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The following is the options trade Henry mentioned on the show yesterday and reasoning behind it. Please remember the risk in long options is losing the capital allocated for the trade entirely, though deep in the money options trade lower the risk significantly. This is for the more intermediate trader, if you have not traded options before this would be a good paper trade.
TSM reports before the bell Thursday, next week, TER Tuesday, ASML and LAM Wednesday, INTC Thursday. Let’s look at a couple of scenarios.
Depending on your goals, you want to look at the change in the option price with the change in the price of the underlying asset. Also be aware of the decay in the time value of the option.
At this snapshot in time the Aug 21 option prices for the 25, 30, and 35 calls are $19.30, $15.50, and $12.15 respectfully. If the underlying asset went up $5 at this moment the 35 call should gain $3.35 and the 30 call should gain $3.80. The time value (premium) for the Aug 21, 25, 30, and 35 calls are $1.91, $2.71, and $4.61 respectively over four months.
The loss of time value between tomorrow and next Thursday will be little to nothing. Remember there are at least five major semiconductor earnings reports over the next week. With SOXL you are not dependent on any one stock so you have limited the effect of any individual stock’s news or report on your trade.
Buy to Open 21AUG 30 Call @ 15.50 plus or minus
Scenario 1: You own an Aug 21, 30 call and TSM has a blowout report and the SOXL climbs 5 points. Your 30 call is now up $3.80. You should now sell it for $19.30 and lock in that 24.5% profit. Then buy the 35 call that is now selling for $15.50 your original investment.
If the following earnings reports continue to drive the SOXL higher continue to reposition your trade in a similar manner. Sell the call and buy a new one with a higher strike price.
If you can do it two more times over the week’s earnings reports you will have made a 73.5% return for the week. If it doesn’t play out that quickly you have the whole earnings season and the call doesn’t expire until August so your time decay is small.
Remember this is optimistic but a 3.3% gain in the SMH will translate to a 10%(5 point) gain in the SOXL and a 24.5% gain in your option.
Scenario 2: The earnings don’t move the market or even bring the sector down some. If you think the sector will rebound or you want to generate income in the mean time try this.
You buy the 30 call for the same $15.50 price. The SOXL goes down 5 points. Your call loses $3.35 in value and is now worth $12.15. You can sell a May call $4 (making it a vertical spread) out of the money (the snapshot is of a 47 call which is $4.25 out of the money in this snapshot but your actually would sell a different strike) against your Aug call for $2.65 to limit your loss to $0.70 if the price of the SOXL doesn’t move through May. If you think the SOXL will still recover you can sell a June call and then a July call as you wait for the price you want on the Aug call.
(The second scenario is for a more active trader that is trading calls around the initial position)
The alternate trade buying the stock outright would be:
Buy Market 43.0 Plus or Minus, Stop 38.00 (risk is 5pts) T1: 60 R:R 3.4
As always let the market settle 30-45 minutes before entering a trade, often these stocks pop at the open and then settle shortly after.
I will be taking the options trade so will be providing updates as it plays out.
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