[Options] Seeding the Crops For Growth

Sean McLaughlin
February 9, 2022

To quote Steve Strazza: "When commodity stocks go, they go!"

This pretty much sums up the talk we had this morning when coming up with today's trade idea.

We were looking across the strongest sectors and hunting for opportunities to get involved. One challenge we were having is many of the stocks we liked had either already had a big move and we'd be chasing, earnings were on deck in less than a week, or the options chains were too thin for us to get good fills.

Finally, after some searching, we found a name that made sense. And it was one I wasn't familiar with.

Here's a weekly candle chart of agricultural & chemical manufacturer Corteva $CTVA:

This stock came public in 2019 and immediately based for the better part of a year. Then in late 2020 it finally saw it's first real bull run. And since May of 2021, $CTVA has paused assent, building another base.

This monthly chart shows it more clearly:

When viewing the action in this context, it appears to us that the next major leg higher is just getting underway.

Thankfully, Corteva has already announced their most recent quarterly earnings (the market responded favorably), and the implied volatility hangover from that binary event has receded, offering us attractive prices to get involved with long calls.

Here's the Play:

We like buying $CTVA September 60 strike calls for no more than $1.80 per contract, preferably less. These calls sport an approximately 25 delta (my sweet spot for buying long calls) which gives us a nice mix of affordability and leverage if we get this one right.

As long as $CTVA can hold above $49 per share, then we'll continue holding these calls. Any daily closing price below $49 invalidates my thesis and I'll look to exit the trade to minimize the potential for any further losses on the next trading day.

On the upside, I'll look to sell half of my position for $3.60 per contract. This would take all of my original risk capital out of the trade, leaving me with a half position with essentially zero risk. Yeah, I'm risking open profits, but if the calls went to zero, net-net the trade would be a scratch. This is a great position to be in. I'll continue holding these calls and if we're still riding it once we get into September (expiration month), then we'll re-evaluate whether or not to continue holding.

The rule of thumb is: On Sept 1, if the calls are in-the-money (meaning: $CTVA is trading north of our $60 strike price), then I'll treat the position like a long stock position and continue holding until it breaks a 3-5 day low. On the other hand, if the stock is below our strike price, then I'll close it for whatever I can get (if anything) as theta is the enemy of out-of-the-money long options approaching expiration.

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

Strazza and I will be doing a livestream on twitter to walk through this trade in detail. Find it on my twitter stream any time after Noon ET today.

ASO subscribers who missed last week’s live Jam Session can catch it here.

~ @chicagosean

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: