Options Trading Newsletter - Issue #152 - Year of Dragon [Options Today - Bullish Trade on HOOD & Updates on Positions]
Year of Dragon...
Year of Dragon…
We have officially entered into the year of the Dragon under the Chinese Lunar Calendar last Saturday. The Dragon symbolises strength, power and good luck and often associated also to wealth, wisdom and power. It is often used by the ancient kings of the Chinese empires as a show of supremacy and power.
We would like to wish everyone celebrating the Chinese New Year, a year of good health, great wealth and prosperity. May the Dragon bring us all a great market and awaken also the sleeping Dragon in the China/Hong Kong stock market.
SPX (5026)
SPX hit the 5000 mark last week. It has gained around 5%+ in less than 1.5 months starting the year with a bang. Earnings and economic activity for the US market remain robust.
69% of S&P 500 companies are trading above the 200 moving average. For the past month IT and Communication Services has been driving S&P higher with utilities lagging. AMD, NVDA, MSFT, MU had led the IT sector while, GOOGL, META & NFLX has all been gainers for the early months of this year.
This week CPI is expected on Thursday and then PPI on Friday. So far the market has brushed off any negative economic data quite fast as every dip has been supported with a quick rebounce. Lets see if the trend continues the same.
We are just watching for any signs of top for some stocks to see any short term trade potential. In event for higher valued stocks, we are placing cheap debit put condors out in time to take opportunity if any pullback comes in the next months. The trade will benefit from both price movement and theta decay.
Trading range for the week is 5000 to 5100.
NDX (17962)
NDX has added another 1.8% for the week. Running up for the past 15 weeks since October, with only 1 down week. The momentum up is still strong. Even any past daily pullback has been regained quite fast. Watch the support at previous high 16764 and the 18000 psychological resistance.
This weeks earnings towards the end of the earnings cycle. Nothing interesting for the week but we are watching HOOD which releases earnings after hours on Tuesday. We see the squeeze indicator on since 8 February to the upside and the stock has been up for the past week into earnings. Possibly another PLTR earnings Pop in the making? We will cover a earnings play this week in Options Today.
Keep a watch on volatility on NDX coming Thursday and Friday for CPI and PPI.
Trading range for the week is between 17600 to 18300.
HANG SENG INDEX (15746)
HSI again had a jump of around 5% this week but gave back some towards the end of the week before the Spring Festival celebration where market will be closed for until Tuesday.
HSI caught a low of 15336 and bounced to a high of 16408 before giving up the gains. it is almost a 900 points up in less than 3 days. We also took in a trade on the same channel play buy on lower channel and exit on run up.
This week there may be a possibility of HSI breaking below the lower channel to 14800 level where it hits the Oct 22 support area. Another potential buy area if it reaches that level. There would be less likely of any market stimulus news this week due to the holidays, so market volume will be lower than normal.
OPTIONS TODAY - BULLISH TRADE ON HOOD
HOOD has been trading up closer to earnings. We see a daily squeeze appeared last Thursday. Possibly the upward momentum could continue into earnings. We can take a very directional trade using Bull Call Spread in the 16 February expiry, buying an ATM Call and selling a call at the expected closing price on Friday 16 February.
If we look at the expected move on the options chain, Hood is expected to move +/-$1.48 till Friday. Based on the current trading price of $11.99, the expected price till end week is between $10.51 to $13.47. Earnings is after market close on Tuesday.
Trade entry - Bull Call Spread (Expiry 16 February)
Buy an ATM Call at strike $12
Selling an OTM Call at strike $14
The cost of the trade is $0.50 with a max profit of $1.50. If the stock price don’t move up from current price, we will likely lose $50. If the stock price goes up from current level, we may gain up to a max of $150. This is a very directional trade and if HOOD does not POP after earnings, we could just close the trade to salvage any values we have on the Bull Call Spread.
Max earnings will be achieved if HOOD is at or above $14 at the end of closing on 16 February.
