Options Trading Newsletter - Issue #181 Options Today - MONSTER DIAGONAL / WINNER CRWD & NVDA]
MONSTER DIAGONAL...
MONSTER DIAGONAL…
Checkout on Options Today below, a trade set-up that can potentially create zero risk calls for you.
SPX (5648)
Choppy week, with SPX declining most of the week and recovering everything back only on Friday before the long Labour Day weekend. The long anticipated NVDA earnings was a dud as growth numbers are declining, nevertheless NVDA closed practically unchanged for the week, but below 50 Days daily Moving Average.
PCE month/month data came in Friday at 0.2% as expected, so no negative data is good news. The sideways movement for SPX for past 2 week looks like a tug of war between bulls and bears. The upside all time high as resistance at 5669 and support at around 5560. As the all time high level is just less than 20 points up, it is most likely going to be retested before any retracements lower.
Thursday, unemployment claims and Friday Non-Farm Payroll and unemployment rate would give the Fed more data they need to decide on rates at the forthcoming FOMC on 18 September. In anycase, market has already placed a 69% probability of a cut in September.
As Tech is selling down, the strong sectors are mainly defensive for the past week.
Keep a watch what happens, if SPX hits new highs, whether there are more profit taking on the Techs and rotation into defensive. We are more inclined, even if it goes higher, after the Fed cut decision, the runup will cool down a bit.
Trading range for the week is 5600 to 5700.
NDX (19574)
Generally a down week, save for Friday’s recovery after PCE. With the weakness in the Magnificent 7, including NVDA which just posted earnings on Wednesday and giving up over 6% post earnings, NDX has generally pulled back after the huge swing up post 5 August market fiasco.
We saw NDX touching the gap area below and ended the week with some recoveries. From the price actions, it may likely be retesting 19,000 level to see if support holds at this level or otherwise breakdown lower. If it bounces back up, the level to watch is 19,938 to see if it breaks above and forms higher high for the trend up to continue.
Expect, more sideway price action until after FOMC on 18 September.
Trading range for the week is between 19200 to 20000.
HANG SENG INDEX (17989)
HSI have broke above the previous range and moved up to higher level breaching above 18,000 level last week. We see an upward momentum but currently weakening. Looking for support at 17500 level and we need to see it trading above 50 daily moving average. The 21 daily moving average is sloping up and looking to cross above 50 daily, a positive sign when that happens and could pull in higher market participants. Next level of resistance to break 18,317. We started to accumulate long positions again last week.
OPTIONS TODAY - DIAGONAL ON MNST
Monster beverage was one of the favourite drinks company and the stock has gone up as high as $60+ in May 23 and later on again in March 24. Each time retracing back to $46-47 levels. The last major drop was post earnings recently and thereafter the stock has recovered from its lows of $43.32. It is slowly recovering and trading sideways now at $47.13. We expect the stock to continue to trade back up slowly as it is in the Consumer Defensive sector which would be quite resilient during this time when investors are rotating out from Tech into defensive stocks. Even Coca Cola (KO) continue to reach new highs every other day.
As these stocks tend to grind up slower, we use a Diagonal Option strategy which involves buying a longer dated call option and selling a shorter dated call option. We expect that the shorter dated call option to expire OTM and the premium earned to finance the long call.
We will try to structure the trade as much as possible to reduce the risk on the upside in case the short call goes ITM on expiry. The downside risk is the premium paid for the trade.
After the short dated call expire OTM or closer to expiry, we will roll the trade to higher strike to get more premium if the stock price have increased. If the stock price has stayed relatively flat, we can continue to roll the short call at similar strike. We will close the trade 3-4 weeks before expiry of the longer dated call, generally.
We seek to get a ROI of at least 25% of the debit paid. However, if price works in our favour, we can technically get a free call if we are able to finance the long call from the premiums earned with 2-3 rolling of the short call, hence profiting at higher ROI or getting into a zero cost call.
Trade Entry (DTE 18 Oct)
MNST is now trading at $47.13.
Buy a long call at strike $47. DTE 18 Oct
Sell a short dated call at strike $48. DTE 20 Sept
Premium paid $1.10. (relook at the pricing when market opens).
By right the best duration is 60 days so we can sell more short dated call along the way, but because MNST options does not have November expiry yet so we can only do October expiry. December expiry is too far out for the trade. The risk profile is as below, and you can see the trade is structured with no upside risk. Sometimes it is not possible and you will see the curve move down to a loss position if price move beyond a certain price level. If in such an instance, we will need to control the rolling of the short call before it gets ITM.
Trade Management
Roll the short call closer to expiry for additional premium.
Depending on the stock price, the rolling can be done as follows:-
If stock price moved higher than the initial entry of $47.13, but still below the short strike of $48, roll at a higher strike price.
If stock price have moved lower than the initial entry of $47.13, the lowest price you can or should roll is $47 being the longer dated call strike price. Do not roll at a strike below the long call. Alternatively, close the trade at 50% loss of the debit entered, ie. $55 loss.
If stock price have moved beyond the short dated call price of $48, roll at higher price or same strike before it had gone ITM. Ensure However, you get some premium or zero cost rolling, avoid paying unless the amount is less than 0.10. If price have gone up too fast, close the trade at break even or small gain. (Per initial entry of this trade, it is possible to do so. Might not be possible if the profit curve on risk profile dips below zero on upmoves)
Diagonal requires active management and monitoring, I would say it can be somewhat a complex option structure if you are not used to it and understanding how the trade behavior between the option profitability and stock price. Nevertheless, if the strategy is used at the right stock and price action, it can create zero risk free trades for you. Happy testing!
OPTIONS TODAY - WINNER DOUBLE BUTTERFLY EARNINGS PLAY ON NVDA
NVDA dropped smack right on middle of our profit zone last Friday as it lost it post earnings. As it was a binary event, we placed a trade on both upside and downside and we won on the downside and losing little on the upside. We exited with 260% profit fully covering both the cost of the downside and upside trade. We could have reached a higher profit level if we closed nearer to the day end but the volatility was too much to take seeing profits depleting every time price drops. If price move out of the profit zone, the profit could go off very quickly, so we need also be nimble on profit taking. NVDA could easily move $1-2 within minutes….
The chart above shows the price movement on expiry day was all within the profit zone $117-$123, with the max profit at $120. NVDA closed at $119.37.
Takeaways
Although butterfly are longshot strategy, the returns are well above 100% when structured correctly and used during the right time. Double Butterfly on both direction increases the probability that a movement can land on either side and lastly when used in earnings, the placement of the trade way OTM because of the expected move will make the trade even cheaper to enter.
OPTIONS TODAY - POSITION UPDATES SYNTHETIC STOCK ON XLU
XLU closedeven higher $76.29 after a minor pullback last week. The synthetic stock trade is continuing to be profitable. However, if you sold any calls, that could cap the profits of the synthetic stock.
OPTIONS TODAY - WINNER DEBIT CONDOR ON CRWD
CRWD is now sitting in the profit zone with just 4 days to expiry. We have close the trade last week around 170% profit. If you had not exited, I suggest you do quick as the trade should now be sitting on 300% profit.
Takeaways
OTM Debit Condor is another way to enter into cheap options trades, whilst using some of the OTM Credit Call Spreads to finance the Debit Bull Call Spreads. Profit is made when the price enters into the profit zone and the closer to expiry, the higher the profit within the profit zone. Of course, it is another science to anticipate where you place the strikes of the debit condor. We can use retracement Fibonacci on highly oversold stocks which is bouncing, estimating the time it needs to get there, or other methods like gap fills etc.
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