[Options] This One Could Rip

Sean McLaughlin
May 24, 2023

Headlines.

We all read them and they mess with our heads. It takes steadfast resolve to listen to the message of price action when everything else we read tries to trick us into doing the wrong thing.

The best way to keep ourselves level-headed when taking risks is to define that risk and trade small. There are few things more powerful than knowing with complete certainty the most I can lose, no matter what the market throws at me.

With this in mind, we're putting on a trade today in a stock that has the potential to be a real highflier if the markets stabilize and head higher following any Washington drama while limiting our risk in case we're early or wrong.

Here is a chart of $2.2B quantum computing company IONQ Inc $IONQ:

As you can see, the stock recently had a dramatic pop, which to us has declared the stock's intention and it has our attention.

We've been keeping an eye on a pullback for an entry as Steve Strazza mentioned in the latest Follow the Flow report:

The stock has spent the past year building out a massive rounding bottom formation. Starting last week, IONQ has been ripping higher, taking out a critical resistance level on the heels of earnings and the announcement of a new agreement with Amazon.

With the stock soaring over 20% today and following through on last week’s breakout, we are confident this pattern resolution is a valid one.

On a relative basis, IONQ just resolved higher from a similar base and is accelerating higher versus the overall market.

We’re buying any weakness back toward our risk level of 8.60. If we get it, we’re targeting 15.50 with a secondary target of 23 over longer timeframes.

We're getting the pullback we wanted and now it's time to step up the plate and take a swing.

Here's the Play:

I like buying an $IONQ January 10/20 Bull Call Spread for an approximately $1.85 debit. This means I'll be long the 10 calls and short an equal amount of 20 calls and this debit I pay today is the most I can lose no matter what.

The reward-to-risk in this trade is highly favorable. However, I'll look to exit the spread when I can sell it for $6.00. This would represent a more than tripling of my invested capital and a capture of a little more than 50% of the maximum possible gain. I'd rather take the profit early than hold on for more all the way into January. This is a best practice I often employ with long vertical spreads like this.

While our risk is defined by the debit we paid, I'll look to salvage whatever premium is left in this spread if $IONQ sees a closing price below $8.00 at any time during our hold. This is my signal that I'm either wrong or early and I won't be interested in sticking around to find out which. I'll just close the trade and move on.

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

ASO subscribers who missed last week’s video Jam Session where we reviewed activity in our options portfolio from the past week can catch it here.

~ @OptionsSean

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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