We play with the cards we are dealt, states Sean McLaughlin of AllStarCharts.com.
There is nothing else we can do. We cannot employ willpower to create market conditions into being the way we’d prefer them to be. They are what they are, it is what it is. So we work with what we’ve got.
And what we’ve got right now are a bunch of badly beaten up stocks. Many are still off 60%+ from their recent highs. Dumpster diving isn’t my favorite way to find new ideas to trade. But my man Strazza enjoys the exercise from time to time and recently, he’s uncovered some notable insider buying and unusual options activity in some former highflyers, most notably Zoom (ZM).
But first, let’s survey the damage: Zoom has fallen from as high as $600 per share to as low as $80 recently. Wow. Just, wow. But the current price zone we find ourselves in has some memory. Is the bottom in?
I cannot definitely say it is. In fact, I wouldn’t be surprised to see this stock fall further.
So with this in mind, we’re going to put on a trade that won’t hurt us at all if the stock tanks to new lows, but will reward us handsomely if ZM sees a face-ripper bounce which would totally make sense given the amount of carnage we’ve seen.
Here’s the Play
We like a ZM Aug 110/130 Bullish 1:2 Ratio Spread for an approximately $1.25 credit. This means we’ll be short August 110 calls and we’ll be long two times as many 130 calls for a net credit. For example, for every one call, we’re short at the 110-strike, we’ll be long two more at 130. We won’t get too hung up on the amount of the net credit, we just want it to be some kind of credit when all is said and done.
We don’t do a lot of ratio spreads at ASO and the position management is a little out of the ordinary, so I’ll lay it out as best as I can.
If ZM tanks and tests or breaks new lows, then this position will be pretty easy to manage. In that case, our options will likely expire worthless in August and we’ll walk away keeping the net credit we collected when we put this trade on today.
If ZM screams higher and makes a run at $150 or higher (which is not inconceivable considering where it came from), then this position stands to do quite well for us. And as long as the position is profitable, I’ll continue holding into August.
Where position management gets tricky is if ZM trends higher from here, but slowly. Due to the short calls at the 110 strike and the distance to the 130-strike where our long calls begin working for us, if we’re anywhere between 115-145 heading into August, then theta drag will begin to take its toll on this position.
So my stop-loss plan is as follows: I’ll be watching my open position PnL in this trade. If at any time, my open loss exceeds the original credit I brought in for this trade (meaning I’m down more than $125 per one lot), then that’ll be my signal that ZM isn’t moving up fast enough for me and I’ll look to pull the trigger to exit the trade for a small and manageable loss.
Learn more about Sean at AllStarCharts.com.