A Profitable Thanksgiving Pairing
I'll spare you any further exhausting preamble and get right to the point. The two stocks we want to get long here are Unity Software $U and Cheniere Energy $LNG.
Let's start with Unity:
For Unity, what I like is that price action in recent days has followed the textbook Steve Strazza laid out for this stock in a recent "Follow the Flow" report:
We covered this stock in late September in a previous Follow The Flow report, and it recently achieved our objective. Unity is the industry leader in a very hot space right now as roughly 70% of the world’s mobile games are built on its platform.
So this is a strong stock in a strong industry, trading just off record highs on both absolute and relative terms. There’s a lot to like here.
Many times when we see our objectives ignored on the way up, they tend to act as support on the way back down. We’re looking for Unity to consolidate here, as some digestion of its recent gains would be healthy. And this is a logical level to do it.
We want to be buying weakness in U back toward 175 with a target of 237 over the next 2-4 months. As always, if we break back below our risk level, we’re out.
As if on script, $U has indeed traded back to $175 and it handled the test the way we hoped it would. And even better, it now gives a clear risk management level to lean against.
Here's the Play for $U:
I like buying a $U February 200/250 Bull Call Spread for around a $10.00 debit. This means I'll be long the 200 calls and short an equal amount of 250 calls. And this net debit I pay represents the most I can possibly lose if I'm dead wrong.
If $U can't hold this bounce off $175, then that is our signal to exit. I'll give it a little bit more room down to to $170 tho. So if $U sees any close below $170, that's when I hit the escape hatch and exit the trade with a loss. If we're wrong, I hope it happens fast! The sooner it happens, the cheaper the loss :)
I'll be looking to sell the spread for a profit when I can collect a $30 credit for the entire spread. That would be a tripling of my money and would represent a capture of half of the maximum possible profit available in this trade without having to hold it all the way into February expiration. That's a good tradeoff in my book.
And to round out our Thanksgiving Pairing, I offer you this chart in Cheniere Energy $LNG:
I called this a "T-Rex" pattern. JC called it a "Schnauzer" pattern. Whatever you want to call it, we're betting this pattern resolves higher.
[caption id="attachment_175937" align="alignnone" width="639"]
ht: @WillieDelwiche[/caption]
One quick look at the trend in implied volatility priced into these options revealed that we want to be selling some premium here:
Of course, this got JC excited about the possibility of putting a "riskeee" on. And upon looking into the options chain, I was pleased to see that we could purchase 25 delta long calls (my sweet spot for bullish call plays) and finance this purchase by selling puts at a significant support (former resistance) level.
Here's the Play for $LNG:
I like an $LNG June 90/130 Bullish Risk Reversal for an approximately 25 cents net credit. This means I'll be naked short the 90 puts and long an equal amount of 130 calls. The two legs combined should yield a small net credit. I won't get too hung up on the size of the credit (not what we're playing for), but I would prefer it to be a credit rather than a debit.
I go into greater detail on how I manage Risk Reversal spreads here, please give it a read.
My goal in this trade is ultimately to gain a free ride on half of my long calls position. If $LNG continues to trend higher, then when I can sell half of my long calls for a rich enough premium in order to pay for the covering (closing) of my entire short puts position, I will do so. (For example, sell one call for $6.00 and use those proceeds to purchase two puts for $3.00 each). If I can do this, then I'll have literally ZERO risk in any of my risk capital. At this point, I'll just hold those remaining long calls all the way into June expiration and shoot for the moon!
While my short puts are at the 90 strike, I'll be leaning against the $95 level as my Uncle Point. If $LNG sees any close below $95 per share, that will be my signal that I'm offsides on this trade and I'll want to exit quickly. And this is important, considering we'll have theoretically unlimited risk in those naked short puts.
If you have any questions on this trade, please send them here.
JC and I will be discussing these two trades today live on a twitter spaces livestream, at approximately 2pm ET. Tune in!
ASO subscribers, if you missed last week’s live Jam Session, you can catch it here.
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! Or give us a call to learn more: 323-421-7910