A Low-Risk, High-Reward Trade That Could Have a 165% Gain

A Low-Risk, High-Reward Trade That Could Have a 165% Gain

Posted On March 30, 2021 1:46 pm

I don’t usually post Options360 trade recommendations on this site in real-time. But, with my conviction being sky-high and the set-up being so clean, I felt compelled to share it with you, the OptionSensei readers.  

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By now, you’ve probably heard about Achegos, a multi-billion dollar fund that blew up last week. It had heavily-concentrated and highly-leveraged positions focused on Chinese technology and international media companies. 

When banks such as Goldman Sachs (GS) and Morgan Stanely (MS) — acting as Archegos’ prime brokers by creating derivative swaps — decided too much was at risk and initiated a forced liquidation causing a cascade of selling. This resulted in a number of Archego’s holdings such as DGX Technology, (DGX), Vipshop (VIPS) to drop 50% in a matter of days. Viacom (VIAC) and Discovery Networks (DISCA) were also caught in the melee, with their shares doubling in the prior 90 days, only to be slashed in half last week. 

This widely-reported story has many intriguing aspects with new details still being revealed.  However, when a fund, firm, sector, or individual blows up the one element that never changes, leverage.  A majority of people think that “leverage is bad.”  In my experienced-based opinion, I think this is wrong, and that in actuality, it’s the misuse of leverage that’s bad. Furthermore, the lack of hedging or risk management is bad. 

That’s the reason that when Options360 does apply leverage, we also use spreads to hedge, or apply risk management parameters, to define any potential loss. 

Let me show you how I recently established a position in JD.com (JD) to take advantage of the fallout from the Archego blow-up.  And what action you can take now to still participate. 

Before last Friday morning’s market open, the news was spreading that GS was shopping large, to the tune of multibillion dollars, buying blocks of stock in names such as VIAC and DGX. 

I had already been eyeing some Chinese big-cap tech companies because… well, I’ll let the Alert I sent to Options360 Service members at 10:20 AM ET on Friday convey my thoughts…    

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JD.com (JD) has been under pressure along with other Chinese tech stocks as the companies face both regulatory pressure from within China and continued delisting concerns from the SEC here in the U.S.” 

JD posted strong earnings two weeks ago and seems less under the microscope than competitors such as BABA and BIDU.

“The stock is staging a nice reversal today leaving a bullish island and could see an extended rebound in the coming days”  

jd com performance chart

The upshot was that I felt JD’s final push below the $80 was due to it being collateral damage to the still-unfolding Archego debacle presenting a buying opportunity. 

The initial trade I laid out for members was a diagonal call spread using the 82 strike with an April 16th expiration as the long leg and the April 1st 85 strike as the short. Using a spread gave us a hedged position with the flexibility to make adjustments.  On Monday, when the stock dipped back and held the $80 level, I became more confident that last week’s reversal represented a buying opportunity.  I issued an Alert to cover the short leg for $0.25, leaving us outright long the 81 strike at a reduced cost basis.  We now have a position with an unlimited upside, but with a well-defined risk — the proper application of leverage. 

This is a position you too can now participate in.  My recommendation is to purchase the JD April 16th 82 strike call for around $3.00 per contract.  My price target is $90 per share, which would give the call a value of $8.00 minimum for a 165% gain. To limit our potential downside, we’re using last Thursday’s close as a ‘stop-loss’ level. Meaning, if shares drop back below $79 we’ll exit the position. At that level, the call will be worth around $2.00, or what would be a 33% loss.  In other words, the position’s reward to risk is now over 5:1.  I like those odds. 

To follow how I continue managing my position in JD & access to all my future trades — Claim your entry into the Options360 Service for just $19 [*This Special Offer Expires April 1st]

About author

Steve Smith

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.