[Options] Big Daddy Hack
Here's a chart of TAL Education Group $TAL:
The analyst team is bullish on $TAL filling that "Monster Gap" from 2021. It is our opinion that the bullish move about 6-8 weeks ago tipped the hand of the bulls who have designs on taking this name higher. The recent shakeout is a test of the previous resistance level and offers us a great "buy the dip" entry point while leaving a clear exit point if we're wrong.
While volatility is low, offering attractive prices for out-of-the-money calls -- we're going to aggressively finance this trade by selling some nearby short puts.
Here's the Play:
I like entering a 1 x 2 Bullish Risk Reversal in May $TAL options. We're going to sell May 6 puts naked short, and use those proceeds to purchase twice as many long May 10 calls.
In this example here, I'm selling five of the May 6-strike puts and purchasing ten of the May 10-strike calls:
At current prices, this trade can be entered into for pretty close to net zero cost (+/- 5 cents). I'm not so worried about getting any exact debit or credit. I just want to keep it to as close to zero cost as possible.
Due to the fact that we're entering into naked puts here, we need to be vigilant with risk management. Thankfully, we've got a clear exit level that was printed last week in $TAL. Any closing $TAL closing price below $6 per share (our short puts strike price) is our signal to exit the trade and prevent any further losses from piling up.
Our bet is that $6 holds. If not, we won't argue with the market or our timing, we'll just exit and move on.
In the meantime, if $TAL starts going our way, I'll look for any opportunity to sell half of my long calls and use those proceeds to close all of my naked short puts. This would give me a Risk Free bullish bet for the remainder of time left until May expiration.
For example, if the calls trade up to 50 cents per contract, and the puts are trading at 45 cents per contract, I'll then sell half of my calls and spend that cash flow on closing all of the short puts. The exact prices will change, depending on the timing. Maybe I sell half the calls for 40 cents and close the puts for 35? -- regardless, the end result is the same: zero net cost for remaining long calls.
If this trade works, it might be a big one!
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 reviewed 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.