7 Trade Ideas in 8 Minutes: Live Options Walkthrough

Key Concepts

• Options Trading Strategies: Put Ratio Spread, Diagonal Spread, Iron Condor, Covered Call, Short Put, Strangle, Call Ratio Spread, Calendar Spread.
• Implied Volatility (IV): A measure of the market's expectation of future price fluctuations. High IV indicates greater uncertainty and potentially higher option prices.
• Delta: A measure of an option's sensitivity to changes in the underlying asset's price.
• Bid-Ask Spread: The difference between the highest price a buyer is willing to pay (bid) and the lowest price a seller is willing to accept (ask). Tight spreads indicate higher liquidity.
• Open Interest: The total number of outstanding option contracts for a particular strike price and expiration date.
• Expected Move: An estimation of the potential price range of an asset based on implied volatility.
• Liquidity: The ease with which an asset can be bought or sold without affecting its price.
• Defined Risk Trades: Strategies where the maximum potential loss is known upfront.
• Neutral to Bullish Lean: A trading outlook anticipating sideways to slightly upward price movement.
• Short Delta: A position that profits from a decrease in the underlying asset's price.
• Long Delta: A position that profits from an increase in the underlying asset's price.

LMND, Carvana, PayPal, and Other Trades – Detailed Analysis

I. LMND Discussion & Initial Assessment

The discussion began with LMND (Lemonade), noting its decline from $100 at the beginning of the year to a current price of $65. Past trading activity was recalled, with speculation about Tom’s exit price (estimated between $30-$40). The current price of $65 and an Ivy Rank of 60 were noted. Earnings are scheduled for Thursday before market open. A potential trade was considered at $50, but the expected move of $11 suggested this would be outside the typical range.

II. Carvana (CVNA) – Earnings Play & Volatility Concerns

Carvana (CVNA) was identified as having earnings after the close. A neutral outlook was expressed, recommending weekly options or March options with a slight bullish bias. However, the extremely high implied volatility (270%) raised concerns about being “married” to the position. A weekly iron condor was suggested as an “all or nothing” trade, but the wide bid-ask spreads and low open interest in February options made trading difficult. The market conditions were described as “goofy” and potentially unsuitable for trading CVNA.

III. Put Ratio Spread Consideration & Market Liquidity

A put ratio spread was briefly considered for LMND, leveraging the fact that the stock cannot go below zero to define risk. March options were examined, but the market was deemed “stinky” with low open interest (50s and 80s contracts). The lack of liquidity was a recurring theme throughout the session.

IV. Diagonal Spread Implementation – LMND

Despite initial hesitation, a diagonal spread was implemented in LMND. The rationale was to limit risk – allowing the trader to walk away if the stock declined significantly, while still participating in potential upside. The trade involved buying a March 70 call and selling a two-day expiration 75 call. The trade was initiated at 420, resulting in a long delta position. The trade was described as a “participation trade” with San Jose.

V. PayPal (PYPL) – Oversold & Strategy Selection

PayPal (PYPL) was identified as oversold, up 67 cents and trading near the low end of its range. A covered call or short put strategy was initially considered. The trader ultimately decided on selling March 40 puts at $1.28, followed by a “poor man’s cover call” – selling a March 42.5 call against a May 35 call. This strategy aimed to offset the extrinsic value of the long call option. A technical glitch briefly displayed a second account, causing confusion.

VI. Market Conditions & S&P 500 (SPX) Context

Throughout the session, the overall market conditions were described as “not great” and characterized by wide bid-ask spreads, particularly in options. The S&P 500 (SPX) experienced a rally, rising 31 points, NASDAQ up 150, Russell up 26, and Dow up 200. Despite the rally, the options market remained illiquid, making it difficult to execute trades at desirable prices. The trader mentioned a previously closed SPX trade and briefly considered re-entering, but ultimately decided against it.

VII. Silver & Gold – Momentum & Short Delta Lean

Silver and Gold experienced a significant rally, with Silver up to $77-78 and Gold up $11-13. A short delta lean was considered on the S&P 500, capitalizing on the rally. A trade was initiated to fade the 6900 mark, selling a call option at 6910/6920 for $225.

VIII. Morgan Stanley (MS) – Strangle & Volatility Assessment

Morgan Stanley (MS) was identified as a potential trading opportunity, with an Ivy Rank of 35 and earnings on April 10th. A strangle strategy (selling both a call and a put) was considered. The trader executed a call diagonal spread, buying the March 80 call and selling the weekly 85 call for $3 and change. The expected move for the month of April was $17, while the March expiration had an expected move of $12.

IX. DoorDash (DASH) – Earnings & Illiquidity

DoorDash (DASH) was deemed untradable due to extremely wide bid-ask spreads and low open interest. The trader passed on the opportunity, citing the lack of favorable market conditions.

X. Intel (INTC) – Existing Position & Adjustment

An existing position in Intel (INTC) was discussed – short the 45 puts and a 45/50 call ratio spread. The trade was up approximately $100. The trader added to the position by selling a 41/52.5 strangle, aiming to flatten the overall delta.

XI. FCX (Freeport-McMoRan) – Bullish Outlook & Trade Execution

FCX (Freeport-McMoRan) was identified as a bullish opportunity, benefiting from positive trends in copper and gold. A trade was executed, details not fully specified.

XII. Walmart (WMT) – Earnings Play & Strategy

Walmart (WMT) was discussed, noting its strong performance year-to-date. An existing position involving the 125/120 call spread in February was mentioned. The trader added to the position, selling another call spread to capitalize on the potential for continued gains.

XIII. eBay (EBAY) – Call Diagonal Spread

eBay (EBAY) was traded using a call diagonal spread, buying the March 80 call and selling the weekly 85 call for $3 and change.

XIV. Concluding Remarks & Market Commentary

The session concluded with a reiteration of the challenges posed by illiquid markets. The trader emphasized the importance of subjective interpretation in trading, highlighting the interplay between price action, volatility, and market sentiment. The trader also reflected on a successful trade in the S&P 500, attributing it to a combination of skill and luck.

Notable Quotes:

• “These markets are so bad.” – Repeatedly expressed throughout the session, highlighting the challenging trading conditions.
• “You have to have good markets. You have to have tight type good markets.” – Emphasizing the importance of liquidity for successful options trading.
• “Sometimes you get lucky.” – Acknowledging the role of chance in trading outcomes.
• “It's all subjective.” – Highlighting the interpretive nature of market analysis.

This summary provides a detailed account of the trading discussion, including specific trades, market observations, and strategic considerations. It aims to capture the nuances of the conversation and provide actionable insights for those interested in options trading.