[Options] Risking Capital in a Risk Manager.

Sean McLaughlin
December 15, 2021

During this morning's internal strategy session with the All Star Charts team, one theme we hit upon was that many of the stocks we want to be long have already had big runs making it irresponsible to get long here, and all the stocks we want to get short have already had big recent legs down and we don't want to chase those either!

I mean, to give you an idea, just look at the charts of healthcare ETF $XLV which is made up of many small-cap names, and $IWM -- the Russell 2000 small-cap index -- both are going in completely opposite directions! That pretty much sums up the predicament we find ourselves in right now.

It's a messy market out there!

So, naturally, we should look at companies that manage risk as their business!

Here's a chart of Marsh & McLennan Companies $MMC that JC loves:

It's been a great runner off the lows in March 2020 and with the rotation we're seeing in the markets into more defensive sectors, we expect that will continue to play well with $MMC in the coming months.

Options volatility has been rising a bit recently making a straight long calls buy here a little less advantageous. So, we're going to play our bullish thesis with a Bull Call Spread.

Here's the Play:

I like buying a $MMC April 170/200 Bull Call Spread for around a $7.50 debit all in. This means I'll be long the 170 calls and short an equal amount of 200 calls. And this debit I pay upfront represents the most I can lose in this trade if it doesn't work out.

Selling the out-of-the-money calls caps our upside, but it gives us a higher chance of profitability in the trade.

My game plan for winning in this trade will be to exit the spread for a $19.00 credit if I get an opportunity to do so. This would mean I've captured 50% of the maximum possible gain available in this trade without holding it all the way until April expiration. It would also be more than a doubling of my invested capital. Nice!

On the downside, if $MMC can't hold above $162 per share, that will be my signal to exit. Any close below 162 tells me that we're early or wrong in the trade and I'll look to close the trade out early the next trading day to eliminate the possibility of any further losses. If we're wrong, I hope we're wrong quickly. The sooner the fail, the less of a sting we'll suffer. Of course, we already know our maximum risk (the debit we pay at entry) and we're good with the possibility that it could happen.

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

JC & I will be livestreaming on twitter later today after the market closes to discuss this trade. Join us!

ASO subscribers who missed last week’s live Jam Session can catch it 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! Or give us a call to learn more: 323-421-7991

Check out our new Options Made Easy course!

Filed Under