Look Both Ways

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:

BWLD_C

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

– DM 1:00 PM CST

 

A discussion on “probabilities”

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:

GMCR_B

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?

– DM 1:10 PM CST

 

Managing a Call Fly starring Tableau Software

I initiated an Earnings trade for $DATA with a Bullish bias. Here is a Daily chart with some notes:

DATA_E

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

– DM 8:30 AM CST

 

Position Updates

A quiet week for me in the regular accounts – the focus continues to be on Earnings trades (both pre & post the event). There are 7 newly added positions this week to survive to the weekend:

Jack $JACK  I am Long the May 95/100/105 Call Fly with Short $85 Puts

United Rentals $URI  I own the May 95/98/91 RRCS

Earnings:  $RCL $VMW $TMO $ORLY $EW

Exits:

  • $AERI
  • $ISRG
  • $QCOM
  • $CAT
  • $DDD
  • $WYNN
  • $IBM
  • $CMG
  • $EBAY
  • $FB
  • $AMZN

Here is the Summary:

04252015

– DM 10:30 AM CST

The Put Ratio – a variety of uses

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.

 

– DM 1:00 PM CST

 

Chart review

Short to Intermediate Term:

A pullback Buy candidate
CAB_B
Back inside the Channel. A RSI Buy
EXPD_B
I like the Hammer on Friday, will look for confirmation on Monday
GS_C
Held Support & bounced. Back over this Rising TL too (blue line) PII_E
Trying to breakout over this Rising TL WBC_C

I would sell $40 Puts XPO_C

Breakout watch ZLTQ_B

Long-term:

Bottoming setup
DBC_B
Bottoming setup XME_B
Bottoming setup DBA_C

– DM 10:45 AM CST

 

Trade Adjustments – the power in Flexibility

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:

The adjustment

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.

 

– DM 9:30 AM CST

 

Stop vs. Options

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:

VHT_Trade_setup
If you would like to learn more about the Managed Account service at Dragonfly Capital you can email us at [email protected]

– DM 11:00 AM CST