The "Gap and Go" pattern is popular with intraday and swing traders. It is a situation where a stock gaps higher out of a base (often earnings driven), then punishes the opportunistic faders who are playing for the stock to come back and "fill the gap." The opposite happens, resulting in a slow, painful grind higher hurting all those short holders.
We've got such a situation developing in the semis space, where a slow grind up has beaten all the faders to a pulp and now it appears we might be setting up for one final push to inflict hurt on the final stubborn bears.
One of the most important parts of my process in selecting potential options trades is to assess the current volatility situation. Everything else being equal, I like to put on trades that position myself for volatility to revert to its mean. In other words, if volatility is high and therefore options prices are high, I want to express my directional trade in such a way that it might also benefit from volatility falling back to "normal" levels. Conversely, when volatility is low, I want any position I consider to benefit from a rise in volatility -- if there is one.
There are no free lunches on Wall Street, nor in options trading. But betting on volatility reverting to the mean might be one of the closest things to it. The trick is in the timing.
Of all the most liquid ETFs I track, the one that has been the quietest lately -- in terms of price action and volatility in options pricing -- is the Retail Sector ETF $XRT. In fact, volatility in $XRT is currently at the lowest levels last seen in 2018 before the Christmas selloff. This has given me a wild idea...
The All Star Charts team is not wildly bullish on US stocks here, though the consensus is that eventually we resume higher out of some sideways action that might take a few months to work through. That said, there is one sector we feel will lead us higher when the time is right and we've got a candidate stock that offers us a good opportunity to express our mildly bullish stance while keeping our risks manageable.
Due to a scheduling conflict around the annual CMT Symposium in New York, JC and I will be doing our monthly conference call a little later in the cycle this month. But have no worries, I'll provide some updates below on positions we have open with April options that may need some attention or adjustments.
I don't often take long premium plays ahead of an earnings event, but there's one coming on the horizon where the options pricing isn't too high (yet) and the All Star Charts team has a price target that would yield us a greater than 4-to-1 return on risk if the earnings catalyst plays out in our favor.
A year ago, I made a commitment to healthier eating. Not that I was a slob or anything, it was just that my attitude about what I was willing to put into my body (basically anything) needed to change. At my age, you begin to think about these things.
That said, I'll still happily get long stocks of fast food companies that are poisoning the human race if there's a way for me to profit from it (then spend the earnings at the local vegan grocer!). And one household fast food chain is setting up for a big potential move.
You probably thought this would be a piece about US stocks, didn't you?
While it certainly looks like the Christmas lows in the US are going to stick around for a while, the All Star Charts team is also detecting some broader potential breakouts overseas that we can participate in with options on index ETFs.
When the facts change, I change my mind. What do you do, Sir? ~ John Maynard Keynes
This quote has been on my mind as I am about to publish a trade idea that runs contrary to an existing position we're currently carrying. And if the Market Gods are smiling, we may be able to win on both of them!
The cool thing about working with smart people is being able to learn from them. Having Sean McLaughlin on our team has made everyone better, not just our clients but us as well. In today's video, we tackle the question of when it makes more sense to finance an options position by selling a different contract to collect the income vs simply just buying calls or puts. As usual, Sean does a nice job of explaining this in a way that anyone could understand.
