[Options] A Play in the Worlds Most Precious Resource

Sean McLaughlin
July 14, 2021

It isn't often that we put on trades where we are explicitly swinging for the fences. But an opportunity has presented itself in the lastest Young Aristocrats report that is offering up an all-or-nothing reward to risk scenario. If we're wrong, we'll likely lose 100% of our capital. But if we're right? We could potentially make 6-10x our investment. I'd like to think the All Star Chart team's conviction on this trade tilts the odds in our favor a little bit.

What's interesting (at least to me), is that the play is in a name with exposure to water. Yes, water. The earth's most abundant, yet precious resource. I've always daydreamed of someday making a killing with long-term investments in water rights and so forth. I'm not there yet, but maybe this play will jump-start my exploration.

Check out this chart in dividend payer Mueller Water Products $MWA:

Here's what Steve Strazza had to say about $MWA:

This one just broke out of a roughly 4.5-year base to its highest level since 2007. As long as these new highs sticks, we want to own the stock against its 2016 highs near 14.25 with a 1-3 month target back toward its all-time highs just under 19.

And making this setup even sweeter, we’re going to collect a 1.5% yield along the way.

Due to the low share price of this stock, out-of-the-money options are pretty cheap in absolute terms. And the ASC team price target doesn't appear to be priced in. So this gives us the potential to really leverage into a big win if we get there.

Here's the Play:

I'm buying $MWA November 17.50 calls for 20 cents. This is a defined risk play where the most I can lose is the premium I paid for these options. Because there is a strong possibility of a 100% loss of invested capital here, I'll be sizing my position accordingly. I won't be risking more than I'd be comfortable losing if the stock doesn't corroborate with our thesis within our timeframe.

If $MWA trades below $14 per share during our hold, then the trade is likely dead and it's likely there won't be any premium to salvage in the options at that point. So this becomes more of an all-or-nothing trade, which we're fine with.

As usual with long calls, if $MWA starts going our way, I'll be looking to sell half of the position for a double what I paid. This will take all of my risk capital out of the trade and then I can let the rest of the position work higher for potentially unlimited gains heading into November expiration.

If you have any questions on this trade, please send them here.

~ @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
All