[Options] Sticking the Landing

Sean McLaughlin
January 12, 2022

The V-Bottom is back! (At least as of the time of this writing). What a bounce stocks have seen off Monday's nadir.

Have we stuck the landing and its back to new all-time highs for the broader indexes soon?

Time will tell. But the short term bet we're making today is that Monday's low will hold at least for a couple weeks. And today's trade in a leading stock in a leading sector reflects this stance. When in doubt, stick with the strongest names in the strongest sectors, right?

So that's brings us to Nvidia $NVDA.

This stock has been nothing but a stalwart over the past year, nearly tripling in value from March to late November. So it's no surprise that we'd see a bit of a pullback at some point after that run:

Now, we're not making the bet that $NVDA is going to race back to new highs before February expiration (though it certainly could!). Instead, we're making a tactical bet for what we feel like is a high probability setup with a strong chance of winning.

With a significant nearby low to lean against, and the tailwind of high implied volatility to sell premium into, I like our chances with a Bull Put Spread.

Here's the Play:

I like selling a $NVDA February 260/240 Bull Put spread for an approximately $4.75 credit. This means we're in the regular February monthly expiration options and we're short the 260 puts and long an equal amount of 240 puts to define our risk.

The PnL Graph for the trade looks like this:

The bet we're making is that this week's hammer low print on Monday is going to act as near-term support. And as long as that level holds, we should have no trouble profiting in this trade.

I'll look to close it for a profit when I can buy it back for 50% of the credit I collected at trade initiation. So in this case, I'll be leaving a resting GTC order to close this spread for a $2.35 debit. If $NVDA continues bouncing higher, we should be able to hit our profit target relatively quickly. If it chops around, it may take a little longer. Either way, I don't plan on holding this spread all the way until February expiration. I'll either exit at my profit target, or if $NVDA sees a close below $260 per share, then that'll be my signal to exit the trade win or (likely) lose.

A close below $260 invalidates our "bounce" thesis and therefore I'm out. No questions asked.

JC and I will be doing a live twitter stream discussing this trade around 1:30PT ET. Tune in on my twitter stream.

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

ASO subscribers who missed last week’s live video 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.

 

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