Feeling Resourceful

Sean McLaughlin
October 27, 2021

Feels good to be back from vacation! And I'm glad to see the stock market fared nicely while I was gone.

Looking around, we're seeing lots of fresh setups. But with earnings calls on deck, I'll have to be patient with many of my favorite ideas to let the event pass so as not to caught offsides by a sudden move in the wrong direction.

However, one of my favorite setups just got its latest earnings release out of the way this morning and thankfully it basically amounted to a non-event. Its recent breakaway gap continues to hold above its prior 3-year resistance level. And with the binary earnings event out of the way, options premiums have been evaporating throughout the day. This sets us up for taking a longer-term position at advantageous prices.

Check out this chart in the mining sector stock Teck Resources $TECK:

Are you seeing what I'm seeing? We're holding above significant support now with a logical Fibonacci extension price target of $38 that could be reached over the next 4-6 months. That kind of move would be to nearly decade-long highs! And even better, we have a nearby risk management level that signals to us that we're early or wrong quickly, which makes the potential gain to risk ratio incredibly favorable here.

So with premiums being squeezed out of the options for $TECK, we're going to get involved with a simple long calls play.

Here's the Play:

I like buying $TECK May 31-strike calls for approximately $2.90 per contract. This is a higher delta option strike than I usually prefer. But this strike currently has the highest open interest in May and one of the tighter bid/ask spreads. We'll have to work a limit order in the middle to get our price, but I'm confident we'll get fair fills here.

As is always the case with long call plays, I'll be looking to sell out of half of my position when I can do so for double what I paid at trade initation. So if I get in at $2.90, I'll be selling half around $5.80 per contract. Then I'll have a "free ride" on the remaining position into May because the worst that can happen is the calls expire worthless, but at least I'll have gotten all my money back and not lost any.

On the downside, if we're wrong (or early), and $TECK closes below $27 per share, that's our signal to cut and run. Our risks are defined to the premium we paid at entry, so there's no need to pain or hurry. But we'll definitely be exiting if we see a close below $27.

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

ASO subscribers can catch my next live Jam Session where we recap recent portfolio activity this Friday at 2:45pm ET 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!

 

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