Following Insider Buying on Cleveland-Cliffs Pays Off
In yesterday’s Trade of the Day, I wrote about the Cleveland-Cliffs (NYSE: CLF) insider play I recommended in The War Room. The thesis behind the trade was simple. I saw good cluster buying by insiders, and that triggered a buy signal.
Usually, insider plays take weeks or months to play out. This one played out in a matter of a couple days!
War Room members entered Cleveland-Cliffs on Tuesday at prices between $8.45 and $8.50. Yesterday they exited at around $9 for a quick base hit. This play was another example of how we can profit from all types of trades, including stocks, in The War Room.
As a refresher, insider buying is one of the best signals in the market. However, you must be able to read between the lines…
Below is a checklist you should follow:
- Do not buy when just one insider buys. That’s not a confirmed indication of anything.
- Note the buy-to-holdings ratio. For example, if an insider holds 20 million shares and adds 200,000 shares… that means nothing for the purposes of a short-term trade. Insider buying by a major shareholder is not a confirmed sign either, as it could be an indication of a major holder adding to a position.
- Check the news. If the insider or insiders are buying after a bad earnings call and even worse forward guidance, it could be years before the bet pays off.
- Look for cluster buying, where more than two insiders buy at varying prices – preferably at higher and higher prices.
- Look for four or five insiders buying over a long period of time. The best indication is when most of the insiders are officers – they have more at stake with their compensation.
- Don’t pay attention to insider selling, as it is not a proven indicator. It can be the result of many factors such as tax or estate planning, diversifying, or buying a new house. But insider buying usually means one thing: There is good news ahead.
Action Plan: Keep this checklist by your side, and when you see insider buying reported, make sure it meets the checklist before diving in.
As for Cleveland-Cliffs, it’s now a closed position in The War Room, but it’s on our screens for a future buy on a pullback in the overall market. So join me in The War Room for more insight on stocks and trades like this one!
About Karim Rahemtulla
With more than 20 years of experience, Karim has mastered the subtle art of options trading. What we admire about him is his ability to score huge gains while minimizing the massive amount of risk that often comes with options. Beyond his expertise in options trading, he is also the author of the best-selling book Where in the World Should I Invest? He publishes weekly about smart speculation in his latest free e-letter, Trade of the Day.