One Stock To Watch Next Week

selling stock options

We are going to host another Filthy Rich, Dirt Poor live event on Monday at 9 AM EST.  We’ve been working through some bugs and we’ll be back to discuss what we see happening in the week ahead and how you can trade around it.  Be sure to check the TradersReserve.com home page Monday morning or watch out for an email with the link to the live stream.  

Ok, let’s get back to it.

The Fed has been testifying before a congressional committee this week and finally, we’ve heard a bit of truth.  The Federal Reserve Bank of Philadelphia President Patrick Harker said, “We could have a couple of negative quarters.”  

The more we can be honest about the situation we are in, the quicker the market can start pricing in the data and revise its projections and soften the volatile moves we’ve been seeing lately.  The global economy has some issues that may take years to settle, but the US job market remains strong, which means there’s a chance of a soft recession with a modest contraction in growth.

Market makers haven’t started pricing in a hard recession, so should we be headed in that direction, the Nasdaq could see another significant dip before a market bottom is in.

The 2008 recession had its fair share of bear market rallies.  The initial retracement came back 24% before continuing the drop down.  

If we are to make any significant headway to get out of the bear market, we need to see small caps from the Russell 2000 and some mega tech companies like this one stock to lead the charge.  Until then, we are in a bear rally. 

Which one stock am I talking about?  

Here’s a chart of Apple and you can see the last bear rally brought Apple up to the $150 level.  We have a trend line coming down to the $142.50 level too.  If we’re going to break out of a bear rally cycle, I’d expect to see Apple break these two key levels of resistance.  If Apple comes up to either of those lines and respects them as a point of resistance, I anticipate seeing the market head lower and possibly even create a new lower-low.  

selling stock options

The reason I look at Apple is that it is so heavily weighted in some of the major indices. Therefore, Apple will play a major role in changing the indices price higher or lower.

With the July earnings season approaching, we have the Fed saying we have a couple more negative quarters ahead, but we also have what appears to be overly optimistic earnings estimates, showing potential earnings growth. If earnings estimates are too positive and the numbers come in less than expected, we could see the next leg of the bear market come roaring back in July.

In other news, there’s been talk about a gas tax holiday, where the government temporarily stops collecting a tax of about $0.17 per gallon of gas for three months. In theory, the consumer gets a little relief at the pump.

While a gas tax holiday seems appealing, the savings per household isn’t enough to be significant compared to the risk of taking funds away from infrastructure projects, but politicians need to do something to show they are trying to help voters before the midterm elections.

If Congress does pass a gas tax holiday, I have an options trading recommendation.

If, and it’s a big if, we get a gas tax holiday for three months, companies like Uber (UBER) and Lyft (LYFT) could be the beneficiaries in the short run. Let’s look at a strategy you can use by selling stock options to potentially take advantage of a near-term bump in the ride-sharing companies.

We’re going to use UBER for this example. We have a line of support going back to the pandemic low of around $20 and we have a resistance line just above $25.

selling stock options

We can look at writing options to take advantage of heightened option prices, and then protect ourselves by buying further out-of-the-money options near the support and resistance lines.

The current price of UBER is $22.35. If we think the gas tax holiday was going to get approved quickly, we can skew this to be more bullish by selling calls and puts and different strike prices.

Ticker: UBER
Sell to open 15 July 22 $23 call
Buy to open 15 July 22 $26 call
Sell to open 15 July 22 $22 put
Buy to open 15 July 22 $18 put

Credit received (max profit): $186 (per contract)
Dollars Required to Place Trade: $216.60 (per contract)
Expected Stock Move Range: $19.28 – $25.46

Position break-even (at expiration): If underlying finishes between $20.14 and $24.86 at expiration.

Here’s the risk graph for the trade.

selling stock options

Let’s say that you look to take profits at 25% of the max profit, you’re looking to make about $46 per contract. You can certainly hold on for longer, but I like 25% – 50% for these types of trades.

If you hang on until expiration, the trade will be profitable as long as UBER stays between $20.14 and $24.96 (shaded green area in the chart above) and you would get to keep the entire credit received when placing the trade ($186 per contract).

