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April 15, 2022
Remember that the markets are closed today for Good Friday. Also important to remember is that earnings season continues next week with banks and brokers early on and then we get into consumer defensives mid-week.
We did have jobless claims come out on Thursday and they were higher than expected, coming in at 185k, which is higher than last week, but you have to remember that the 4-week moving average is near 40-year lows. Companies are still struggling to attract and retain workers. The unemployment rate is still low at 3.6%.
Just look at the volume on this chart… nothing and then BAM!
It’s too news-driven for me, but given the historic trend of Musk saying wild things and then pulling them back, I wouldn’t be surprised to see Twitter (TWTR) try to go back down and fill that gap. That would be close to a $5 move on a $45 stock.
While all of that plays out, I think I’ll be on the sidelines, spending some time with the family, recharging for the market ahead.
Can the trade idea of the day be to stay away and NOT trade? Well, the market is closed anyway, but let’s say you’re unsure of the direction of TWTR, but if you really want to get involved, here’s an option for you if you think the price won’t move more than about 15% in either direction.
SELL IRON CONDOR TWTR 100 20 MAY 22 50/55/38/32 CALL/PUT @2.14 LMT
At the time of writing this, it gives you an upfront credit of $2.14 so your max profit is the $214 you collect and your max risk is $385. Your two breakeven lines are at $35.85 and $52.15. Look for a 25-50% profit (buy back the iron condor at 25-50% less the total credit received).
If you look at the chart up above, the 200 simple moving average is around $51 and the recent gap up happened around $39.55. The breakeven prices are even outside of those two prices, so you have room to play with, and the more whipsaw news events that come out, the better, as long the price doesn’t move outside of those breakeven numbers.
High risk, but that’s one way to play the TWTR news if you must. Keep in mind that this is a news-related trade and anything can happen.
You have to love earnings season because you just never know where we’re going to go. With the shortened week, it’s no surprise that we didn’t see much volume or activity, but JPMorgan Chase did start us off with a dud. Of course, analyst expectations were so bad, that even though their EPS was down over 12% year-over-year, it still counted as a win over expectations.
Overall the markets dropped back-to-back weekly declines and if JPM is any indication of what’s to come for the rest of the earnings season, it may be time to go back and read previous issues of this newsletter and make sure you have a hedge in place on your portfolio.
I mentioned an iron condor in the trade above. An iron condor is a delta-neutral options strategy that profits the most when the underlying asset does not move much, but of course, when volatility is up, the premiums you collect allow you to spread the wings of the condor.
Ok, but what the heck is a condor? An iron condor is an options strategy consisting of two puts (one long and one short) and two calls (one long and one short), and four strike prices, all with the same expiration date.
It combines a put credit spread and a call debit spread together.
You buy one out-of-the-money (OTM) put with a strike below the current price and you sell an OTM put with a strike price closer to the current price. This creates a credit spread on the put side.
The call side is similar. You sell an OTM call closer to the current price and buy an OTM call further away than the one you sold.
I built the condor starting off with selling options at the key prices I identified on the chart. I looked to sell the put spread just below where the gap happened and I looked to sell the call spread at the 200 simple moving average. If the current price moves lower or higher than either of those strike prices, the trade will lose money at expiration.
If you have any questions, comments, or anything we can help with, reach us at any time.
Have a good weekend everyone!
Editor of Wealthy Investor Society
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