[Options] Tis the Season?

Sean McLaughlin
November 4, 2020

Depending on where you're located, the month of November means many of you are looking forward to your first snow falls of the season. Were I live here in Colorado, we've already had two snow storms -- the first one on the day after Labor Day!! Don't feel sorry for me though, we love it. And with all the wildfires Colorado has had recently, it was badly needed.

With snow on my mind, it feels fitting today's trade idea is also related to snow, if in name only.

JC and I have been talking back and forth about recent IPO Snowflake Inc $SNOW over the past week or so. The stock came public on September 16th, found support at $208 per share and now is showing signs of moving towards the upper end of it range.

But what really has me interested is the juicy premium currently priced in December 200 strike puts. As I type this, they are bid $4.20 per contract with $SNOW trading at $270 per share. That is a lot of room to be wrong!

So we're going to put on a trade that is mildly bullish, but gives us plenty of room to make money even if the stock declines from here.

Here's the Play:

I'm selling $SNOW December 200 strike puts naked for approximately $4.20 per contract. There is theoretically unlimited risk in this position so I will be very conservative in my position sizing. A good rule of thumb for anyone interested in a trade like this is to size your position such that if the naked short puts were to go in the money ($SNOW trades below $200/sh) and there is a risk of getting assigned shares (meaning we become owners of 100 shares of stock per each short contract held), the total dollar position of the stock equals no more than 10% of your trading equity.

So for example, if I short one contract and I get assigned, I'll be the proud owner of 100 shares of $SNOW at a cost of $200/share or a $20,000 investment.

If you're trading with an account with less than $200K in equity, it's totally ok to skip this trade. Or, you can choose to be far more aggressive with your position management.

For me, I'll look to close the trade if $SNOW breaks below $225 per share. That's my Uncle point. Win or lose, I'll close the trade. At that point, the charts will be clearly telling me that trend is not my friend.

If every thing is kosher and the stock rises, or only suffers a mild pullback, I'll look to cover the short puts for half of what I collected at trade initiation. This means if I get $4.20 for my sale, I'll look to buy them back for $2.10 to close the trade and book the profit. I'm not looking to squeeze every nickel out of this trade. It's not worth the worry.

If you have any questions on this trade, ASO subscribers can email me here.

~ @chicagosean

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