How Our Top Research Team Finds High-Conviction Trades

Key Concepts

• Put Spread: An options strategy involving buying and selling put options with different strike prices, aiming to profit from a limited price decrease in the underlying asset.
• Butterfly Spread: An options strategy involving four strike prices, designed to profit from limited price movement in the underlying asset. Typically benefits from the asset price remaining near the middle strike price.
• Ivy Rank: A proprietary ranking system (likely used by the trading team) assessing the quality or potential of a stock.
• In the Money (ITM): Describes an option where exercising it would result in a profit.
• Strangles: An options strategy involving buying an out-of-the-money call and put option with the same expiration date.

Dutch Market Exploration & Initial Assessment

The discussion begins with an exploration of potential trading opportunities outside the commonly discussed US and Chinese markets, specifically focusing on the Dutch market and the company NBIS – an AI infrastructure company. A quick initial assessment of NBIS options reveals bid-ask spreads of approximately $0.30, considered wider than ideal but not prohibitive. The Ivy Rank for NBIS is noted as 56, deemed “pretty good,” with an earnings date of February 18th. This suggests a potential trading window before earnings are released.

MU (Micron Technology) Put Spread Trade

The primary trade discussed centers around Micron Technology (MU). The trader is implementing a put spread strategy, expressing a bullish outlook – specifically, a belief that the stock price will remain within a certain range. The trade was considered more challenging to initiate given MU’s recent price increase of $12, making the entry point less favorable. The put spread is estimated to have approximately a 60/40 probability of profitability based on the credit received. The rationale behind the trade is tied to the expectation of a broader rally in the high-tech sector.

Apple (AAPL) Butterfly Spread Trade

A second trade involves Apple (AAPL), utilizing a butterfly spread strategy. The trader believes Apple has been relatively quiet during the recent market rally and anticipates it will “catch up” if the high-tech industry experiences a broader upswing. The butterfly spread is currently “slightly in the money,” estimated at $4 in profit, though initially at $5. The trader highlights Apple’s limited participation in the recent $2 rally from its yearly lows.

The specific details of the AAPL butterfly spread include short strikes at $265, with a maximum risk of $700, and the willingness to hold the position through earnings if necessary. The trader characterizes the trade as a “cheap shot” due to its favorable risk-reward profile.

Rationale & Market Sentiment

The underlying assumption driving both trades is a belief in a potential rebound within the high-tech sector. The trader specifically points to Apple’s relative underperformance during the recent rally as an indicator of potential upside. The discussion also touches on the recent “down tick” experienced by MU, which, despite a subsequent recovery, influenced the timing of the trade (with regret that it wasn’t executed the previous day).

Risk Management & Trade Parameters

Risk management is explicitly addressed in the AAPL trade, with a defined maximum risk of $700. The trader expresses comfort with holding the position through earnings, indicating a willingness to accept the risk of earnings-related volatility. The assessment of the NBIS options focuses on the width of the bid-ask spread as a key factor in determining trade feasibility.

Logical Connections

The conversation flows logically from exploring new market opportunities (NBIS) to executing specific trades based on perceived market dynamics (MU and AAPL). The trades are interconnected by the overarching theme of a potential high-tech sector rally. The discussion of risk management and trade parameters demonstrates a practical approach to options trading.

Notable Quotes

• “I don't know how you can hate it. I mean, cheap shot.” – Referring to the favorable risk-reward ratio of the AAPL butterfly spread.
• “I'm being bullish on MU. I'm doing a put spread. Just hoping they the stock price we stay in the range.” – Clearly stating the trading strategy and underlying expectation for MU.