Options Trading Newsletter - TIME BOMB- Issue #156 - [Options Today - PUT RATIO SPREAD ON BA]
Time Bomb...
TIME BOMB…
Often, you might hear a ticking sound but not bother to find out what and where it's coming from. I'm talking about situations where you feel some kind of discomfort but think you can live with it. It could be a body ache, a growth somewhere on your body, a creaking chair, or even a leaking roof.
Many times, these small ticks can one day turn into a big problem if we don't address them. It's like living with a time bomb that could explode any day if we don't call in experts to defuse it or, in other words, fix the issue.
Last weekend, one of my time bombs went off, and my car was literally flooded with water from the inside. I had noticed a water sound around the backseat for several months but didn't look into it. I let it be, and the time bomb exploded when the water rose above the car carpet. You could even raise some fish in the back of the car! Looking back, if I had taken the car to the mechanic sooner, the problem could have been fixed quickly. The issue was just some blocked water exits in the car's drainage system.
So, thinking about "Time Bombs," how many of these ticking bombs do you have, waiting to go off? I suggest you start looking for solutions to these issues before they explode. When a problem is small and manageable, most of the time, the solution is easier. When it grows into a big, unbearable problem, it's much harder and more complicated to fix.
"A stitch in time saves nine."
SPX (5123)
At last, we see some normal price action last week. SPX closed slightly down for the week with an undeceive doji candle on weekly chart, which indicates market is looking for direction. Coupled with the daily chart which closed bearish and also an engulfing bar on previous candle. On the weekly squeeze meter, we also see that the histogram has changed colour indicating a possible down move soon, technically, it does not look too well for the Bulls and favours the bears.
If we see last Friday’s market movement, there has been quite a number of sell offs on stocks which had huge rallies over the past months in the Technology and Communication Services sector. It was quite clear as those beaten down recently like AAPL and GOOGL on the other hand was green on the day. Looks like profit taking before CPI release this Thursday. NVDA had a $109 move from +$40+ to down $50+ on the day. FOMO at its peak? Perhaps… but I’d rather stay out than to get in right now on these stocks.
On SPX, we see a possible move down to 4900 levels, also the likelyhood of covering the gap area of the daily 5038-4983. Let’s see how CPI plays out for the next move on SPX.
Trading range for the week is 5050 to 5250. First time we see a downtick in the trading range for week.
NDX (18018)
NDX is down 1.55%, 284 points for the week. The weekly squeeze histogram has also changed colour indicating a possible change in trend. As discussed above, major communication and technological stocks had seen a selloff on Friday.
On the weekly sectors, we see a rotation into utilities and defensive stocks, which are up for the week.
XLU the utilities ETF has gone up almost 8% in the past month. With anticipation of lower interest rate going forward, utilities stock and real estate (example XLRE) is expected to increase in price.
With unemployment rate on the rise, 3.9% reported last week versus 3.7% expected, the economy is expected to contract reducing discretionary spending whilst the necessities such as utilities and consumer staples will maintain. It’s time to look at these sectors, albeit lower growth but safer bets during such cycles.
We could see a possible retracement coming into the 17500 to 17800 range before hitting support of 17,000. This is a mere 5-6% retracement which should be norm, just that we are always used to seeing up moves of 1-2% weekly for the past 4-5 months, which makes a down move an odd one.
Trading range for the week is between 17750 to 18650.
HANG SENG INDEX (16353)
Last week, HSI fell to the lowest of 16136. We managed to pickup some short term trend and exited on same week on the reversal. As said, we see some support and buying interest on down moves and take opportunity to add in at the levels below 16400. HSI opened this week strongly up hitting slightly above 16600.
We have now changed the price action trendline to a uptrend as shown on the daily chart. We could see some support at the lower end of the trendline and if it breaches below, support should still be at 16200 level and we need it not to go down below the previous low of 16,095 for the higher high, higher low trend to remain intact.
Resistance, at the 200 daily Moving average above.
