The markets have been experiencing some liquidity and dislocation issues. It circles back to the stock of the week– Gamestop– and how that can lead to selloffs in quality stocks.
Say you’re a hedge fund stuck short in a name that is absolutely ripping to the upside. To cover your losses, you will need to raise cash, and that can be done by selling stocks that you’re long.
And that’s how, out of nowhere, you can get a strong move to the downside in the Nasdaq, and it feels like funds are selling anything that isn’t nailed down.
We can see the lack of liquidity reflected in the VIX, which spiked up to 37. To put that in context, of all pullbacks in the S&P that are within 5% of all time highs, this is the highest VIX reading by a statistically significant margin.
So what can we do here? I think the best bet is to anticipate the unwind in some of these high quality names this week.
N.B. – we have a setup in CMI that requires a bit more explanation due to earnings risk, so make sure you read it before considering putting risk on.
Trade #1: AAPL
AAPL got a little ahead of itself with that most recent rally, and the mechanics surround “sell good things to finance the bad” are taking place here. i want to play it into that trendline support along with the support levels from earlier in January.
Trade Setup
Expected Price: 126.76
Sell to Open AAPL 19Mar21 110/107.5 Put Spread
Tier 1: Enter at 0.51, Exit at 0.17
Tier 2: Enter at 0.714, Exit at 0.35
Tier 3: Enter at 0.918, Exit at 0.46
Stop Out If Close Under 190.95
Trade #2: CMI
This is a special case due to earnings, so I want to step through how I’ll be looking at it.
CMI reports earnings this week, and it’s seen a pullback just with the overall market.
I think there are a few key levels to work with. First is the trendline and previous resistance level in the high 220s, and then you have the test of the breakout range at 215, then the support just above 200.
I will look at this trade ONLY after earnings comes out, and the trade may look very different depending on how the price moves. If the stock rips to the upside, then it’s clearly going to be a “no trade.”
What I want to anticipate is the stock to dip. If the stock sells off into any of these levels, I will be focusing on finding the March put spread that has a value of around 0.70– and that may vary depending on changes in option premiums due to earnings, and how fast the stock can move.
So if, for example, the stock has nasty earnings and breaks under 200 premarket, then I will avoid and wait for a new setup to develop. But if it has just a normal post-earnings selloff into the low 200’s, I’ll be looking to take advantage of it.
The trade setup below will give you the structure I’m looking at, but I will not play it until after earnings.
Trade Setup
Expected Price: 226.45
Sell to Open CMI 19Mar21 185/180 Put Spread
Tier 1: Enter at 0.7, Exit at 0.04
Tier 2: Enter at 0.98, Exit at 0.17
Tier 3: Enter at 1.26, Exit at 0.21
Stop Out If Close Under 190.95
Trade #3: V
Looking for a pull back to support and a test of that island bottom put in last quarter after earnings.
Trade Setup
Expected Price: 190.95
Sell to Open V 19Mar21 165/160 Put Spread
Tier 1: Enter at 0.7, Exit at 0.04
Tier 2: Enter at 0.98, Exit at 0.17
Tier 3: Enter at 1.26, Exit at 0.21
Stop Out If Close Under 190.95