RLFF Mean Reversion -SPCE
The RLFF ("Regression Line Fractal Framework") is one of Ken's most powerful ideas. According to the RLFF we should stalk stocks that had abnormal stretch between the RL10 (which represent the power of the traders) and the RL270 (which is the long term investors fair value). Whenever the distance is too wide in respect to its history, we should stalk the stock and as it reverse back we can anticipate a mean reversion move back to the RL270.
Using the KL-TC2000 scanner I found SPCE that had a big stretch from its long term fair value with a Z-score of 3.
As I stalked it I notice that it started to go down, and day traded it using put options.
First I bought Put31 at 1.4$ each as it crossed down the VWAP.
Next as it continued to go down, I scaled in with a second position by buying Put20 at 1.49$ (and moving my stop to BE).
Towards the end on the session I decided to leave the trade for a swing play.
In order to reduce my Theta (time decay) exposure, I sold 40 Put27, that were trading at 0.9$, thus leaving my risk at 2.2K while having a maximum payout of 14K. (R:R of 5.3:1).
The next day, as SPCE crashed more than 10% , I could buy back the put27 at 0.85$, because the volatility of that strike which became ATM now collapsed too.
Then as SPCE continued to go down I could sell again the Put27 for 1.44 thus, taking all my risk out of the market, and offsetting the overnight Theta risk.
The next day, although SPCE continued to go down, I could again buy the P27 for less than I sold it yesterday (buying back at 1.18$).
And riding the trend down, I could lock-in gains now by buying Call25 for 1$.
And finally as it continued to go down, I could sell my Call25 for 0.7$ and buy Call24 and lock-in more profits.
Using the RLFF scanner we can find symbols that are either overbought or over sold and stalk them for a reverse move.
When that happens we can use the Core & Turbo technique in order to leg in to the position in order to profit from the mean reversion move.
Using options, we can both limit are losses on swing trades and also let it run, as far as the market will give us.