OPTIONS TODAY - PUT RATIO SPREAD ON BA
On a longer term, we are bullish on BA but BA has been shrouded by falling doors, wings and tyres which is depressing its prices down. Since our fully bullish debit condor have not fared well due to timing, we continue to trade BA using a slight neutral to bearish strategy but with no upside risk by using a Put Ratio Spread.
Price Action Thesis
BA to continue to move sideway with slightly bearish move down to further support level of $175. The expected move to this price level is June 21 expiry. So for our short term trade, we will only trade the April 19 expiry before the earnings on 24 April. Expected move for April 19 is $13.64, ie, to level $185 to the downside.
At the same time, we are also bullish on BA and hence, we want to cover our upside risk by entering a trade structure which have no upside risk, using a Put Ratio Spread.
Trade Entry (April 19 DTE)
BA is now trading at $198.49.
Buy a Bear Put Spread, Buy an OTM Put at strike $190 and Sell a Put at $185.
Sell an additional Short Put at $185
Total credit collected $1.31.
Probability of profit is 86%, Max Loss $17,869 (assuming BA goes down to $0) and Buying Power is $2,752.80. Max profit is $631 if BA closes at the short put strike of $185 on expiry. Breakeven is at $178.69.
Best to enter trade when IV is high to get more premium on the short put. Current IV Rank of BA is 37 with an IV of 30.6%.
Trade Management
Exit the trade at 25%-50% of the max profit.
Some possibility of Trade Management below:-
Close the debit spread (Bear Put Spread) if you achieve close to the max profit. In this case, max profit of the Bear Call Spread is $368, ie when price is around strike $185 or lower, closer to expiry. The remaining short put can be rolled in time for additional premium (possibly the strike would be tested, in such scenario).
If on expiry, BA stock price goes below $185, one of the short put will be assigned (if you had not rolled it in time as above). In such case, you will hold 100 BA shares. Convert it to a covered call by selling a OTM short Call.
Lastly, you may roll the entire spread out in time for additional credit. You will need to see what is the price level when rolling if this trade management makes sense. If price action, continues to go down, it will be much easier to manage if you close the Bear Put Spread and roll the remaining short put in time.
OPTIONS TODAY - STATUS UPDATE - BEAR CALL SPREAD ON SPY
SPY retraced around $1 from entry and the trade is more or less still in breakeven due to the increase in IV since entry. The down move is positive for the trade since the overall trade is negative delta. We will continue to monitor the trade band of 495 to 530 being the short put and short call and if SPY price stays within this band, the trade should be profitable.
OPTIONS TODAY - TRADE STATUS ON BA DEBIT CONDOR
BA is now trading at $198.50 lower than the long call price of $200. We need the price to be above $200 level. We need the price to be above $202.29 to be profitable and we only have one more week for this to happen. To reduce any risk, if the trade goes into profitability in the next days, close the trade. We have closed the Bear Call Spread at 0.03 Debit last week leaving only the Bull Call Spread. This was to eliminate the upper side risk of a sudden big spike up which happens last minute going above $225. So our risk now is only on down side and we want BA to go up in the next 5 days. Prior to Friday last week, BA has been holding support at $200 but broken below on Friday.
Possible Actions
Close the trade now at around $1.50 and take a loss of $78.
Wait for the price to go up and close the trade at lower losses. I’ll take this if I do not see any bullish action on Thursday.
Do nothing, be prepared to make a full loss or a full profit when BA closes at $205 or above by Friday. Anything above $202.29 on expiry will result in a profit, you may close the trade with some profits closer to expiry if price goes back up.
Price action wise, we see the daily squeeze which means BA is trading at lower of bollinger band and momentum is likely to reverse up. The only problem for us is that we do not have enough time due to the expiry on 15 March.
Even at below $200, we still see a good price support at the current level. We can enter into another new bullish trade at this level for April expiry. We will stick to Option 3 in the meantime.
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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
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