[Options] Getting Long My Favorite Kind of Setup

Sean McLaughlin
December 15, 2022

One of the great things about options trading is the flexibility afforded to traders to combine multiple contracts, of the same or differing expirations, long or short, to express unique ways to participate in whatever thesis we might have about the future direction or opportunity the market is offering.

Depending on the type of trader and person we are, this menu of choices available either incredibly excites us, or it overwhelms us with analysis paralysis.

I usually fall into the first camp, excited about the choices. But I'll admit to sometimes feeling myself unable to make a confident strategy decision.

So when opportunities like today's trade come along, I get pumped. This is because today's trade is my favorite kind of setup. Both for the potential of the move and the simplicity in how we can play it!

Check out this chart of Deere & Co. $DE:

Following earnings a few weeks ago, $DE gapped higher, just below all-time highs, and it has held there pretty convincingly -- even during the recent trading slop we've experienced around the latest market-moving CPI (inflation) release and FOMC (interest rates) announcement.

And correspondingly, the implied volatility which reflects the cost of options premiums in $DE options has fallen to the lows of the year:

New All-Time highs + cheap vol = Long Calls!

I love buying stocks that are at or new all-time highs. These are stocks that have no overhead supply ready to be dropped on the market. There are no bagholders. Everyone who is long the stock (for a trade or an investment) is making money and probably in no hurry to take profits. And any unfortunate souls who are short will have to buy to cover their positions as the stock moves higher, adding more fuel for a move.

And with options volatility so low, this means the cost of buying long calls is the cheapest its been all year and it affords us the ability to go further out in time to fully take advantage of any exploration into new all-time highs territory.

So that's exactly what we're going to do.

Here's the Play:

I like buying $DE June 500-strike calls for approximately $15.25. This premium we pay up front is the absolute most we can lose if we're dead wrong. But we'll look to exit the position to minimize the potential for any larger losses if we see $DE close below $420 per share at any time during our hold.

In the meantime, as I often do with long call positions, I'll look to sell half of my position if/when the value of the calls doubles from here. Selling half at a double pays me back my original invested capital, leaving me with a half position that I'm holding for a net zero cost! The potential of unlimited gains for zero cost? Calculate that rate of return! LOL

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.

~ @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.

 

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