[Options] Nine Months to Get "High"
Here's the chart of Grow Generation $GRWG:
When you zoom out, this chart takes a little of the sting off the pummeling the bulls have suffered over the past year, plus. But make no mistake, that fall from 55 down to below 7 is a nearly 90% retracement. Ouch.
But its now safe to say the hot money has left this burning building.
And that gets us interested.
One observation that had my attention is that while off the highs, implied volatility is still pretty jacked in this stock:
Another thing: The stock is currently trading around $9.50 per share. And the January $7.50 strike puts -- a strike that is 21% lower from current prices -- is offering some very nice premium to sell into. And at such a low stock price, our downside is in effect "limited."
But I'm not looking at this as a premium collection play. Nope. I want to sell those puts to finance an aggressive purchase of out-of-the-money calls. Why? Well, the ASC team believes the technicals are lining up such that any pop off these recent lows could send $GRWG into the upper 20's! If that is to come to pass, then these 15 calls -- which will have cost us close to nothing -- will be big winners for us.
Here's the Play:
I like a $GRWG January 7.5/15 Bullish Risk Reversal for a small net credit. This means I'll be selling Jan 7.5-strike puts short and using those proceeds to purchase an equal amount of Jan 15 calls. Ideally, I can net out a small credit on the two legs. The amount of the net credit isn't all that important - looks like we can get about 5 cents right now.
Here's how the PnL graph of this trade appears:
Ignore the prices listed in the image above, those would be the prices if we sold the puts on the bid and bought the calls on the offer. We won't be doing that. If we get anywhere near the mid-prices on both contracts, it should net out to a small credit or small debit.
We've got a lot of time for our bullish thesis to materialize. But for risk management purposes, I'll be leaning against January's low print of $6.74 as my line in the sand. Any close below that previous low invalidates this trade and I'll look to close the entire position down to eliminate the risk of any further losses.
If we get the follow-thru to the upside we're looking for, then I'll look for any opportunity to sell half of my long calls to pay for the closing of the entire short puts positions. As an example, consider the PnL graph you see above. At position initiation I'm selling 6 puts and buying 6 calls. Let's say $GRWG starts moving up such that now I can sell 3 of my calls for $3.00 each ($900 credit) and buy-to-close all 6 of my short puts for $1.50 each ($900 debit)? That's a trade I'll make. My net cost to effect that trade would be zero. And then I'd be left with 3 long calls at a NET ZERO COST!
That's the goal. And if we succeed in getting that trade on, then we'll be holding this risk-free position all the way until January (assuming it doesn't break our stop loss level). We'll then revisit on January 1 to decide if we'll keep holding (if the calls are in-the-money) or exit (if the calls are out-of-the-money).
If you have any questions on this trade, please send them here.
ASO subscribers who missed last week’s live Jam Session (where we review activity in open positions) 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: 323-421-7991.