[Options] Zoom Out, Drop In.

Sean McLaughlin
March 30, 2022

JC had a great blog post out this week about zooming out. In a nutshell, he was reminding us that zooming out and looking at price action from a wider lens often makes the present murky waters look suddenly clear. It's easy to get distracted by the day-to-day price action and to look at only the last few months of daily charts and conclude that a stock or an index is in one sloppy clusterjam of price action.

But when you look at that same price action, instead with weekly or monthly candles, the more recent ones will often look like insignificant noise in an otherwise smoothly trending longer term pattern.

In the post referenced above, JC shared several current examples of instruments that look sloppy recently, but the bigger picture is still sitting pretty.

One of the stocks he mentioned is currently giving us a nice pullback to get a nice entry on.

Here's a chart he shared for Cameco Corp $CCJ:

When viewed in this context, there seems to be a reasonable shot $CCJ could make a run at that $44 level some time this calendar year!

Looking at the options chains for $CCJ, if I want to make a bullish bet here, I don't think buying straight calls here is the move. The premium in out-of-the-money call options is a little rich for my taste. But purchasing a call spread will help neutralize the effect of the expensive premiums.

Here's the Play:

I like a $CCJ September 30/40 Bull Call Spread for an approximately $2.20 debit. This means I'll be long the 30 calls and short an equal amount of 40 calls for a net debit which represents the most I can lose in this trade:

While my risk is defined (I can't lose more than the debit I pay up front), I'll look to close this position to salvage whatever is left in the value of this spread if $CCJ closes below $26 per share. At this point, the stock will be moving in the wrong direction and I'm not going to argue with price. Price always wins. Close and move on.

Meanwhile, if CCJ follows through toward our upside price target at any time from now through this summer, I'll be leaving a resting order to close the spread down when I can capture 50% of the maximum possible profit. So in this case, my limit order to close will be working at around $6.10 for the entire spread, good 'til canceled. If my profit target is met, this would be a near tripling of my invested capital. Nice.

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

ASO subscribers who missed last week’s live Jam Session, you 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.

Filed Under