When the market seas get choppy, options premiums tend to inflate everywhere you look. Investors get scared and Speculators smell opportunity, both putting a bid under calls and puts as each is willing to pay up for protection and good fortune, respectively.
However, regardless of market direction, options premiums tend to mean revert. In other words, they tend not to stay high for very long before retreating back to some version of average. This creates an opportunity for nimble options traders to profit off of others' misguided notions.
This being our current backdrop, I've identified a nice instrument for fading the current volatility spike.
Believe it or not, there are still some stocks at or near all-time highs in this current market environment. And if we're of the mind that the recent selloff is just another "glitch" that repairs itself through price and time, then we'll want to position ourselves in the leading stocks that will drag us higher in the next upswing.
We've identified one stock doing the heavy lifting for a sector that is showing signs of mean-reverting higher and offering a good potential payout if it works out.
I've made no secret about it. I've been bullish on Twitter -- the business -- since I first discovered the power of the platform in 2009. To say that Twitter has profoundly changed my life for the better would be a vast understatement. Sure, the company has social, ethical, even financial challenges. But Twitter is one of those companies that if it disappeared tomorrow, it would have a huge negative effect on me. I can't say that about most businesses I interact with.
Finding opportunities to invest in the stock of Twitter -- $TWTR -- has been a bit trickier.
Scanning through the plays that appear in the latest All Star Chart Quarterly Playbook, I see many that have pulled back into support levels and/or near levels that we previously labeled as "bullish above." This offers a clue that perhaps stocks are heading into a rest period. We've had a good run off the "Christmas Miracle" bottom and maybe here's where stocks catch their breath?
With that as a backdrop, I scanned our universe of liquid ETF names and found a candidate to put an income trade on to benefit from any sideways action we may be headed into.
With earnings season in full swing, unique opportunities with options often spring up.
It's pretty common for the prices paid for options to increase leading up to earnings announcements. It's a classic example of the battle of fear and greed playing out. On one hand you've got nervous shareholders purchasing insurance to protect themselves from any serious adverse price action, bidding the prices of puts higher. On the other hand, you've got shark speculators looking to participate in a sharp reaction to make a quick buck in either direction, adding further buying pressure to both puts and calls.
The astute options participant can use this battle to leverage into his own vision of the big picture.
I don't make it my primary business to go against the trend. Sure, it can be pretty satisfying and certainly pays well to nail a turn in a major trend. But it's a tricky business that has left behind a graveyard of wannabe Heroes.
But every so often the stars align, risk is clearly defined, and supporting evidence suggests a turn may be at hand.
The All Star Charts team has been drawing attention to financials and banks recently, putting forth the idea that the broader markets likely will not rally without banks participating:
We’re in the camp that Interest Rates in the US and Globally are set to mean-revert over the coming weeks and months, and if we’re right, that should benefit Equities as an asset class and Financials due to the rotation they’ve seen over the past several months.
And since we're believers that the market is going higher from here, logic dictates we should be looking for opportunities in the banks.
ASC published a piece on Regional Banks earlier in the week highlighting a handful of names to keep an eye on for upside should certain levels be pierced. Yesterday, we had our first name pop up and declare it may be ready.
There's an opportunity developing out on the farm -- everyone's favorite farming machinery (and apparel?) company is setting up for a big harvest. While investors should take notice, opportunistic trader hunters like us have spotted a way to get in/out with a quick profitable trade before volatile weather appears on the horizon to spoil all our hard work.
Remember when Outrage Twitter was running wild with conspiracy theories about Chipotle poisoning its customers and the business was doomed? That was fun. You know who had more fun? Long term investors who turned off the "news" and stayed the course.
Earnings are coming up that may serve as a catalyst to launch the next leg higher in shares of $CMG.
There is potential for a 10-to-1 payout if we nail it and $CMG has a monster gap along the way to get us to and through our price target. But our aims are a bit more modest. We're simply looking to capture some of the barbacoa in the middle.
One of the most powerfully bullish patterns that I know involves an instrument which gaps higher on explosive volume, builds on those gains for a day or so, then spends the next week or two consolidating those gains on declining volume. This price action tires out the fast money that entered the game on the breakout and attracts opportunistic bears looking for a reversion back to the mean. The chart pattern begins to resemble a coiled spring. And when it Pops!? -- the next move can be powerfully higher and sustainable.
One of the more compelling opportunities in the All Star Charts Q3 Playbook centered around the Rails sector. Several stocks there are setting up for big moves, and with an accommodating economy, I don't see how rail stocks won't start participating soon.
