Yesterday, the All Star Charts team published a bullish piece on the New York Times $NYT, suggesting the stock has the potential to leap as much as 50% from current prices. For those of us interested in leveraging this bullish idea using options, you’ll like what I have in store for you today.
The All Star take:
Momentum is in a bullish regime. The Relative Strength is there. We’re pressing up against 14-year highs. If the U.S. Stock Market is gonna go, this one is likely to shine.
Good enough for me.
However, volatilities priced in to $NYT options are a bit elevated right now, making me shy away from a straight long calls buy. So we’re going to get creative and let the market pay for our action.
Here’s the Play:
We’re going to buy a $NYT January 30/40 Risk Reversal. This means we’ll be buying January 40 calls and financing this purchase with the short sale of an equal amount of January 30 puts. I expect this trade to net out to a small debit of around 5-10 cents based on Tuesday’s closing prices. I’m not too concerned about nailing a specific debit cost, I’m mostly just interested in having the puts pay for most of the calls cost. If it ends up costing me 25 cents, so be it.
The risk profile of the trade looks like this:
Once this trade is on, I’ll be keeping my eye on the 31.50 level that has acted as support since March. If $NYT closes below $31.50 at any time, I’ll close the entire trade down, take my manageable loss and walk away. This position won’t necessarily be in any immediate danger, but my thesis for being long will then be busted, so no sense leaving capital (and naked puts) at risk until another setup proves itself.
If $NYT breaks out higher, I’ll look to hold this position into the low 50’s where I will then take my sizable profits. We’ve got until January, so plenty of time to let this stock work its way higher.
This position will require higher margin than most of our trades due to the naked puts. A good rule of thumb I use when sizing Risk Reversal positions is to imagine the worst case scenario where the stock craters and I get assigned long stock at my short puts strike. If that were the case, I’d want my now long stock position cost to represent no more than 10% of my portfolio equity.
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