[Options] A "Loco" Options Trade
We're looking at El Pollo Loco Holdings $LOCO and here's the ASC take:
The $LOCO daily chart is showing prices going through the classic bottoming process that I explained using Twitter’s stock last June. Longs and shorts have been worn out, expectations reset, and now prices are breaking out of this base to the upside. With momentum in a bullish range and prices above a rising 200-day moving average, the weight of the evidence suggests that this is the beginning of a new long-term uptrend in the stock.
I couldn't have said it better myself, and here's the chart again:
You've got to love how well the stock hung above previous resistance as the broader market was seemingly falling apart everywhere else. And as one would expect, as the market found its footing, $LOCO has rebounded nicely with designs on going higher.
The guys have a potential price target north of $21. Does that mean it gets there next week? Of course not. But we don't need it to. To profit, we're going to keep it simple and give ourselves plenty of time to let our thesis play out.
Here's the Play:
We're going to purchase June 18 calls for $1.00. We'll patiently wait for a fill at our price as I wouldn't be surprised if a short pullback is in the cards in the coming days or weeks. With 156 days until expiration, I'm confident we'll have plenty of time to both get our price and catch a ride higher. Of course, if it doesn't work out, our max risk is limited to the $1.00 we'll pay at initiation and we'll size our position accordingly. Typically, I assume I'll take the max loss on straight long option buys when we're wrong. However, if $LOCO ever closes below $14.00 while we're still in our position, we'll probably hit the bid and take whatever we can get (it won't be much) to exit the trade. Below $14 and our thesis is definitely busted.
If we get this one right, we'll look to take half of our position off whenever we can sell some contracts at $2.00 or more. When given the opportunity, I always like to take my original risk capital off the table and have a free ride on the rest. After that, we'll root for $LOCO to hit our price target of $21 and then sell a little bit more, hanging on to a sliver just in case our price target is too modest and it really takes off (remember, it'll be a free ride and we'll already have booked a guaranteed profit by now). If that happens, we'll all be loco for El Pollo!
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