Sometimes I see a chart that clearly shows the potential to make a move in either direction. I noticed this potential in $BWLD today with the 2 Gap Fill areas:
So, how about a trade idea? This is one approach to consider:
Long the September 175/140 Strangle
Short the December 175/140 Strangle
This is called a Strangle Swap
Cost: $7.70 credit (that’s right, get paid)
Pro: protected until September expiry on any sudden UP or DOWN move beyond the chosen strikes
Con: takes margin
Some scenarios to consider:
1) Price is $185 at September expiration. The long Sep $140 Puts go poof. Take the stock at $175. Now plan for adjusting the short December $175 Calls any time before the December expiration. If the short December $140 Puts are real cheap, BtC
2) Price is $135 at September expiration. The long Sep $175 Calls go poof. Take the stock short at $140. Now plan for adjusting the short December $140 Puts any time before the December expiration. If the short December $175 Calls are real cheap, BtC. Might want to consider buying Calls to protect the short stock too, use some of the credit
I often receive negative feedback from traders regarding a perspective that I show on a particular chart. Although this should be expected – people see what they want sometimes – I wanted to focus on the topic of probability.
When I consider the price action in a stock I want to consider what traders are thinking on both sides of the fence. When I use RSI to keep things simple, I am looking to answer this one question:
What is the probability of price movement now?
To illustrate I want to use a Daily chart of GMCR to show what some traders used to enter this stock last week:
When you consider the history of price, what happened each time RSI touched 30? From a probability stand point, it seems easy to follow this. Could it have remained weak, gotten weaker? Sure. The point here is: what is the probability for price movement next?
I initiated an Earnings trade for $DATA with a Bullish bias. Here is a Daily chart with some notes:
The reaction was very positive on the report but now it’s time to look at the plan for the next step(s) to take. Note: I did trade stock in after hours for a $.90 gain. I currently have long stock at $105.45 (2nd trip long, hedge). With the Call Fly fully ITM (in the money) now, here are a few choices for me today (May 08w expiration is today):
1) Unwind the Call Fly for a $2 gain if price holds above $105. Sell the long stock piece for a gain (the hedge). Let the short $88 Puts go poof
2) Sell Calls in a future expiration ($105 strike likely) to buy back the middle of the Call Fly. Keep the debit to a minimum. If price is above $105 I will also StC (Sell to Close) the Long $105 Calls for whatever premium is there near the close. Sell the long stock piece for a gain (the hedge). I would then take stock at $97 creating a normal covered call trade. Let the short $88 Puts go poof
If you don’t currently trade Options that is fine – you may find this subject peeks your interest as I discuss the Put Ratio.
During my weekend review I noticed that several of my positions had Put Ratios that were drifting ITM (into the money) or very near it. Let me list a few positions here and then go over why I like this approach for protection:
Skyworks Solutions $SWKS I am Long stock at $63 (since 11/18). The Option pieces: I am short the Jan 2016 $100 Calls (covered) and Long the April 24w 95/88 1×2 Put Ratio
Zillow $Z I am Long stock at $82.96 (since 4/14). The Option pieces: I am short the May 08w $97 Calls (covered) and Long the 95/88/85 1×2 Split Put Ratio (L the $95 Puts, S the $88 & $85 Puts to create the ratio)
Avago Tech $AVGO I am Long stock at $105 (since 11/26). The Option pieces: I am Short the July $125 Calls (covered) and Long the May 125/115 1×2 Put Ratio
If you do you homework to pick solid strikes, you can gain downside protection at a very low cost (does take margin however). I typically use a Stop on the stock if it gets anywhere near the middle range of the Put Ratio.
Another use of the Put Ratio
If you think there is more short-term weakness in the stock but see a level below where you own it – choose that level for the lower portion of the Put Ratio. For example:
If you think stock XYZ is going to $50 – and is currently trading at $54.00 then consider going Long the 52.5/50 1×2 Put Ratio. You can capture a move down thru $52.50 all the way to $50. B/E will be at $47.50 +/- what you pay/get for the trade.
A pullback Buy candidate
Back inside the Channel. A RSI Buy
I like the Hammer on Friday, will look for confirmation on Monday
Held Support & bounced. Back over this Rising TL too (blue line)
Trying to breakout over this Rising TL
For those that don’t trade Options, I’d like you to stick around anyway to read the rest of this. Why? To help illustrate the power in Flexibility that comes from trading Options:
For an adjustment example I will use the current trade in $ISRG. I came into this week owning the April 520/530/495 Risk Reversal Call Spread. Another way to look at this trade:
Long the 520/530 Call Spread
Short the $495 Puts
This takes margin until the short Puts are closed
I did this trade on 4/9 for a .39 credit
When you see a trader discuss an “adjustment” it doesn’t always mean a negative event to a trade. In the case of the $ISRG above, I am taking advantage of the continuation up move today to sell Option premium next week and BtC the Short $530 Calls for this week. The 520/530 Call Spread becomes an April/April 24w 520/540 Diagonal Call Calendar (takes margin). I now have flexibility for Friday expiration with several choices:
Take the stock at $520
StC the $520 Calls & BtO Calls in a future expiry
Build a Call Fly for next week
Do a new Risk Reversal
Just to name a few. Flexibility is what I focus on – the Trade Design to give me this – and that is what I have here.
I send this to client prospects for the DCMA to show how I would create a position for them. This is a recent Trade Setup for $VHT. I cover several key elements like Position Size, Amount to Risk, Stop price, etc:
If you would like to learn more about the Managed Account service at Dragonfly Capital you can email us at[email protected]
I think most traders understand this concept of following the trend. Although there would be a lot of debate among traders on what they use to measure it, we can all agree that the 1st place to start is Price.
What I want to do now is to give you a different twist on Trend Following. This perspective comes from a review I did this weekend of all my current positions and noticing a common element in many:
Dip Buy at Support
Maybe this is a trend in itself, something that many traders are increasingly doing. A market participant “trend” if you will.