[Options] Straight as an Arrow

Sean McLaughlin
April 21, 2021

Readers of All Star Charts research are no doubt familiar with the team's focus on relative strength. They are often comparing sectors against each other to uncover where hidden strength (or weakness) is hiding out. It's one thing to see how a stock or a sector is performing on absolute -- dollar and cents -- terms. But seeing how investors favor one sector versus another offers important insight into how the marketplace is perceiving risk and opportunity.

This analysis often forms the bedrock of our best discoveries.

With this in mind, I'd like to point our attention to Arrow Electronics $ARW. Here's what Steve Strazza had to say about it in his most recent 2-to-100 Club report:

...this is yet another electronics parts and components manufacturer. We continue to see a lot of stocks emerge as leaders in line with this theme of “old-tech” or value-oriented tech showing relative strength as opposed to the growth-tech stocks which have been secular leaders for so long.

We like to see these base breakouts on both absolute and relative terms.

We’re long ARW above 116 with a target of 164 over the next 3-6 months. Depending on your risk tolerance we think you can give this one room down toward its recent pivot highs in the 108-110 area.

We've been treading along the $115-$118 level for the last week or so, and with an earnings catalyst coming up, this makes it look like the right time to jump in.

Here's the Play:

I like buying long $ARW September 135 calls for around $2.50. This purchase price represents the most we can lose in this trade. It's important to size our position such that we're comfortable taking a 100% loss just in case as we've got earning on the horizon April 29th.

Normally I wouldn't purchase straight long calls so near an earnings event, but the implied volatility does not feel too burdensome at the moment:

Gift from the Trading Gods or a trap? We'll find out soon enough. But at least we can define our risk to protect ourselves in a worst case situation.

Following earnings, if we see a close below $108 per share, that'll be my signal that our trend is in doubt and it's time to salvage whatever is left of the premium in these calls by closing the trade down.

As always with long call plays, if the stocks moves towards our price target of $164, then I'll look to close half of my position when the calls have doubled in value. This will give me the strength to hold the remainder of the position into September, positioned to capture even bigger gains.

~ @chicagosean

P.S. We do trades like this regularly. If you'd like to leverage Best-in-Class technical analysis into smarter directional options trades, try out All Star Options Risk Free!

 

Filed Under: