Today's trade has me thinking of this classic corny joke from Pulp Fiction:
One of the strongest sectors out there right now is banking. Particularly regional banks. And as we head into year-end, the catch-up trade is real and money managers chasing alpha are looking into some beaten-up names in the regional banks to get the juice they need to make their year.
This plays in favor of today's trade which has a yawning gap to fill which is likely to overshoot on the upside if a broader market melt-up is in the cards (narrator: we think it is).
During our Analyst meeting this morning, the idea I brought to the table was a long bet in Cloudflare $NET.
I like that it's just starting to break above a level of resistance that has been in place for the better part of two years.
My initial thought was to make a short-term tactical bet on a run to $100, but then I noticed that in the June options expiration series, the highest strike available is $110. Clearly the CBOE doesn't read All Star Charts research and our belief that this stock could touch $130 per share over the next 3-6 months!
Check out this chart of $NET and you'll see a move to $130 doesn't seem that outlandish at all:
If a new leg of the bull market is just getting started, positioning in the leaders should pay off well. With this in mind, we're going to get involved in a name everyone knows and uses -- Amazon. The odds are good that Amazon will deliver profits to those well-positioned for a run.
Implied volatility in the options affords us the luxury to go further out in time for our thesis to play out, but we're going to cap our upside both because we think there will be some upside resistance that comes into play and also to increase our odds of success.
Today, a "darling" company in the media thanks to new obesity drugs and other good news hitting the media airwaves is selling off. In fact, its having its worst day relative to its sector peers in many years.
Someone forgot to tell Eli Lilly $LLY that a new bull market run may recently have gotten under way. Of course, it was already way ahead of the game. In fact, look at this long-term chart:
These aren't usually the trends I like to take the other side of.
But perhaps it's gone on a little too long and it's ready to pause and retrace?
This stock could get cut in half and the long-term trend would still be intact.
When we zoom in a little closer, we see a very notable (and sizeable) gap from this summer where the stock jumped from $450 per share to north of $500 per share overnight:
In the 16 months since we launched the All Star Charts Paid-to-Play options service, subscribers have enjoyed positive risk-adjusted returns with far less volatility and smaller drawdowns than a simple investment in the S&P 500. They've also learned how to execute our strategies to produce incredible outperformance versus comparable ETF benchmarks that seek to sell options premium.
But one thing we can all agree on is that we wish it could be simpler.
In an effort to simplify your trading lives, we'll begin presenting our daily trades and open positions in an easier format!
Instead of receiving numerous emails throughout the day alerting you to actions in the portfolio and producing repetitive videos that few of you are watching (we have the viewership data!), we're going to send you ONE DAILY DIGEST that packs far more punch.
The market is speaking. It wants higher prices. The year-end, seasonality-driven rally may be taking hold. Or it may be something else? It doesn't really matter. We only follow price, and right now prices in certain stocks are pointing us to start taking some directional bets.
Today's trade is in an industry-disrupting name that has already had an impressive move over the past week that we feel is only the beginning of a much larger drive.
Check out this chart of everyone's favorite ride-hailing service Uber Technologies $UBER:
If these were the first three lines people read in a book about profitable trading, odds are many wouldn’t make it past the first page.
It’s natural for humans to want to avoid pain, to choose the easy path, and to put in the least amount of work for the maximum amount of output. Business schools call this “efficiency.”
And you can find plenty of examples in the real world where this is good, solid advice.
Trading is not one of those places.
The hard truth is that 80-90% of people who attempt trading in any capacity, frequency, or timeframe eventually end up net losers.
So why would we want to choose to do what the average trader is doing? The average trader is a loser. The stats don’t lie. Don’t make this fact worse by denying it.
JC wanted to put this trade on yesterday (I think he did), but I wanted to wait until after the Fed announcement juuuuuust in case. You never know what shenanigans may take place on binary event risk days.
Well, my patience was rewarded. I am able to put the same delta-neutral credit spread on today at the same premiums that were offered yesterday, but now I don't have to sweat the fed.
Consumer Staples stocks, as a sector, have been displaying relatively high implied volatility in their options and so I wanted a name from this space that was stuck in a range.
The candidate that we all agreed on was Proctor & Gamble $PG:
Microsoft $MSFT announced earnings last night, and while the stock gapped higher at the open, it has spent most of the morning giving back much of those gains.
It looks to me that the prior trading range for $MSFT is acting as a powerful magnet. And the broader market weakness sure is helping things along in that regard.
At the end of the day, the market is telling us that the latest earnings report hasn't really changed any minds of Microsoft bulls or bears, and therefore, we're likely to remain stuck in this range until some new information reveals itself:
We options traders can benefit from this scenario.
Today's trade is a bet on stocks making a run back towards all-time highs over the next 3-6 months. If you don't believe that's in the cards for stocks, then this trade isn't for you.
Unfortunately, its also a trade in a stock with a high trading price, so the margin requirement may perhaps be a bit onerous for some.
If you're in either camp, there's no shame in skipping this trade. It's not for everyone.
If I haven't scared you off yet, then keep reading...
There are no free lunches on Wall Street and certainly not in options trading.
It might be sexy to tell people that we’re “options premium sellers” and suggest that all we do is sell naked options that expire worthless – while keeping all the premiums for ourselves. Easy peasy.
But we know that’s not really how it works.
There’s a risk in holding naked short options. Our brokerage houses are keenly aware of these risks – and that’s why they require us to post margin in order to hold these positions. The margin protects the house. Mostly their house, but our houses too.
When a short options position goes against us, our brokerages need to ensure we have adequate buying power in our accounts to close the position and prevent further losses.
But just because we need to post a certain amount of dollars to hold a position doesn’t mean we should calculate our returns off of that number. That number doesn’t mean anything other than the fact that it’s the amount the house needs in order to be comfortable with us being naked short.
