I was talking with a trader friend this weekend who reads all our research. The first thing he said to me was, “what’s with all the catch-up trades?”
I thought it was a great question so I’m writing this note to answer it.
The main idea is that there’s a time and a place for everything… and right now is primetime for catch-up moves.
The strategy has a higher probability of success in an environment where breadth is expanding and losers are catching up to winners… and not the other way around.
I’m basically describing the mid-to-late stages of a bull cycle.
It’s where we are now.
Correlations for stocks are moving higher and more and more things are working every day.
Catch-up trades are simply betting that something that isn’t working starts working in the future.
For example, when our housing index is ramping back toward its highs and homebuilders are on the mat— we buy homies and bet they look more like their industry peers in the future.
It should look something like this.
Or when all the Mag Seven stocks are working except Tesla and Apple, we get long those laggards and make the bet they get up to pace with the leaders.
That’s catch-up trading in a nutshell.
And because they eventually buy even the worst stocks in the best times, this strategy is perfect for the current environment.
All things equal, these setups have a higher win rate in a market like today’s.
It’s why so many of our big winners have come from these setups... and it’s why we keep seeking them out and buying them.
Let me explain.
Options are priced for the standard volatility of each individual stock. If the stock makes a directional move, but it comes with average volatility, it’s unlikely to be a great trade.
The market does a phenomenal job at pricing these instruments for what is most likely to occur.
Therefore, the magic with options tends to happen when you are in something that acts in a way it wasn’t supposed to.
It’s when there is an unusual move… one outside a certain standard deviation… one that the greeks and options premia weren’t pricing in— that’s when you get the outlier winners.
Just think about it. What does a catch-up trade usually look like?
It’s when a stock makes an outsized move to get back in gear with its group. It’s when they sprint a bit to catch up with the pack, right?
By definition, catch-up trades tend to come with above-average momentum and volatility.
So when you buy options, which are priced for normal action, and the stock makes an abnormal move… You can earn abnormal profits from it.
That’s what we’ve been doing in our Breakout Multiplier book all year. As long as the strategy keeps working, we’re going to keep working it.
I guess my advice to you is to throw some catch-up on that dog every now and then.
It’s grill season out here.
Like any good New Yorker, I usually dress mine with mustard, sauerkraut, and onions… But, like I said, there’s a time and a place for everything… and now is the time for some ketchup— or catch-up. You get it.
We’ve already generated a handful of 10x winners from this strategy this year… and based on what I’m seeing today, I’m confident more home runs are coming our way.
