Geez... the calendar turned into October and traders are acting like Halloween is already here! The up-and-down trading action so far in the first three days of October can be downright frightening if you're chasing every whipsaw in this schizo tape.
Considering my portfolio is leaning a bit long at the moment, it feels prudent to put some downside exposure on.
The biotech space has been a laggard all year. If broader markets still have additional spook in them, it is likely biotechs will lead the way. So I'm positioning myself accordingly.
Ok, today's title is a cheeky play on the ticker symbol I'm trading today. I couldn't help myself.
Today I'm getting into a low conviction trade, but shifting the probabilities in my favor so that even if I'm wrong, I still have a good chance of reaching my profit objective. Pretty sweet, right? This is one of the many reasons I like trading options.
It's that time again where we start heading into the next monthly expiration cycle and I review any options positions that remain open which might require some adjustments, monitoring, or closing before we get too close to expiration.
The October expiration cycle has been good to us. At the time of this writing, I've already closed two positions that hit my stop loss levels ($NKE, $DE), and two others that hit my profit objective ($GLD bull call spread, $PHM bull calendar spread). And as usual, the bulk of profits for this cycle came from just a couple trades.
These are the remaining open October positions that need some monitoring:
During the course of my day-to-day engagement with the markets and market participants, including subscribers to All Star Options, I'm often asked my thoughts about how I would manage some position that somebody is in. Usually goes something like this:
Sean, I've been in this inverted double reverse downward dog position and now I'm losing money. What should I do?
Ok, so I made up the name of the position, but you get my point. People do weird things and they are looking for help.
One commonality I get from people engaging with options is that they bought long-dated calls (sometimes Leaps) in stocks they are bullish on in lieu of buying stock. And they got lucky -- real lucky. So lucky in fact that they are sitting on enormous open profits on calls that are now WAY in the money.
Sometimes, the charts set up where one could make a case for a consolidation being on the cusp of breaking out. One such beleaguered company appears to be doing just that. If there's any follow through, there is blue skies ahead and I've got a play lining up on the runway to take advantage of the tailwind.
I love it when steady dividend payers breakout to all-time highs. What's better than a stock breaking into blue skies and paying you a dividend to hold on? In the recent All Star Charts monthly conference call, JC uncovered an opportunity in an insurance company stock that has us thinking about profits. Sure, we options traders don't get to collect any dividends, but it is nice knowing that yield-starved savers will keep a bid under stocks like these as long as interest rates remain comically low.
All else being equal, when deciding between two or three viable trades, I'll often choose the one that offers me the best opportunity to neutralize my "greeks risk." Meaning, if my overall portfolio is leaning a little long delta, I might favor the new trade that is short delta. If I'm long a bunch of premium and therefore have a high negative theta score for my entire portfolio, I'd likely choose to add the trade that offers me the most positive delta. My thinking being: if I can neutralize as many greeks as possible, then I put myself in position to let the individual edges and risk-reward ratios play out in my favor without getting negatively affected by any sudden changes in the overall market.
This also applies to timeframe.
A quick scan of my open positions today revealed that I have a relatively high number of open positions with October, December, and January expirations. But just a couple with November expirations. So taking an idea from All Star Charts' September Conference Call, I've found an opportunity that we can play in November.
Okay, having a play in mind for Kansas City Southern $KSU made the title of this post low hanging fruit. Captain Obvious, this guy.
Our boy JC here at All Star Charts went shopping this weekend and couldn't help catching a glimpse of the cover of this week's Barron's attempting to instill fear into the hearts of Railroad investors. He, like me, is a natural skeptic of headlines. So he dug into the sector and was not surprised to see price action telling a different story. One of the most compelling charts to me is the one for $KSU and I'm liking the route these tracks are headed.
You've got to love a stock breaking out of a seven-year base and doing so with options pricing in the lowest volatility levels all year. And when it is in a strong sector that has been among the leaders all year, I'm licking my chops.
In elementary school, nothing was more interesting to me than Space. And a quick look at my Lego collection would confirm this in two seconds flat. I was obsessed. But more in the "great unknown" way. So many questions. So many possibilities.
As an adult, I'm still fascinated by people (Elon Musk, Richard Branson, etc) and companies who are involved in trying to bring humanity into space and further exploration. And it makes me happy to see the stocks that represent these endeavors do well, because its often a clue that they are on to something, that they are making headway.
In recent days, the US Aerospace & Defense ETF, which tracks all the biggest names in this space, showed signs of making new discoveries -- of all-time high price territories.
Sometimes we spot an opportunity, but we have to be quick to capitalize on it. Fading volatility spikes is one of those situations. If we're willing to take on a little more risk in favor of a high probability setup and we act quick, nice profits can be earned. We've got a play in Gold developing right now that offers up this potential.
