Today's trade is something I don't do much of: a pairs trade, but with an options twist.
A typical pairs trade goes like this: You find two stocks that typically trade together, but for some reason, they've diverged. So, you buy the underperforming stock and short-sell an equal dollar amount of the outperforming stock. This is typically a market-neutral trade where you're betting the values of the two stocks will eventually resume their normal parity, resulting in a net profit from the two trades.
We have a situation developing right now that screams pairs trade to me, but I'm going to do it with options.
We have to be selective out here. The names that were working last year are not the names or sectors that are working this year.
Meanwhile, downtrends that have been in place for a year or more are starting to find their footing. And when you add in a relatively high short interest, if the worst is now behind us, then names like the one I'm trading today have the potential to surprise to the upside.
Everyone has an opinion on the stock underlying today's trade. Strong opinions.
The Bulls think the stock price is a steal here. The Bears think this party is over, and a long overdue comeuppance is on the horizon, which will careen the stock price lower.
While the market has been rising early in the week, I've been less than impressed. The volumes in the indexes just isn't there. At least not enough for me to issue an 'all clear' signal to get back to our regularly scheduled Bull Market.
And so, I've been keeping an eye on some weak stocks to see how they'd recover in any broader market bounces.
For today's trade, this stock had every opportunity to reverse course. But it just can't find its footing, which makes me think the next big move is lower again.
With today's early rally and VIX on its way back down the recent mountain, now feels like the right time to capture some options premium in a wide Iron Condor in the QQQs.
I'm not calling that the bottom is in, but I'm open to it. Either way, it's unlikely we V-Bottom out of this morass, which is why betting on a wide, sloppy, sideways range feels right to me.
Today's setup is in a hotel name that has been getting clobbered as of late and may be on the verge of completing a major topping pattern.
Unless the broader market sticks a landing soon and rallies hard, lifting all boats with it, I have a hard time believing this stock doesn't have further to fall.
Today's trade is one of those setups where if the bulls can't stick this landing (making it a good buy), then it's goodbye and good night.
I'm betting on the latter. But being mindful that it could in fact be a good time to buy for those brave enough to step in, I'll be getting short with a defined risk put debit spread.
Today's trade is in a therapeutics name that continues to press into new highs in spite of all the bearishness that the broader stock indexes are suggesting.
And if you look at the implied volatlity in the options, it seems that traders are skeptical that the trend can continue.