[Options] The People Gotta Eat!
Today's blog title was uttered during this morning's internal Analyst meeting by our Commodities Analyst Ian Culley.
He drew our attention to Wheat futures and the corresponding ETF in the stock market $WEAT and loves this setup for a long trade. We're not fundamentalists here, but it's hard not to be aware of the macro economic backdrop with inflation on the rise and food shortages looming in Europe with a cold winter on the horizon. This combined with the technical picture sets up a really nice high reward versus low-risk trading opportunity.
Here's the chart for $WEAT:
This chart is a little stale, it doesn't show today's trading action which thrust $WEAT above that resistance line, trading almost up to $9.00 today before peeling back, giving us a better entry.
To take advantage of this setup, we're going to keep it simple and define our risk with straight long calls.
Here's the Play:
We like buying January 10-strike calls for approximately 55 cents. If $WEAT makes a run back up towards that consolidation zone in the $11-12 area, then these calls will pay off nicely -- perhaps a 4-5x return on our invested capital.
The most we can lose in this trade is the 55 cents in premium we pay upfront. We'll size our position assuming that if we're wrong we'll lose 100%. But we'll keep an eye on the $7.80 level for risk management. If $WEAT closes below $7.80 then we're likely wrong in this trade and will look to exit if there's any premium left in the options to salvage.
On the positive side, if/when this trade starts working for us, I'll look to sell half of my position if I've doubled my money. Doing this will remove all of my original risk capital from the trade, leaving me a #FreeRide on the remainder.
The potential for free unlimited upside? I'd eat that!!
If you have any questions on this trade, please send them here.
ASO subscribers who missed last week’s live video Jam Session where we review activity in our options portfolio from the past week 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.