[Options] What if Everyone is Wrong?
The team mulled over this question during our morning meeting today, and we kicked around some ideas of what would be the best underlying vehicle to purchase way out-of-the-money call options in as a cheap, risk-defined way to participate. We decided the big indexes ($QQQ and $SPY) were too exposed to tech to be a viable option. The Technology sector has been a laggard and we're not comfortable making a bet that tech will lead the next bull rally. JC thought buying $IWM would be "too cute" (his words).
As a team, we zeroed in on either the Financials ($XLF) or the Industrials ($XLI) as being the likeliest leaders of a bearish sentiment unwind that sees investors scrambling to get reinvested into a rising market. These sectors are currently among the relative strength leaders and leaders are likely to continue leading. Here's how the $XLI chart looks:
The key thing here that we want to accomplish is we don't want to risk too much capital, but we want to give ourselves the opportunity to win big if we hit a long shot. JC likes to joke that this is a "YOLO trade," but really we're just trying to protect ourselves from the risk that we might be underinvested if the market screams higher before the end of this calendar year.
Here's the Play:
We're buying $XLI January 130 calls for 35 cents or cheaper. This is an "all-or-nothing" trade in terms of us willing to lose everything invested in this trade. We're treating it as a portfolio hedge and if it doesn't work, it's likely a zero. And that's ok -- it just means we'll size our position appropriately to accommodate this likelihood.
In the meantime, as is always my Best Practice when buying long calls, I'll look to sell half of my position if the calls double in value. This will remove all of my original risk from the trade and allow me to rest easy for the remainder of the duration of the trade -- come what may.
If you have any questions on this trade, please send them here.
ASO subscribers who may have missed last week's Options Jam Session 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.