Trade Entry - Call Butterfly (Expiry 16 February)
We can also use a very cheap trade structure to become directional on HOOD on earnings.
Sell 2 call at the expected price of HOOD on 16 February. In this case, we select a strike of $14.50
Buy one call at $13.50 and one call at $15.50, $1 width apart from $14.50.
Trade cost is $0.05 only with a max profit of $0.95, a return of 19x.
Trade Management
This is a speculative trade on earnings. Do not expect to salvage anything if the trade don’t go your way. The best you can do is to close the Bull Call Spread to salvage any value if the price does not move-up post earnings.
On the Butterfly, just leave the trade if stock price after earnings is below the long call. If the price shoots above the upper call strike of $15.50, we can leave the trade to expire worthless. The same if price is below strike of $13.50.
If the price is in between $13.50 to $15.50, the trade will generate a profit, higher profit, when stock price goes into the range and closer to the middle price of $14.50. Highest profit is achieved towards the end of the expiry day when the price is within the trade price band.
OPTIONS TODAY - TRADE STATUS ON BA DEBIT CONDOR
BA is now trading higher at $209 now. When we entered the trade, BA was around $204. The price movement is good for the trade and the trade is in slight profit of $13.
We will continue to monitor the trade and keeping a watch on price reaching to $215 level before deciding if we should take any action on trade.
OPTIONS TODAY - TRADE STATUS ON MICRO CRUDE OIL FUTURES IRON CONDOR
Crude oil futures is back up 6.31% last week after it had went down 7.4% a week earlier. We entered the trade on January 9 when price of MCL (14Feb) was trading at $72 and it is now trading at around $75.50.
The short put strike is at $65.75 and short call strike at $78.75. As the trade will expire on 14 Feb, 3 more days and MCL has gone up by more than 6% over past week, we will probably leave the trade to expire worthless, unless we see strong move up to test the short call strike, we will not do anything.
Crude oil trades and oil futures and related stocks including the ETF XOP has been one of the most profitable trading sectors for us for over the past year. Mainly because it has been trading range bound, we are able to apply the right strategy when it reaches certain price points. The general rule would be neutral trades on the mid range, bullish on lower range and bearish on upper range. Even if you just applied a neutral trade consistently throughout the period, the outcome would also be positive.
OPTIONS TODAY - POOR MAN’S COVERED CALL ON XLU
XLU is now trading at $60.27. The short strike of $60 will expire this week. There is just $0.73 cents of premium left. We will likely roll the trade over for 2 weeks to strike $61 for a premium of around $0.50 to $0.80 premium. If the stock price goes down a lot, we would probably need to roll for 4 weeks to get similar premium. The trade is generating a loss of around $1.30 now mainly due to the drop in the stock price since entry. But that is not a bad thing as we did manage to generate more premium from the short calls. When the stock price recovers, in the months to come, we will recover these losses from the long call, but the premium’s earned from the short call are ours to keep.
Such trades is similar to you owning a house and leasing it out. When property price drops, you won’t be concerned as you are still generating the lease income. You won’t sell your house when you see falling prices as the house still makes the rental. And when the property price goes up, you will regain the capital value of the property but those income you received from past rent is yours to keep. If you understand this concept, trading options can be an alternative to property investment, having lower capital outlay, less risk and yet higher rate of returns, well above 8-10% per annum using a rent to lease options strategy.
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Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options before deciding to invest in options: https://www.theocc.com/components/docs/riskstoc.pdf
MYstyework is an Online Financial Literacy Educator and materials provided is solely by MYstylework and is for informational and educational purposes only. It is not, nor is it intended to be, trading or investment advice or a recommendation that any security, futures contract, transaction or investment strategy is suitable for any person. Trading securities can involve high risk and the loss of any funds invested. MYstylework, through its contents, does not provide investment or financial advice or make investment recommendations. Investment information provided may not be appropriate for all investors, and is provided without respect to individual investor financial sophistication, financial situation, investing time horizon or risk tolerance. MYstylework is not in the business of transacting securities trades or an investment adviser.