[Options] Chew On This Trade!

Sean McLaughlin
December 27, 2023

Today's trade is in a name that has caught the fancy of aggressive short-sellers. As of the latest update, approximately 25% of the outstanding shares in Chewy Inc $CHWY are held in short positions.

Now, I'm sure the short-sellers have done their homework and have very compelling reasons to be short. I will concede their points to them.

However, short-sellers are human too. And being human means they can also be wrong. And if they are wrong, the only way they can make the losses stop is to buy stock to cover their short positions. If 25% of the float has to cover their shorts, that sets up the possibility of a wildfire to the upside.

We're here for that possibility.

Check out this chart:


Are we seeing a failed breakdown? If so, one thing we love to say around here is: "from failed moves come fast moves." And a high short float can really add some juice to that fast move.

Of course, the New Year is right around the corner, and there is the possibility for shenanigans. As such, we're going to put on an aggressive bet, but with a short-term hedge to protect against any possible funny business.

Here's the Play:

I like entering a modified bullish Risk Reversal in $CHWY. I'm going to sell the June 22.50 puts and buy an equal amount of June 30 calls. But the unusual wrinkle I'm adding is to additionally purchase an equal amount of January (monthly) 21-strike puts. All-in, these three legs should net out to approximately zero net cost.

I'm adding the long January puts to define our risk in the short term. I'm of the mind that if we're wrong, we're going to be wrong quickly. And these puts will help to keep any losses in check.

For risk management, I'm eyeing the 21.50 level. Any close below $21.50 is my signal that we're wrong and I'll look to take the entire position off.

If/when $CHWY gets to $30, I'll sell half of my calls and close all the puts to book some gains and let the rest ride into June.

If $CHWY languishes and stays between our short 22.50 strike and our long 30 strike, then all options will expire worthless and we'll walk away unharmed.

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

If you missed last week’s video Jam Session, you can catch a replay on Stock Market TV.

~ @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: 323-421-7910.

 

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