Monday morning gaps are the worst. You can come into the week with a fresh set of ideas, ready to put some money to work, and it all goes down the drain with a 1% gap higher.
Now we end up in the unenviable position– do we chase and run the risk of reversion, or do we sit on the sidelines, feeling like chumps as the market marches higher?
Those are all very normal emotions to have, and instead of fighting those emotions, you can see it reflected in the price action. We aren’t the only ones feeling like this!
Think about the collective anxiety of the market right now. Tech got absolutely clobbered at the beginning of the month, providing a much-needed reset.
The election is around the corner, which investors are treating as an “earnings-like” event, so everyone is already hedged to the teeth — as evidenced by the risk premia in the options market, and the elevated volatility market.
Then we see a pretty good sized rally on Friday, with a followup gap on Monday. The early shorts looking for a gap fill get stopped out, and now we are just in “no man’s land” between support and resistance.
Yup, about clear as mud.
And it’s exactly what we expected. After a parabolic spike higher, stocks don’t have to go straight down– because everyone is hedged up, it’s very difficult for the market to head lower, so we’re due for a choppy range that exhausts everyone before we can get a good rally out of the market.
And that’s where we sit. Anyone that tries to swing for the fences will probably be left disappointed, and the bears looking for a collapse are going to have to contend with all the other investors laying off downside risk into the end of the year.
Selling spreads seems to be a pretty good idea in this environment. Our focus is on long only trades right now, and if things get a little wild to the upside we will start looking at bear call spreads.
Our theme is to stick with the best in class names that are starting to move off of their support levels.
Trade #1: NVDA
While the rest of the market had a pullback, semiconductor stocks were on an absolute tear today. I want to see NVDA retest the recent breakout levels for a good swing long, and an eventual retest of all time highs.
Trade Setup
Expected Price: 510
Sell to Open NVDA 20Nov20 425/420 Put Spread
Tier 1: Enter at 1.05, Exit at 0.37
Tier 2: Enter at 1.47, Exit at 0.76
Tier 3: Enter at 1.89, Exit at 1.01
Stop Out If Close Under 424.89
Trade #2: ADBE
Similar structure as NVDA, it came back and tested the rising 50 day moving average and prior resistance. The retest was a little messy because tech was weak *and* ADBE had earnings, yet it made a new higher low while the Nasdaq was retesting the swing low. As earnings are out of the way, this feels fairly safe to put on some November spreads.
Trade Setup
Expected Price: 489.33
Sell to Open ADBE 20Nov20 415/410 Put Spread
Tier 1: Enter at 0.85, Exit at 0.14
Tier 2: Enter at 1.19, Exit at 0.42
Tier 3: Enter at 1.53, Exit at 0.55
Stop Out If Close Under 414.89
Trade #3: COST
Sensing a pattern? Higher low and a clean breakout, and earnings are already out of the way.
Trade Setup
Expected Price: 350.96
Sell to Open COST 20Nov20 325/320 Put Spread
Tier 1: Enter at 0.8, Exit at 0.08
Tier 2: Enter at 1.12, Exit at 0.34
Tier 3: Enter at 1.44, Exit at 0.44
Stop Out If Close Under 324.89