[Options] Feeling 100

Sean McLaughlin
April 15, 2019

Most regular readers of mine know I'm a big fan of the "hundred-dollar-roll."

If you aren't familiar with this phenomenon, essentially, its the tendency for traders and investors to be distracted by a big, sexy, (but ultimately meaningless) round number. And 100 is the most common of the big round numbers that captures the fancy of speculators new and old.

And this phenomenon isn't new. In fact, in Reminiscences of a Stock Operator (the greatest trading book ever written, in my opinion), Jesse Livermore mentions trading stocks as they approach 100, 200, or 300 was one of his favorite strategies as he could very often count on that large number acting as a magnet for buy orders -- which then eventually results in further follow thru for several more points beyond the round number. "There is nothing new on Wall Street," he'd say.

This is all on my mind as a household name and a darling of Wall Street and Main Street emerges from a nice bounce off its 50-day moving average and approaches 100...

Just do it!

Yep, Nike $NKE is setting up nicely for a run at 100.

Even better, options premiums are relatively low and set up in such a way that we can take a long position with plenty of time for unlimited upside to play out, and get paid a little to hold it!

Here's the play:

We're going to enter a Bullish Risk Reversal in October $NKE options for a small credit. We'll be purchasing the October 95 calls and financing this purchase with a short sale of October 80 puts. The net result should work out to a small credit of at least 25 cents. The amount of the credit is not so important, but we'll be working to earn one regardless.

Here's how our P/L graph on this trade should look:

The goal of this trade is to play for the hundred-dollar roll. If/when $NKE gets to $100, we'll close our position and enjoy our gains.

However, if we get there before 4th of July weekend, then we'll likely play for the bigger move. We will sell half of our profitable calls and use that money to purchase back the now cheap short puts to remove all original capital risk from the trade (which would likely also lock in some additional small profits) and then enjoy a free ride on the remaining half position of long calls, but that'll be determined by the speed at which we get to 100.

Due to the naked short puts at trade initiation, this position will require higher buying power than most trades we put on. In this case, it'll require approximately $1650 in buying power per one-lot. It is important for us to size our trade such that if it doesn't work out (NKE tanks), and our short 80 puts get exercised against us, we are comfortable holding the stock position at a strike price of $80/share. We'll trade this position small.

In the case NKE never makes it above 95 (our long calls strike) nor below our short puts strike (80), the options will expire away worthless and we'll keep the small credit we collected when we originally put the trade on. Consider it a parting gift.

If, however, NKE ever closes below $80, that'll be our signal to completely exit the trade and limit our losses. I'm not interested in sweating through a hold of naked short puts in a collapsing market. We'll take our manageable lump and move on to the next opportunity.

100 -- Just do it!

~ @chicagosean

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