Trade Summary: August 24, 2015

| August 24, 2015

August 24, 2015

 

 Trade Rationale

Well, it’s certainly an interesting time to put on a new set of trades.  The market has basically entered correction territory, with the S&P 500 down 10% in a week. Volatility has vaulted to crazy levels as well.  We’re dealing with a major dose of overselling, but it will have to run its course.

The selloff is mostly due to the collapse of the Chinese economy.  China has been a major source of demand for goods for the last several years, so the implosion of the world’s second largest economy is spooking investors.  Oil’s plunging price is also a cause for concern, and is certainly hurting emerging market countries, who rely on it as an export.

Still, the market’s reacting like it’s 2008 and we have a fraction of the risk on the table as we did back then.  More than likely, margin calls and short covering are adding to the selling pressure as much as anything fundamental.  I believe we’re close to finding a bottom.  That also means we should have some excellent bottom-fishing opportunities.

We’re going to buy calls in three stocks that I believe are great values after this selloff.  Because option prices are going to be all over the place, I’m going to put an extra large buy-up-to range for each of our options.  If for some reason, the market opens much higher than any of ranges, we’ll just sit on the sidelines for the time being.

The first company we’ll buy calls in is Exelon (EXC).  Solid utilities with good dividends should be some of the first stocks to recover.  Moreover, the utility industry has been merger/acquisition crazy recently.  A major utility like EXC is ripe for a rebound.

Another attractive opportunity is buying calls in American International Group (AIG).  Financials are down because interest rates are now expected to be lower for longer.  However, insurance companies shouldn’t have to worry about that nearly as much as banks.  AIG is down with the industry but looks super cheap right here.

Finally, let’s buy calls on eBay (EBAY).  The leader in online marketplaces is down big with the rest of the tech world today.  However, the company is looking like an excellent buy as it spins off its businesses (like Paypal) and focuses on core activities.  The stock’s valuation is also extremely attractive at these levels.

 

Trade Details

#1) Buy Exelon (EXC) October 16th 33 Calls up to $2.25

For this trade, we’re looking for a rebound in EXC.  Our first profit point for conservative traders is at $35.  For aggressive traders, you can hold up to $37.  For risk control, the conservative exit level is $31.  $29 is the final exit level for aggressive traders.

Exelon

#2) Buy American International Group (AIG) October 16th 57.50 Calls up to $3.00

With this trade, we’re also looking for a move higher.  Our first exit point for conservative traders is at $60.  For aggressive traders, you can hold to $63.  For risk control, the conservative exit level is $52.  And, $50 is the final exit level for aggressive traders.

American International Group

#3) Buy eBay (EBAY) October 16th 25 Calls up to $2.25

Finally, we’re looking a move up in EBAY.  Our first profit-taking exit point for conservative traders is at $27.  For aggressive traders, you can hold to $29.  For risk control, the conservative exit level is $22.  $19 is the final exit point for aggressive traders.

eBay

 

Category: AOA Trade Summary