[Options] Looking for a $NUE Opportunity.
And here is the implied volatility trend for $NUE options:
The team is pretty bullish on NUE over the next 4-6 months, especially since we've come back down and tested the previous highs around the $125 area -- and they've held pretty well so far.
So we like the idea of using this pullback, and the elevated put premiums, to jump into a long position at favorable prices/strikes.
Here's the play:
I like a $NUE October 110/155 Bullish Risk Reversal for any net credit I can receive, no matter how small. This means I'll be naked short the 110 puts and long an equal amount of the 155 calls.
Essentially, we are selling the naked puts to finance the purchase of the long calls. I don't want any net out-of-pocket expense on this trade. Preferably, I earn a small net credit. The size of the credit is immaterial. It is not the win we're playing for. But I like knowing that if $NUE does nothing from here, worst-case scenario is both options expire worthless and I get to keep the small net credit.
From a risk management standpoint, I'll be leaning against the $115 level. If this trade isn't going to work, I have a feeling we'll find out pretty quickly. Right now, the rising 50-day moving average has plotted a smidge above $115 (see in the $NUE chart above). So if that level doesn't hold, we're probably headed for trouble. Therefore, any close below 115 is our signal to completely exit the trade to protect ourselves against any further losses.
In the meantime, if $NUE begins to resume it's upward momentum and target the previous high around $140, I'll be looking for any opportunity to sell half of my calls whenever those proceeds can pay for completely closing ALL of my naked short puts. So for every one call I sell, I want to be able to close two puts and I want the net result to be a scratch or a net credit. If I'm successful in accomplishing this, then I'll be left holding my remaining half calls position at a net-zero cost. In fact, I'll have a small built-in credit. Therefore, it's a NO-LOSE situation to participate in potentially unlimited gains until October expiration! That's my kind of position!
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