Trade Summary: October 20, 2014

October 20, 2014

 

 Trade Rationale

This week’s trade theme is really about as straightforward as a theme can be. It’s all about safety. Clearly, volatility has returned to the equity markets. And while the worst of it may be over, it’s not too late to prepare for another steep move down.

That’s not to say I expect another bout of selling like we saw last week. However, given what’s going on in the world, it makes sense to protect against a selloff. We lost several positions last week (although we also had some big winners) and I want to make sure we fully profit should it happen again.

I’m going to throw a bullish trade in there as well. I also want to be able to take advantage of overselling and not miss a great opportunity.

As such, we’re going to place two “selloff” trades to protect against the downside. And, we’ll do one bullish trade to profit from a potential snapback in a certain, hard-hit company.

First off, we’ll buy puts on iShares Russell 2000 (IWM). During times of high volatility, small caps tend to get hit harder than large caps. Since IWM is a proxy for the small cap market, it’s a perfect ETF to buy puts on. You also tend to get more bang for your buck with IWM than you would for say, a large cap ETF.

Our second “selloff” trade will be calls on iPath S&P 500 VIX Short-Tem Futures ETN (VXX). Keep in mind, during a selloff, volatility goes up – which is why we’re buying calls here instead of puts. VXX can and does move a lot in a hurry, so we can buy farther out of the money options and reduce our costs a bit. Also, our conservative exit point will be lower than the strike price, because if VXX climbs anywhere near our strike, you can bet the calls will significantly inflate in value.

Finally, let’s take a long position on International Business Machines (IBM). IBM is getting crushed today after the company announced abandoning earning forecasts for 2015 and selling off its underperforming chip-manufacturer. With IBM finally seeing the light, it could be due for a fresh wave of new investors, once the old investors are done jumping ship. Also, if the market rebounds, a rising tide lifts all boats.

Keep reading for the details of each trade.

 

Trade Details

#1) Buy iShares Russell 2000 (IWM) December 104 Puts up to $2.40

This trade profits from a downside move in IWM. Our first profit point for conservative traders is at $104. For aggressive traders, you can hold down to $102. For risk control, the conservative exit level is $114. $116 is the final exit level for aggressive traders.

#2) Buy iPath S&P 500 VIX Short-Tem Futures ETN (VXX) December 45 Calls up to $3.00

For VXX, we’re looking for a higher move. Our first exit point for conservative traders is at $42.50. For aggressive traders, you can hold to $50. For risk control, the conservative exit level is $30. And, $25 is the final exit level for aggressive traders.

#3) Buy International Business Machines (IBM) December 175 Calls up to $2.50

Finally, we’re looking for a rebound in IBM. Our first profit-taking exit point for conservative traders is at $177.50. For aggressive traders, you can hold up to $182.50. For risk control, the conservative exit level is $164. $160 is the final exit point for aggressive traders.

 

Category: AOA Trade Summary