We're going to discuss 3 trade setups we're currently stalking for their setups on Overstock, Apple, & Tesla.
POSITION: AAPL 2018 January $160 / $170 Call spread
CURRENT COST: $7.20
TARGET COST: $5.00
BREAK EVEN: AAPL @ $165/share
MAX GAIN: 100% gain if AAPL closes @ $170/share or higher upon expiration
Last week we sold our $OSTK call options for a 120% gain after buying them @ $12 & selling them at @ $26.40. That has put us in a good amount of sideline cash that we we're going to redeploy on a combination of other setups we can take advantage of.
However, we're not going to rush into any new positions unless the set-up is perfect. We do have a few different plans in mind. First, if Apple starts to immediately pull-back, fills its gap and goes oversold on the hourly, we want to be adding more exposure to set up the portfolio to take us into the Christmas Santa Claus Rally for the pre-earnings runup that we anticipate. We are moderately hedged right now to the upside with our deep in the money January AAPL leaps. In the unlikely event that AAPL just keeps on melting up from here, we're at least in those call options. They will outperform what owning the common would yield by about 2x. For example, when we purchased those call options AAPL's stock price has since climbed up about 15% from trough to the current spot price...where as the options we purchased are up about 32% since that entry. So we paid a fraction of the cost...at an entry of $58.35 for those call options, that's 1/3 the cost of what owning the shares would have cost us. So that was a very conservative position designed to act as a "stock replacement strategy." A solid conservative trade with little stress, expiring in January of 2020 & very deep in the money with a 100 strike. We obviously don't expect to hold this till expiration....we could ...but that's not our goal with this position. We will inevitably look to sell this position once this AAPL bull cycle winds down which will inevitably happen likely sometime early to mid next year. We discussed previously why & how this always happens. AAPL goes through mega bull & bear cycles that's cyclically timed around every 2 years upon the release of the new form factor of the iPhone. The new form factor always breaks new YOY comps compares to the previous iPhone "S" release. Like clockwork, AAPL will break all time revenue numbers this January and then next January of 2019 those comps will fail to beat from the year prior. In anticipation of the slow down, the street always starts to unload/underweight AAPL going into the next year before the iPhone S cycle is released. That's the fundamental gist of why we see mega bull & then mega bear cycles in AAPL. But the technical picture becomes very obvious on AAPL as we can start to see the air coming out of the bag when that's about to happen.
Ok now moving on to what we're considering for the Santa Claus Rally heading into the Holiday season....we're currently looking @ the 2018 January 160 - 170 call spread. It's trading around & $7.20 right now. If we can get this around $5 even then that's a 100% gain so long as $AAPL closes @ or above $170 upon January 2018 expiration. So if AAPL pulls back and fills this gap ...then that would make for a nice entry on this call spread...as that would bring the cost of entry to around $5. Again, the setup has to be perfect for us to consider this. We don't want to risk buying a call spread up here at the current premiums. When we look at $AAPL here...we can see that almost always these gaps ups tend to get filled. Every now and then, they don't...and if that's the case and we see this just continue to run ...then so be it. That's why we're already hedged to the upside in those conservative leaps.
Now given that Apple no longer has any major events ahead of it until January earnings...and given the huge rally it has already seen, I do expect to see Apple struggle near-term. At the very least, one would expect Apple to test the $170 level at some point.
POSITION: AAPL January $160 / $170 Call spread
CURRENT COST: $7.20
TARGET COST: $5.00
BREAK EVEN: AAPL @ $165
MAX GAIN: 100% gain if AAPL closes @ $170 or higher upon expiration
We don't have a clear enough picture on Overstock to reenter our calls that we sold last week. We still have a bullish pattern on $OSTK but good enough to hold our common stock position. For us to reenter with call options, we're going to need to see a deeper pullback before we entertain a reentry.
An interesting setup is occurring on Tesla but we're not quite there yet. We can see that Tesla took a nice hit on earnings and it's back around a key support level here @ the $300 area. So much emotion has already come out this down move that the risk / reward ratio is looking more attractive. However, just like we saw with CMG ...things can go much lower. Whenever we see deeper lows on RSI & MACD we tend to get a deeper low in price action as well. It means the selling aggression is different/stronger to the relative the pullback periods we've seen. Past members will remember our entry on TSLA back around $199 & again @ $207 back in late 2016. There was a very specific reason why we caught the very beginning of that breakout rally that took TSLA from $200 to $370. See below on this daily chart:
So if Tesla resumes its selling pressure and can push down to around a 23-25 RSI on the daily, that would make it interesting. We would look to put on a similar trade like what we had recently put on with Apple when Apple was at a 30-RSI back at $150 area. So those are the three different ideas we are currently entertaining. None of them are at the exact right place they need to be right now. So we're going to wait until we have that right set-up. I think our exiting on Overstock last week back around last week was a good move. Because either way, it puts us in a good place to position. Like I said, if Apple continues to pull-back -- as it should -- it sets up an opportunity for us to re-purchase our spread. If Apple rallies to deeply overbought, it sets-up an ultra near-term trade. So we'll discuss that more as things play out.