig recently
my role, therefore, is to bet on regression to the mean even
as most investors, and financial journalists, are betting against
it. I try to talk readers out of chasing whatever is hot and,
instead, to think about investing in what is not hot. Instead of
pandering to investors' own worst tendencies, I try to push back.
My role is also to remind them constantly that knowing what not
to do is much more important than what to do."
Thank you Jason, I couldn't have said it better.
The sharp sell-off pushed the stock into a short-term oversold
extreme (as seen by the circled RSI reading in the chart). And
this is exactly what I look for everyday - highly liquid stocks
that are at short-term oversold/overbought extremes. Once
these extremes enter my universe, I implement one of several
(I speak about this in great detail in my latest
With the recent Apple scenario, the stock quickly became
oversold. So I made the assumption that the shares would move
higher, at least over the short term (1-5 days). Therefore, I
used a bullish options strategy - also known as a
Bull Put spread
The goal of a bull put credit spread is to have the stock
close ABOVE the short put strike sold at options expiration, the
third Friday of every month…in our case $345.
If that occurs, the puts expire worthless and I keep the
credit received up front.
Basically, as long as APPL closes above my chosen short strike
of $345, roughly 15% below the current price of the stock, the
trade is profitable. The return on the trade… 11.1%, and that's
in less than 30 days.
I can't go into too much detail in this forum - but I
encourage you to
watch my latest webinar (for free)
to get a closer look at this specific trade.
Mean-reversion coupled with a high-probability strategy like
the Bull Put spread is a combination professional options traders
have been using successfully for years. Due to advances in
technology we now have the ability to take advantage of these
same conservative, high-probability strategies.
It is my goal to help you understand some of the more
effective ways to enhance your portfolio returns and not use the
highly speculative methods that have been touted over the
Editor and Chief Options Strategist
Options Advantage and The Strike Price