Today, I want to talk about something traders refer to as “filling the gap.”

“Gaps” in a stock’s chart occur when the price of the asset moves suddenly up or down, usually in response to news outside of market hours. In many cases these gaps don’t last. Instead, they’re “filled” when share prices move back into the range of the gap.

For instance, if XYZ stock closes at $100 on a Monday and then opens the following day (Tuesday) at $120 (an overnight gain of 20%), there’s a good chance that over the next several sessions the stock will trade back down to the $110 range, which would be halfway between Monday’s $100 close and Tuesday’s $120 open.

This phenomenon tends to hold true regardless of which way the stock moves, up or down. In either case, shares have a tendency to fill the gap over the next several sessions.

So whenever I see a particular stock take a big jump or a big dip, it’s a signal to me that there’s a potential opportunity for quick profits, buying options to cover the gap that’s about to be filled.

And I’ve got a great pick to move on right now. It’s a leisure company out of Rhode Island that sells toys and games, and it just had an earnings surprise which led to a big pop for the stock. But with the economy heading toward a recession, those gains just aren’t going to last, and that means we can get in now for a nice ride as it falls back down.

That company is Hasbro, Inc. (HAS), publishers of pretty much every board game you played as a kid. About two weeks ago, HAS reported Q1 2023 results that included revenue of $1 billion, which was down 13.9% over the same period last year. On the bottom line, earnings came in at $0.01, compared to $0.57 in the year-ago quarter.

Even though both revenue and earnings were significantly lower than the same quarter a year ago, they were still above analyst expectations. The stock jumped more than 14% in a single session on the news.

Like I said, that’s far too much of a move for a leisure company, especially if the economy is heading toward a recession.

Since the April 27 gap-up, the stock hasn’t been able to add to the gain and I think it’s ready for a reversal to fill the gap created by the post-earnings jump.

So here’s what we’ll do:

I like buying-to-open HAS June 16, 2023 $62.5/$60 Put Spread for $1.25 or less. only. Plan on exiting the position for a 30% profit.

While this is a short-term trade, I’m also keeping an eye out for longer plays. There are plenty of opportunities to make money, even in this sideways market.

— Shah Gilani

We Could Be Less Than 3 Months Out from an AI Superevent [sponsor]
According to one of the world's top AI scientists, there's a major event coming as soon as three months from today that could cause expensive tech stocks like Microsoft, Google, and NVIDIA to double or triple in price in the months ahead... but whatever you do, don't go all in on big tech before you have all the details. Click here.

Source: Total Wealth