Another week, another round of volatility compression.
Eventually, this has to give. Markets rarely stay this quiet for this long. If you’re looking for a catalyst, well, we’re headed hot into earnings season. We’ve already seen large cap financials get taken down a peg as the expectations baked into the stock were too great.
Since this is a “market of stocks,” it could simply be that a handful of the bellweather names will dictate direction in the near term. So if stocks like AAPL and GOOGL manage to hold tech afloat, then everything else will get pulled along.
Earnings season will also give us much better setups on individual stocks. Volatlity is our friend here.
Trade Setup #1: TLT
When TLT has a move like this to the downside, it’s very rare for it to be a “one off” event. Unlike stocks that get bid up on any sign of weakness, it’s possible (and probable) that the low will be retested, and most likely broken.
What we are looking for here is a new marginal low in Treasuries, with a momentum divergence. This simply means that we sell off, but the psychology of sellers has shifted from outright fear to exhaustion. Into 115, which is the next large support level, is where I want to get involved.
Trade Setup
Expected Price: 115
Sell to Open TLT Mar 110/107 Put Spread
Tier 1: Open at 0.50, Close at 0.10
Tier 2: Open at 0.70, Close at 0.40
Tier 3: Open at 1.00, Close at 0.70
Trade #2: SWKS
This is an earnings catalyst play.
We have the combination of two things. First, the fundamentals are solid. The company had a “beat/beat/raise” event, where they beat on revenue and earnings, while raising forward guidance.
Second, we have a clear technical breakout from a multimonth base. While there are some resistance levels to contend with in the 90’s, it’s a very high odds trade that SWKS does not fill this gap anytime soon.
This will be a slightly different setup. First, because March options opened yet, I don’t yet know the actual pricing for the spreads. I’m using theoretical pricing to figure out the expected value of the spreads. Second, this will have a stop baked into the trade.
Trade Setup
Expected Price: 88
Sell to Open SWKS Mar 80/75 Put Spread
Tier 1: Open at .90, Close at 0.20
Tier 2: Open at 1.20, Close at 0.90
No Tier 3
Extra Risk Management: On a close under 78.18, exit the trade for a loss.
REMEMBER: These prices are not yet confirmed by the market. Look to see how it plays out on Monday and make a decision from there.