If you like action, then you've enjoyed this week so far.
The markets looked ho-hum for most of the day Monday. But then the last hour offered us a harbinger of things to come. And Tuesday's gap and crap confirmed the bulls' worst fears.
But as usual, bears might have gotten a bit ahead of themselves as today's action seems to suggest.
Either way, the indecision and confusion in the markets is resulting in elevated options premiums -- which is what we can expect. As options players, this puts us in the position of wanting to look for opportunities to take the other side of this fear by getting short these elevated premiums.
Scanning my list of my liquid ETFs, I've found a great candidate to sell premium in.
The price action in the broader stock market during the second half of last week and continuing into this morning suggests this is a strong possibility. Meanwhile, the action in the dollar and metals space offers a sneaky way to play this shift.
Sometimes, we play 3D chess to look for opportunities in one place when everyone else is distracted by the headline-grabbing moves.
The ASC team did their monthly conference call this week, where they rip though a million charts and highlight the things we need to pay attention to -- the trends, the divergences, and particular setups in stocks that we like.
The blizzard of information they throw at us can be overwhelming at times. This is why you come to me to cull through it all and find my favorite setups that can be played with options.
Today's pick comes out of that call and its focused on the small business side of things.
With volatility rising this week, I've been on the hunt for opportunities to "safely" sell some premium.
While there is no such thing as a sure bet in the markets, selling elevated premium in rangebound securities is one of the closest things we will find to that idea.
I was chatting with my partner Steve Strazza this morning and when I told him what I was looking for, he immediately responded: "Oh -- you want $IWM. That is the very definition of sideways action."
Sure enough, he's right. And upon closer inspection of the options chains, there is some good premium offered for sale if we're willing to go a little further out in time.
The game plan in the markets over the past several quarters has been to buy the dip whenever the S&P 500 approached its 50-day moving average of prices.
So naturally, I spent the weekend thinking about some long trades that I wanted to put on today -- thinking the same old game plan was likely to continue.
Then I woke up to S&P Futures showing the largest gap down opening we've seen in a while and $SPY indicated to open significantly below its 50-day moving average for the first time in seemingly forever.
In other words, the market was telling me to rethink my bullish ideas.
Another 20 year base breakout? This is the second one we're putting a trade on in this week! Maybe the market is trying to tell us something?
I have to be honest, when I first pulled this ticker up, I thought it was a Men's suits maker. But when I learned it's involved in the intersection of Artificial Intelligence and Semiconductors, the sex-factor went up for me.
This is not something we do often -- usually because these types of opportunities don't present themselves frequently. But we've identified an under-appreciated potential for a 20x gain on our invested capital if the markets cooperate.
Its the perfect storm of a megacap stock emerging from an long base, options flow showing people are starting to position for "something" and an ASC price target that doesn't appear to be priced in by the crowd.
Of course, part of the reason for the elevated options activity is due to an "Investor Day" event happening today, but the action still has been raising some attention.
As is often the case, the Labor Day Weekend has come and gone and some volatility has been reintroduced to the marketplace. And I say: "Welcome back!" with outstreched arms. Volatility = opportunity. Let's get after it.
With the rising volatility, we're seeing premiums start to pump up in options land. When this is the case, I always start hunting for some delta-neutral credit spread opportunities.
Today's hunt has yielded an excellent candidate with clearly defined levels for us to lean against.
The big indexes offered us a little pullback this week which has been helping us identify the true standouts -- the stocks that are holding up best in a down tape. We're all about relative strength at All Star Charts as it is one of the most reliable indicators for us. And true leaders really identify themselves when they are swimming against the current while markets are sliding.
So on days and weeks like this, we're paying very close attention to the strongest sectors and keying in on the strongest stocks to see how they react.
Today, one those names is in the Capital Markets space where we're seen tremendous strength this year.
