[Options] The Logistics of This Trade Work

Sean McLaughlin
June 7, 2023

As the bull market in stocks continues, the lifeblood to keep the ball rolling is sector rotation.

We're already seeing some of the big caps that have driven the first leg of this run start exhibiting signs of overexertion (check out $GOOG today).

It makes sense to us that stocks further down the cap scale are going to start asserting themselves and perhaps in some cases play "catch up" to their big brothers.

Today's trade is in a cyclical name in the Logistics space.

Internally at All Star Charts, we like this setup in GXO Logistics, $GXO:

We like the rotational headwinds to swoosh this thing higher. The base going back to winter of 2022 is now complete and we recently saw a successful retest which sets us up with a great risk management level to lean against.

Let's go!

Here's the Play:

I like buying a January $GXO 60/75 Bull Call Spread for approximately $5.25 debit. This means I'll be long the 60 calls and short an equal amount of 75 calls. And this debit I pay today is the most I can possibly lose in a worst-case scenario:

Of course, if I can help it, I'll exit this trade for smaller than a total loss. To aid me in that effort, I'll be leaning against the $57.50 level for my stop loss level. If we see $GXO close below 57.50 at any time during my hold, then I'll look to exit and salvage whatever is left of the premium in this trade.

Early or wrong is the same thing to me and I'll want out.

If $GXO follows through to the upside as we expect it to, then I'll be looking to take profits on this spread when I can sell it for $10.50. This would represent a doubling of my invested capital, without having to hold the risk all the way until January. Holding out for any more exposes me to a diminishing return-to-risk trade and I don't like that. I'd rather take the "easy" profit early and move on to the next great idea.

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.

 

Filed Under