[Options] Riding The Wave

Sean McLaughlin
June 17, 2020

Coming out of the most recent All Star Charts Monthly Conference call, one of the themes that JC stressed was the continued stream of bullish setups in the strongest sectors, and most notably Internet Retail. Makes sense, right? Outside of grocery shopping, not many people are heading to the local mall for any unnecessary "retail therapy."

Additionally, exercise-crazed Americans who've suffered their favorite gyms and yoga studios being shuttered for several months now are exploring options to get their exercise fix at home. Sounds like a perfect setup for an internet company that sells exercise equipment!

Here's JC on the opportunity setting up in Peloton $PTON:

One of the areas we continue to like, and continues to pay well, is Internet Retail. The relative strength and positive momentum coming out of these stocks has been off the charts for months.

A nice clean setup in the space is Peloton. I like how prices have been consolidating below their 161.8% extension and ready for their next leg higher:

With volatility in $PTON options near the lowest levels of the year, this is a clean, simple setup for long calls which offer the potential for unlimited upside.

Here's the Play:

I'm buying $PTON October 60-strike calls for approximately $5.70. The most I can lose in this trade is the debit I pay for these calls.

I considered buying a 55/75 bull call spread for approximately the same price, but then I thought it better to leave my upside open-ended -- because you never know...

My line on the track for $PTON on the downside is $41/sh. If we see a close below that level at any time during this hold, I'll close the trade for whatever premium I can salvage. A close below $41 invalidates my thesis for being long. Best to throw the kickstand down and take a sip of water and wait for a better opportunity to present itself.

On the upside, I'll look to sell half of my position at double the price I entered. It's just good risk management to take all of my original risk off the table. This will allow me to sit tight through any pullbacks and keep focused on patiently holding out for a bigger move.

If I'm still holding these calls into the month of October, that's when I'll start aggressively managing my exit. If the calls are out-of-the-money (OTM) then (meaning $PTON shares are trading below my 60 strike price), then I'll close the calls for whatever I can get. These options will start to rapidly decay any premium left, so no time to delay. If my calls are in-the-money (the stock is trading north of $60), then I'll look to hold on as long as I can until a near-term support level is broken which will signal to me that it's time to take my profits and close the trade.

ASO subscribers with any questions on this trade, please send them here.

For everyone else, if you'd like more idea like this -- try out All Star Options risk free! 

~ @chicagosean

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