For a stop loss, you can set an alert to exit the trade at either one of the break-even-at-expiration prices. Your max loss at those levels is $36 to the downside and $18 to the upside. We’ve now created trade with a better than 1:1 reward to risk ratio, and we skewed the trade to be more bullish, while still being very close to being within the expected move range. This trade also benefits from time decay with 22 days to expiration.

Have a great weekend and see everyone on Monday for our live edition of Filthy Rich, Dirt Poor.

If you have any questions, comments, or anything we can help with, reach us at any time.
Email: [email protected]
Phone: (866) 257-3008

 

 

Jeff
Guest Writer, Filthy Rich, Dirt Poor
Editor, Wealthy Investor Society

Is The Stock Market Cycle Pointing To A New Bull Market Already?

Is The Stock Market Cycle Pointing To A New Bull Market Already?

memberswis
On February 6, 2023

February 7th, 2023Is The Stock Market Cycle Pointing To A New Bull Market Already?Are we in another bear market rally or the start of something new? That’s what everyone wants to know, especially as we

Job Creation Shocks The Market

Job Creation Shocks The Market

jeffwood
On February 5, 2023

February 6th, 2023Job Creation Shocks The MarketIf we’re heading into a recession, how were we met with better-than-expected job growth numbers last week? Unemployment dropped, despite the headlines of tech companies planning to lay off

Job Cuts And Stock Buybacks Keys To Success In 2023

Job Cuts And Stock Buybacks Keys To Success In 2023

memberswis
On February 2, 2023

February 3rd, 2023Job Cuts And Stock Buybacks Keys To Success In 2023 The thing I’ve learned from this earnings season is that a company can have consecutive quarterly drops in revenue and provide a lower

Fed Raises Rates But Bulls Are Still In Control

Fed Raises Rates But Bulls Are Still In Control

memberswis
On February 1, 2023

February 2nd, 2023Fed Raises Rates But Bulls Are Still In ControlOk, bulls. You win.  I will start lifting my bearish stance on the market.  Despite the final 10-minute market sell-off and a Dow that finished

What Past Fed Announcements Tell Us The Market Will Do Today

What Past Fed Announcements Tell Us The Market Will Do Today

jeffwood
On January 31, 2023

February 1st, 2023What Past Fed Announcements Tell Us The Market Will Do TodayWatch out - this article is going to have some math.Here we are once again on Fed Announcement day. Most of the folks

The Hidden Profits Of 2023

The Hidden Profits Of 2023

jeffwood
On January 30, 2023

January 31st, 2022The Hidden Profits Of 2023There is still one more trading day left in January, but if the adage “as the S&P 500 goes in January, so goes the year” holds true, the markets

The Fed Goes Up Against Earnings This Week

The Fed Goes Up Against Earnings This Week

jeffwood
On January 29, 2023

January 30th, 2022 The Fed Goes Up Against Earnings This Week We are in peak earnings season with some heavy hitters like Pfizer (PFE), Snap (SNAP), Meta Platforms (META), Amazon (AMZN), Alphabet (GOOGL), and Apple

Smoother Sailing in 2023

Smoother Sailing in 2023

user
On January 18, 2023

January 17th, 2022Smoother Sailing in 2023 Nothing has changed since the end of 2022, yet traders have already decided that this year won’t be as bad as the last. Bulls have been piling into stocks

The Rise Of Bing Over Google – That’s No Joke

The Rise Of Bing Over Google – That’s No Joke

jeffwood
On January 12, 2023

January 12, 2023 The Rise Of Bing Over Google - That’s No Joke Before we talk about two tech giants getting ready to battle it out once again, let’s look at the overall market. The

Why I Ignore Most Of The News

Why I Ignore Most Of The News

jeffwood
On January 8, 2023

January 9th, 2022 Why I Ignore Most Of The News It’s easy to get caught up in the financial headlines. I’ve certainly done it. Last week shows why I ignore most day-to-day stories. I know

PREV NEXT
Receive the latest news

Subscribe To Our Daily Newsletter

Get notified about new articles, special events, training, and much more

Like What You See?

Leave your info below to get more options and trading ideas to your inbox

Yes, send me news to my inbox.