[Options] Minding the Gap

Sean McLaughlin
January 26, 2022

We're continuing the theme of monitoring relative strength in this tricky tape. The next leaders if/when a bull market resumes are revealing themselves now. Are you paying attention?

One of the names that is holding up relatively well recently, and one that also appears in our recent Follow the Flow report is Qualcomm $QCOM.

This week when the broader indexes printed their recent lows, $QCOM tested the low of a the range coming out of its breakaway gap last November and held. This is important.

As can be expected, the recent pullback has juiced the options premiums here. Adding further to the rising volatility is the fact that Qualcomm will be revealing their latest quarterly earnings report on February 2nd.

So while we want to leverage these elevated premiums to our advantage, we need to play with a defined risk trade in case earnings becomes a catalyst for $QCOM shares to give back that November gap.

We're really making two bets here: That earnings won't be a disaster, and the gap is gonna hold. And of course, if our bets are right, then theta and vol reversion will help us to our profit target.

Here's the Play:

I like a $QCOM March 165/155 Bull Put Spread for an approximately $3.50 credit. This means I'll be short the 165 puts and long an equal amount of 155 puts. My risk is defined -- the most I can lose is $6.50.

While the most I can possibly gain here is my initial $3.50 credit, I'll be leaving a resting GTC order to close this spread down when I can buy-to-close for a $1.75 debit. This Best Practice helps me profit quickly without exposing myself to too much time risk. I have no intention of holding this spread all the way until March expiration -- if I can help it. And coming out of earnings, as long as $QCOM doesn't test the rest $160 price level lows, then the value of the spread will likely move in our favor pretty quickly.

Meanwhile, $QCOM at $155 per share is the risk management level I'll be leaning against. Any closing price below $155 will be my signal to exit on the next trading day. On the day earnings are released, we're likely to see violent intraday price action. Even if $QCOM trades below 155 intraday that day, I will not take action. I will rest calmly, knowing my risks are defined. I will not be baited into making an impulsive exit that I might later regret. Defined risk affords us the time to exit on our terms.

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

ASO subscribers who missed last week’s live Jam Session can catch it here.

Catch our next one this Friday after 2pm 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! Or give us a call to learn more: 323-421-7991.

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