By: Steve Smith
As I’ve recently discussed, the market has been incredibly tricky to trade. Patience and discipline have never been more important.
The initial challenge started about 8 months ago when we shifted from nearly everything going up into a heavy-rotation environment of “stay-at-home” (out-of-growth tech) stocks and into cyclical value and businesses that reaped the benefits of “reopening.” Initially, if you caught that respective theme, nearly any stock in the various sectors would work. However, the problem was in the rotations switching back and forth on a near-daily basis.
This kept the major indices such as the S&P 500 Index (SPY) and Nasdaq 100 (QQQ), moving higher in a seemingly orderly fashion. However, beneath the calm surface, there was incredible turbulence. Monday was a perfect example of that — while the SPY dropped some 1%, 223 of the 500 stocks hit 52-week highs yesterday; the most since at least 1990. It’s cliche but it really has become a “stock pickers’” market.
This is why it’s crucial to be disciplined, stick with your process and wait for proper risk/reward setups. For example, my discussion last week on getting long on Netflix (NFLX) if it could hold above $500 confirming a bullish reversal.
My patience in waiting for confirmation paid off as the stock broke below $500. And as of this morning, it traded as low as $478. I’ll be keeping NFLX on my watch list. But, it will need a new setup before I make a trade. I may want to establish a short/bearish position if it gets back to the $510 level, which will now be resistance.
Staying out of trouble and avoiding big drawdowns has been nearly as important as picking winners to keep the Options360 performance on a steady rise; up some 17% for the year-to-date.
Speaking of bearish positions, I just added one on Monday. Aside from the SPY ‘triple plays,” I’ve been using, the current one has now locked in a 35% gain with one more roll before this Friday’s expiration. I hadn’t established a bearish position in an individual name since early March. Needless to say, It didn’t work out.
My new trade is in Hilton (HLT) hotels. The Alert sent to Option360 members yesterday laid out the following trade thesis.
“HLT operates some 570 hotels under a broad range of brands with about a third being owned by the company and the rest managed through leasing or franchise agreements.
Last week it reported disappointing earnings results with misses on both top and bottom line. I think it will remain challenged as business travel will be slow to come back and leisure travelers are looking to go to more remote locations and stay in more intimate settings.
Cost, such as aforementioned wages, and a balance sheet carrying over $8 billion in debt puts it on shaky ground with the need to raise money lurking in the background.
The chart shows it broke an uptrend and is now forming a potential bearish flag below the $125 resistance level.
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There are only monthly options. We can start with calendar and then hopefully roll into a favorable diagonal “
-Buy to open 2 contracts July (7/16) 120 Put
-Sell to open 2 contracts May (5/21) 120 Put
For a Net Debit of $3.40 (do not go above $3.60)
The game plan will be to roll the short May put down and out to the June 115 strike next week to create a diagonal spread. Assuming HLT shares are still around the $120 level, I expect to collect an additional $2.00 in premium to bring the cost basis down below $2.50 on a $5 wide spread. This will give us the opportunity to realize a 100% gain as HLT shares drop below $115 over the next 4-6 weeks.
The market is now creating some very good opportunities, the key will be patience and discipline. To see what comes next, take advantage of this special offer of just $19 for a one-month trial in the Options360 Concierge Trading Service.