Archives for March 2021
[CLOSED] – SPCE Put Sales
Bubble? What bubble?
SPCE has round-tripped its most recent parabolic rally. Momentum traders who are still holding out are puking, and anyone who bought the dip early are taking some serious heat. I want to fade this move, anticipating that the downside risk is a little bit overpriced.
Nothing has changed with respect to the stock. Earnings… well, they lost money but everyone new that. This is more just a proxy-momentum-breakdown that is occuring with many other names as well.
Here’s the trade setup I like:
Very simple premise here. Currently the stock is crashing and coming back to the topside of its earnings trading range. I’m very OK with owning SPCE at a basis of 17.80.
Here’s what it looks like on the chart:
Always the possibility I’m early, so look to add on the name if it trades into the 22s.
If you want to manage your margin a little better, you can buy the 15 put and convert it to a bull put spread.
Update, March 15th, 2021
Closing out the trade.
IBB Bull Put Spreads
Biotech is the first momentum sector that unduct last week’s lows. We’re coming into some support around 150, with the rising 200 day moving average coming into play right around previous pivot levels from Setember-November of last year.
The sector isn’t properly oversold yet, but I think it’s “close enough” given how high implied volatility is sitting right now:
Sure, this is “low” by March 2020 standards, but from my experience with trading this name, anything above 25 tends to be a pretty good “fear” indicator. Not saying it’s *the* bottom, just that we are close.
Here’s the trade setup:
Fairly straightforward bet here. We think that the downside risk is less than what the options market is pricing in. 140 is a pretty good level to work with as it is below the 200 DMA as well as the range highs from last summer’s trading range.
I’m probably early on this– in fact my first fill was 0.40, so you’re getting a better initial fill than me. As IBB sells off, we will continue to scale into the same spreads, just at higher prices. If the spread goes for 0.15 I’m all out.
Given the current volatility, and the fact that we are using April options, it’s very possible that we see something where you can enter, exit for profits, and reenter if you want to trade aggressively like that.
At current fills of 0.55, and an exit of 0.15, that’s a potential profit of 0.40 per spread. With a margin of about 2.45 that puts return on capital at around 16%, which is a good RoC to start the trade at.
Full Time Profits, March 1st, 2021 – WMT, JPM, CAT
The chart of the S&P doesn’t show how hard some trades broke last week. Yes, it was a nasty selloff and increased volatility in the indices, but under the surface we saw some blowout trades.
TLT, which tracks long term bonds, saw a liquidation event with a capitulative low put in. Much of the narrative in the markets has been geared towards the reflation trade– copper broke above $4, Oil has been running, and the yield curve has shifted to benefit banks and commodity stocks.
That reflation trade has hurt some sectors. Retail stocks have not participated with this recent rally as investors are starting to get concerned about input costs and margin squeezes… this will be a theme for the rest of the year I think.
In terms of strategy, the best bet this week is to anticipate yields falling off a bit. That most recent capitulative low in bonds can get some decent reversion, and that will *hurt* banks and reflation stocks. If they have weakness I want to start getting long into it.
Trade #1: WMT
WMT had a bad week last week. Earnings followthrough to the downside, odds are investors are spooked about rising input costs and how that can affect margins with the company.
It’s nearly 10% away from its 50 day moving average, something that doesn’t come along very often. I like establishing a position right here.
Trade Setup
Expected Price: 130
Sell to Open WMT 16Apr21 125/120 Put Spread
Tier 1: Enter at 1.2, Exit at 0.55
Tier 2: Enter at 1.68, Exit at 1.01
Tier 3: Enter at 2.16, Exit at 1.36
Stop Out If Close Under 124.89
Trade #2: JPM
JPM is my favorite trading instrument out of all the banks. I want to see a push to test that previous resistance as well as that rising trendline.
Trade Setup
Expected Price: 143.32
Sell to Open JPM 16Apr21 125/120 Put Spread
Tier 1: Enter at 1.12, Exit at 0.46
Tier 2: Enter at 1.568, Exit at 0.87
Tier 3: Enter at 2.016, Exit at 1.17
Stop Out If Close Under 124.89
Trade #3: CAT
As CAT is a proxy for reflation, it’s seen a solid move higher, but got a little bit extended recently. I want to see a retracement of this most recent move, and will start scaling in if we crack 210.
Trade Setup
Expected Price: 207.18
Sell to Open CAT 16Apr21 190/185 Put Spread
Tier 1: Enter at 0.89, Exit at 0.19
Tier 2: Enter at 1.246, Exit at 0.48
Tier 3: Enter at 1.602, Exit at 0.64
Stop Out If Close Under 189.89