January 31st, 2022

The Hidden Profits Of 2023

There 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 are in for a favorable year.  The market rose over 4% (so far) in January and only closed with a red candle (lower close than the open) 37% of the time (seven out of 19 times).  The market got stuck around its long-term resistance line, but eventually broke free.  We still have to make it past the impending Fed announcement though, so I’d expect at least a retest of the resistance line, if not a dip lower.

This year has been fairly kind to stocks so far.  Many have enjoyed much more than the 4% gain of the broader market.

Let’s look at the hourly chart for LendingTree (TREE). The stock has quietly gone parabolic this year, starting at $21.80, and is already up to $38.60.  That’s about a 78% move in one month! 

Then there’s Tesla (TSLA).  That’s a 40% gain this year so far.

There are many more.  But how do we go about finding the ones with the potential to keep going?  How do we find the next TREE or TSLA?

Let’s go back in time to January 3rd and look at the options chain for TSLA. Look at the column of Open Interest and look for the larger numbers. The 19 JAN 24 expiration (381 days away as of January 3rd, 2023) had over 45,000 in open interest for the $150 strike and over 40,000 at $153.33.

Not to be outdone, look at the $180 and $183.33 strikes, both with over 50,000 in open interest.

Think about that for a second. At the beginning of the year, TSLA was trading at $110 and there was that much open interest at levels there were over 36% out of the money!?

I wouldn’t have guessed that TSLA would go from $110 to $180 in one month. The $180 strike that was going for $12.42 at the beginning of January is now worth about $34.80 a month later, a 180% gain.

Just because a stock has a high open interest number on a LEAP doesn’t mean it will go up and touch that strike, but let’s take a look at Microsoft (MSFT). There’s an awful lot of interest at $250 compared to the other strike prices. Part of the reason is that $250 is a “big number”, but given that MSFT is trading at $242 right now, I wouldn’t at all be surprised to see the stock gravitate toward the strikes with the highest open interest, and right now, that’s $250.

Is open interest showing the hidden fortunes of 2023? It’s certainly something I’m watching. Look at the 19-JAN 24 LEAP options for several of your favorite stocks. What strike prices have the highest open interest? Do you think they have the potential to reach those numbers by 2024?

Today’s options trade idea is on the stock, PayPal (PYPL). The stock has been largely flat since 2023 started. This lends itself to selling iron condors for income. That’s a trading strategy that involves selling puts and calls for income. More specifically, an iron condor is made up of a put credit spread as well as a call credit spread.

I’ve added some colored lines of the strike prices we would use. We sell options at the red lines and buy options at the green lines. The trade is successful over time as long as the stock stays between the two red horizontal lines by the expiration date.

Going out to the March 3rd expiration, I’m looking to do the following:
Sell to open PYPL 3-MAR $84 call
Buy to open PYPL 3-MAR $86 call
Sell to open PYPL 3-MAR $72 put
Buy to open PYPL 3-MAR $70 put

Net credit: 1.19

Here’s what the risk graph looks like.  I’d look to exit the trade at 50-60% of max profits and the stop loss would be if the current price crosses over either of the breakeven levels.

Keep in mind that this week has numerous reports that could move the market in either direction so while I like this trade setup, I’m adjusting my risk on trades this week to match the volatility I’m anticipating.

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Jeff Wood

Editor, Filthy Rich Dirt Poor

Trader, Options Testing Lab

Any trade or trade idea discussed is for educational purposes only.  They will not be tracked as an official trade recommendation.