The overwhelming majority of options trades we put on at All Star Options tend to be structured in a way to participate in moves that should take place within 2-8 months. The shorter duration trades are usually trades where we are net short premium (naked puts, short strangles, bear call spreads, etc), whereas our longer-term trades tend to be ones where we are net long premium at attractive prices (in volatility terms).
Today, we're doing something we've never done here. We're making a long-term bet utilizing LEAP options.
"LEAP" is an acronym for Long-Term Equity Anticipation Securities. Essentially, this means we're taking a position in options that have greater than a year until expiration.
If you were on the @allstarcharts twitter SPACES chat this morning (every trading day at 11:30ET), you heard us riffing on today's trade.
I was chatting with an All Star Options member this morning and he asked me a very insightful question:
“Sean, I’d be very interested in your thoughts on why you choose not to make a trade in certain setups?”
He went on to elaborate that he’d like to know the things I look for that are possible “red flags” that prevent me from pulling the trigger in otherwise good stock setups.
The overwhelming majority of trades I put on for All Star Options subscribers are in stocks that the All Star Charts team has identified as stocks we want to be in (either long or short).
The most common reason I won’t pull the trigger is
...And trading volumes are particularly good for the trading exchanges that make it all happen!
With the markets whipsawing back and forth to start the year and trading volumes rising all over the place, the exchanges that extract fees for every stock share, futures contract, or options contract that trade at their venues are seeing their revenues rise.
Couple this with some strong relative performance in the stocks, and we're setup for a very nice bullish move -- should we get it.
Today's trade is in a one such name that facilitates all kinds of trading.
For anyone that joined me, JC, and Strazza on the Twitter Spaces this morning, you heard us scratching our heads on what to trade next.
In this sloppy tape, there just aren't any real compelling opportunities we can find worth getting aggressive with. When the best idea on the table is "buy $QQQ above 350," then you know we're struggling for good directional bets.
But that's ok. We options traders don't just need directional markets to make money. We can take advantage of sideways action too!
And that's what we're going to continue to do with today's trade.
We're continuing the theme of monitoring relative strength in this tricky tape. The next leaders if/when a bull market resumes are revealing themselves now. Are you paying attention?
One of the names that is holding up relatively well recently, and one that also appears in our recent Follow the Flow report is Qualcomm $QCOM.
This week when the broader indexes printed their recent lows, $QCOM tested the low of a the range coming out of its breakaway gap last November and held. This is important.
I joined JC and Strazza today during their daily Twitter Spaces brainstorm and we got to kicking around ideas of how we want to play this market.
When prompted, I voiced my opinion that anything we do in the options space right here should involve being sellers of options. Premiums are elevated pretty much across the board. So whatever we do, let's get a tailwind to help us along. And for me right now, that tailwind is mean-reversion in options premiums.
We never know when premiums will trend back to normal, but we do know that they always eventually do. So we must position ourselves accordingly.
After kicking around a few ideas, collectively we agreed it's best to err in a household name that is unlikely to kill us if we get it wrong.
I wrote that headline to save you the trouble of turning on your TV or following your favorite fear mongerer online. You're welcome.
Unless you've been lost in the wilderness for the last two weeks (not a bad place to have been, btw), then you no doubt know the bulls are currently in trouble.
The fake-out breakout in the Russell 2000 $IWM has turned into a full-blown route, the S&P 500 is testing levels last seen at the end of September and early October, and $VIX has printed the highest levels of the year. There's not a lot to be optimistic about right now -- especially if you're holding a bunch of long positions that are at or near stop-out levels like I am.
I got stopped out of a bunch of positions last week, two today (a long call spread in $STX and a short strangle in $XLK), and a couple more might get exited tomorrow if things don't stabilize here.
Into this maelstrom, we've been dialing back putting on new positions. During last week's holiday-shortened trading week, we only put one new position on -- and that may have been one too many ;)
While the US Stock Market has pulled back a bit this week, we've seen $VIX pop its head back up above 23 and print its highest levels in a month. And this isn't entirely surprising given that the highly watched Russell 2000 $IWM has been struggling to hold on to its yearlong support level of around 210.
But has the "all-clear" signal for the bears fired? Is it time to pile in short? We're not convinced yet.
Meanwhile, we've seen some pullbacks in semiconductors stocks we own ($NVDA and $MU most notably) that may get us stopped out soon. But when we zoom out to the bigger picture, as seen via the $SMH Semiconductors ETF, we see that we've been in a range for quite some time now. And even if we'd lose the support of this recent consolidation range at around 290, we can expect the 270-275 zone to offer a new level of support:
The V-Bottom is back! (At least as of the time of this writing). What a bounce stocks have seen off Monday's nadir.
Have we stuck the landing and its back to new all-time highs for the broader indexes soon?
Time will tell. But the short term bet we're making today is that Monday's low will hold at least for a couple weeks. And today's trade in a leading stock in a leading sector reflects this stance. When in doubt, stick with the strongest names in the strongest sectors, right?
On days and weeks like this, I love to look for opportunities to sell premium into the elevated implied volatilities we're seeing rising across the board. With $VIX back up above 20, you'd think there's been plenty to pick from.
Problem is, I haven't found any delta-neutral setups that look good today. Too many busted charts on the most liquid ETFs makes finding support levels that both make sense and offer enough premium to make it worthwhile from a safety standpoint hard to find.
So, as always, I reached out to my team from some other ideas.
We've been asking the question: "how bad can things be if we're seeing this kind of relative and absolute strength in the banking and financial sectors?"
Steve Strazza served up an interesting bullish play that is either a gift of a pullback, or we're buying the top. If you're market the bullish, then you gotta believe this idea has merit.
The first two days of this week completed a nearly text book Santa Claus rally. Then on Wednesday, it appears the Fed may have stolen his Sleigh and now his reindeer have no idea which way to steer!
This indecision has played out in the options market by raising the risk premiums being asked across a wide sector of index ETFs.
At times like this, I like to go hunting for premium-selling opportunities. And I've got one teed up so lets get to it!
If this blog post was served up to you when you were searching for the latest scare porn on the omicron covid pandemic, I'm sorry to disappoint. But if you'd like to draw a correlation between the rising omicron cases and rising share prices of Micron technology stock --- you wouldn't be the first person to commit a #ChartCrime in service of a good story.
Micron Technology $MU is a stock that's been on my radar since the team published the Under the Hood report around Christmas highlighting the setup.
