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Options Trading Newsletter - Issue #139 Hero to Zero... [Options Today - Crude Oil Play on XOP]
Hero to Zero... [Options Today - Crude Oil Play on XOP]
Hero to Zero… [Options Today - Crude Oil Play on XOP]
We have heard of many success stories in the world of technology, but they’re often matched by tales of failures. The tech sector, known for its lucrative potential, attracts many, but not everyone strikes gold. This is a stark reality, further complicated when initial success crumbles due to poor business decisions or disruptive innovations.
We have all heard of WeWork, once the darling of the investment world, valued at an astounding $47 billion valuation where WeWork was hailed as an innovator in office leasing. However, a combination of overambitious expansion, questionable management decisions, and unforeseen impact of the Covid-19 pandemic led to a dramatic downfall. While WeWork is now in bankruptcy proceedings, its value and reputation have significantly diminished, serving a cautionary tale about the fragility of success and the importance of sound business strategy.
The other interesting story I came across during my last flight movie was Blackberry. The Blackberry’s story offers a different but equally instructive perspective. Once synonymous with mobile communication innovation, Blackberry was a pioneer, impressively cobbling together prototypes from scrap calculators, toys and electronic boards during an investment pitch. This ingenuity captured investors’ imagination, turning visions into reality. However, the advent of the iPhone and subsequent Android devices heralded a new era of mobile technology, one where Blackberry struggled to keep pace. The company’s failure to adapt to the rapidly evolving market led to the disintegration of its once-thriving mobile phone business.
My personal experiences with Blackberry devices, which were great devices during their peak, echoes a broader truth about the tech industry, that no success is permanent. The stories of WeWork and Blackberry illustrates that achieving success is only part of the journey, maintaining it requires constant innovation and an acute awareness of market changes and emerging competitors.
The tech industry’s rapidly evolving landscape demands adaptability and foresight. It is no different from our personal journeys. We must not only stay true to our visions and goals but also remain vigilant and flexible to navigate the unpredictable waters of market changes. As history shows, today’s triumphs can quickly become tomorrow’s cautionary tales.
“True success is a journey, not a destination, requiring perseverance and adaptability at every turn”
Last Friday’s price action seems somewhat weird as the reversal on Thursday did not follow through but instead strongly rebounced to break the 4400 resistance level. In any case, SPX has since gone up around 7.6% from October lows and it should be bound for a retracement. The 4400 level seems ripe for it.
It seems that the Magnificent 7 is driving the market once again, with AAPL, MSFT, NVDA, GOOGL, AMZN and META all gained for the week, enough to push some bullish candle for SPX.
As this week the CPI is coming in this Tuesday and the PPI and retail sales on Wednesday, these should act as cooling factors for the market to retrace on short term profit taking. Keeping a watch at the 4370 level if the market comes back down.
Trade range for the week is 4350 to 4450.
NDX broke above the trendline and is now testing another resistance level at 15512. It closed slightly above it on Friday at 15529.
The end of the hike regime is here and that should be bullish for NDX in terms of cost of doing business/borrowings. However, please do not forget that consumption would need to be high to create the required earnings. As we have seen in recent earnings announcement, the situation is not that great for existing earnings nor is it extremely bullish for forward earnings. So it may not be an all the way up right now and we still have probably dwell around until 2nd quarter of 2024. In the meantime, we still stay cautiously bullish for time being, taking profits when market is extended.
Earnings season continues into this week with the following releases:-
Trading range for the week is between 15200 to 15850.
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HANG SENG INDEX (17203)
HSI tested the upper down channel at 18000 and retraced from there closing the week at 17203, down almost 800 points. If the US market slides this week, we could possibly see it testing the lower support channel at around 16500 and that would be painful to see for the China/Hong Kong market. It is one of the worst markets for 2023 so far.
The lower support now at 16500 and resistance at 17600.
OPTIONS TODAY [Crude Oil Play on XOP]
Once again we see short term forces driving commodities to its high and reversed instantaneously when the fear elevates. This was true for oil and also gold back in early October when the Hamas strike Israel which brought oil from $81 to $90s level and GLD from $168 to $186s.
So is it now a good time to be directional? Up or down and because of what factors which way will they go? I am not sure either, if the war escalates, probably oil is going to go up and if the world economic situation gets worse, probably that will bring oil down. So it is a tug of war really for oil. So for us we always have a upper range and lower range view on this commodity. It can’t go too high as that will cause inflation and hamper growth while it cannot go too low as that will cause oil companies not to be in a profitable state and if that happens, the supply will be reduced and price adjusted. Of course, trying to gauge the upper and lower range is always a dynamic exercise.
But for now, we see that we are once again in a good spot where oil is again poised at the mid level of our range target. A good proxy we use to trade oil is the XOP ETF. Recall in past we get many Free oil trades on XOP. Even the trades where we went deep ITM, we got out of it with the recent retracement.
Price action wise, XOP is currently trading at $137.17 retracing from its high of around $154. The IV Rank is not exceptionally high, just at 15.7, but we can compensate that with a longer trade duration. We will do a slightly positive delta (7.3) trade since XOP has came down straight 6 days and lost almost 9%.
Trade Entry (29 Dec)
Bull Put Spread, Sell a Put at strike $125 and buy a Put at $120. Enter 2 lots for this leg. Total credit received is $0.70 x 2 = $1.40
Bear Call Spread, Sell a Call at $150 and buy a Call at $155 for a credit of $0.59.
Total credit received for the entire trade is $1.99 with a max loss of $8.01 on the downside and $301 on the upside. Probability of profit is 64%.
(adjust accordingly when market opens)
There is no real trade management required save for monitoring the price action. Our price thesis is XOP may continue to go down but hit oversold position and possible hold support or bounce as it nears our short put at $120. By this time, the trade should near our expiry and we may exit at a profit. If it goes ITM, the thesis of oversold still stays and we rollover this leg for more time for it to recover.
If price goes up to test our call side, we would have the overall crude price levels hitting resistance at $90 to help keep XOP from going higher. Similar to the lower side, crude oil can be as cheap as it can be to produce it, probably not lower and hence a market support should also form around $67 level.
OPTIONS TODAY [POST EARNINGS PLAY - BEARISH ON AMD]
We only had 1 day of positive price movement in favour of our trade and AMD had continued to rocket up since. AMD is now trading at $118.59, almost $7 above our trade entry. We need AMD to retrace by almost $10 to our price target. In a week, that’s tough but you will never know if a CPI or other news could spook the market into a sell off mood.
We are still in the trade and there is little extrinsic value left, we will likely keep the trade and if a market retracement comes. we will salvage some additional value and if it is big enough, potentially hit max profit.
Again, the risk of a directional trade is you have to be right on the direction and time limits to make the gains.
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