I recently discovered an extremely predictable strategy that has thus far not yielded me a losing trade. This strategy was developed to exploit specific forced market mechanics that effectively put extreme sell pressure on stocks during specific time windows.
This strategy is the convertible note strategy. It goes like this:
1) Company issues a press release announcing a convertible note issuance.
2) Go and check the filing. There will be an exhibit 99.1 as an attachment. Read this, and look for a pricing window (if not already price) This pricing window is generally a VWAP during a small timespan on the next trading day. If the filing is release in the pre-market, it will be that same day. Here is the recent filing from MARA on Wednesday. It mentions 2pm through 4pm EST.
3) Open a PUT contract (short duration is riskier but reward is insane) shortly before the pricing window starts. I would suggest like 1-2 hours prior. If you open one in the morning, the price will likely bounce around a bit before declining into the window. The only thing that matters for the pricing here is the VWAP during the window.
4) Sell the PUT shortly after the pricing window starts. Often, stocks will flatline. Here is another example of the exact same thing. Every time I have seen this happen, price action is almost the exact same, and I will explain why.
This price action isn't due to normal bullish/bearish mechanics, or even shares actually being sold into the market. It is due to institutional bond hedging. When an institution buys the bonds, or intends to buy the bonds, they hedge their positions... by selling/shorting the underlying stock. This is a mechanical process that happens every single time a bond is issued.
Sometimes convertible note announcements are pre-priced and the note selling takes place the next trading day. What is the plan then?
The plan is the same. As the bonds get sold to qualified institutional buyers, these institutions short the underlying to hedge the position, and generally these institutions are allowed to short naked. Here is ASTS, which happened today. Due to the convertible note selling, there was excess sell pressure on the stock. Even though the stock is in a bullish pattern on the daily, the sell pressure from the hedging today overwhelmed the buy pressure.
While this strategy isn't an every day occurrence since companies don't release these kinds of filings all the time, it is definitely something to keep in the toolkit since it can yield 100%+ returns consistently if done correctly. I personally generally paper hand out when I get a minimum of 20% gain since that is still a big win for me.
This strategy doesn't use chart patterns, TA, or anything... it exploits forced institutional hedging mechanics, which yield predictable and repeatable chart patterns.
