We have been calling for the market to make new highs in July while most of the talking heads and money managers have been telling you there is going to be a pullback. Although we aren’t there yet, we are feeling pretty good about our predication so far.
We have been busy today but we want to cover a powerful option strategy that many of you may not be familiar with. We will cover the market at the end of our update but let’s look at what a “strangle” option trade can do for your portfolio.
We profiled a strangle option trade for Travelzoo (TZOO, $57.27, down $28.44), which is down a whopping 33%, earlier this week and here is the beauty of this type of option strategy. We knew with the company reporting earnings today there was a chance for a HUGE move but we weren’t sure which way the stock would move.
Below is a chart from Monday morning showing how we drew it up in the sand and the possible move that we thought the stock could make. The green line represented resistance on an earnings beat while the red line (with black circles) represented lower levels of support on an earnings miss.
Here were our exact comments inside our Members Area:
“Thoughts: The 52-week high is $103, the low is $13.75. Last time out shares moved over $20 and have moved higher in the last 4 quarters. If the company can impress the Street, then the stock could hit triple-digits again. If not a drop to double-nickels ($55) could be in the cards.” (END)
The August 90 calls (TZOO110820C00090000, $0.20, down $6.40) opened at $3.10 on Monday and had more than doubled by Tuesday afternoon to $7.20 as the stock reached a high of $90 after opening at $77 that morning. This is where you would have CLOSED the call options side of the trade because it was up 130% in two days and would have allowed you to hold the put options open for free.
The August 60 puts (TZOO110820P00060000, $7.40, up $5.70) opened at $2.20 on Monday morning and were at $1.70 yesterday. Today they are up 335%.
A strangle option trade involves buying both a call and put option and the trade was up 66% going into Wednesday’s action with both sides open. Of course, you would have had to have managed this position daily but the premiums for both options were $5.30 on Monday morning. Even if you didn’t sell the call option and are still holding both, the trade is up over 40% if you closed at current levels. If you played the trade perfectly then you could have made over 100% on EACH option just on the volatility.
Here is a current chart for Travelzoo with today’s drop:
As you can see, strangle option trades can be a great tool if you know a stock is going to make a big move but you are unsure of the direction. They are also known as “chicken trades” and sometimes they don’t work out, especially if a stock stays flat and doesn’t make the anticipated move your were counting on.
We teach these strategies in our trading manual, How to Trade Options on Momentum Stocks, and in our videos.
As we head to press, the Dow is up 115 points to 12,687 while the S&P 500 is higher by 14 points to 1,340. The Nasdaq is showing an advance of 15 points to 2,829.
We are just getting warmed up and there is a lot to cover in our Members Area so let’s get on it. Subscribers, check for the updates.