A Tactical Short-Term Trade to Make Ahead of the Election
By: Steve Smith
The stock market has been herky-jerky over the past two weeks as it reacts to every bit of news regarding a new stimulus package and awaits election results. Although I doubt any stimulus will come to fruition prior to 2020’s end, I think the market will rally regardless of the election outcome — as it removes an unknown. Hence, I’ve become more tactical in my trading. This means taking a more defensive posture for existing positions by focusing on premium collection and establishing delta-neutral iron condors for new positions, expecting most stocks to remain mired in a range for the next week. Case in point: Last week, our Options360 service initiated bullish diagonal spreads in Wal-Mart (WMT) and Zillow (Z) with short legs set to expire today. Normally, I’d hold off until Thursday or Friday to roll the short leg. However, with both stocks drifting sideways, I decided to issue alerts on Wednesday to ensure we didn’t get caught in a downdraft.
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Additionally, to make sure we were collecting a solid premium and reducing cost basis — and therefore risk — I rolled short calls to lower strike prices, neutralizing the positions so that we can bide our time through next week. Paypal (PYPL) is an example of a new neutral position I established. The digital payment company had a big jump Wednesday on news it would start accepting Bitcoin and other cryptocurrencies for payment on its platform. On Thursday, it backed all those gains and then some. This is when I stepped into an iron condor on the theory it would hold above the recent breakout above the $200 level but stay below the high printed on the bitcoin news. At least until the company reports earnings on Nov.3.
To quote myself in the alert, “I think it will hold within a range ahead of the report and we can sneak in some premium collection with an iron condor ahead of the event”
The position established in Options360 consisted of:
-Buy to open 2 contracts PYPL Oct (10/30) 190 Calls
-Sell to open 2 contracts PYPL Oct (10/30) 195 Calls
-Sell to open 2 contracts PYPL Oct (10/30) 215 Calls
-Buy to open 2 contracts PYPL Oct (10/30) 220 calls
For a Net Credit of $1.50 (+/-0.10)
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This is an opportunistic or tactical short term trade designed to generate income while the market waffles ahead of the election. This is a time to become tactical rather than predictive.
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Steve Smith have been involved in all facets of the investment industry in a variety of roles ranging from speculator, educator, manager and advisor. This has taken him from the trading floors of Chicago to hedge funds on Wall Street to the world online. From 1987 to 1996, he served as a market maker at the Chicago Board of Options Exchange (CBOE) and Chicago Board of Trade (CBOT). From 1997 to 2007, he was a Senior Columnist and Managing Editor for TheStreet.com, handling their Option Alert and Short Report newsletters. The Option Alert was awarded the MIN “best business newsletter” in 2006. From 2009 to 2013, Smith was a Senior Columnist and Managing Editor for Minyanville’s OptionSmith newsletter, as well as a Risk Manager Consultant for New Vernon Capital LLC. Smith acted as an advisor to build models and option strategies to reduce portfolio exposure and enhance returns for the four main funds. Since 2015, he has worked for Adam Mesh Trading Group. There, he has managed Options360 and Earning 360, been co-leader of Option Academy, and contributed to The Option Specialist website.
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