Yesterday we advised you that CREE was on our watch list for a possible put selling candidate based on its post-earnings gap to a significant support area.  I said that I would update you on how I analyzed it and possibly traded it.  Although I did not trade it, I will outline the factors or “check list” I consider before entering such earnings gap plays.

Yesterday I showed you the daily and weekly charts of CREE showing the significant support in the $22.50- $23 area, as well as minor support in the low $25s from the prior unfilled gap area.

Trade Analysis Check List

Here is my trade analysis check list on selling puts on large gaps to support:

  • Is it gapping to significant support on multiple time frames?
  • Does the 5-Minute chart set up with a compelling bullish pattern in the first 60 minutes (also considering pre-market support and resistance)? The reason for this is that the odds of bullish follow through increase if the bulls can take control of the damaged pattern quickly at the perceived value prices.  Additionally, typically in the first hour the volatility of the option prices stay somewhat elevated, allowing for overpriced premium to sell.
  • Are the desired options (recall that our goal is to sell puts under the major support area if the factors in this check list are met) liquid, tight, and overpriced?
  • Note: A bonus is that the broader markets are also bullish (or at least neutral), but not mandatory because of the unique nature of the shock from the gap.

CREE Put Selling Failed Analysis

Below is the 5-Minute chart of CREE (with after-hours market data) showing the post-earnings collapse to the low $25s minor support area, as well as the ECN pre-market action the following morning:

8-17-2016 CREE 5 min 3-11-47 PM

Although the first criteria was obviously met since it would not have been on my interest list otherwise, the main factors #2-3 did not exist.  Since #1-3 are mandatory, any failure will veto the trade, as it did for me.

As you see on the 5-Minute chart, there was NO compelling pattern.  We teach many types of bullish intra-day patterns to assist you in taking a long position (e.g., shakeout, +123, breakout, 30-Minute high, double bottom, etc.), but none existed within the morning session at all.  And the pre-market action was also bearish, not holding the prior day’s post-market $25 support area.

Regarding the third factor, see below the very wide spreads on the OTM puts.  They were untradeable.  Period.  Although this is somewhat normal for the first 5-10 minutes, these stayed wide all day.  Don’t get involved unless you want to try to get filled as low offer (and when pattern turns bullish).

8-17-2016 CREE quotes 9-31-27 AM

Finally, even if the spreads were tight, the premium received would have to be worth the perceived risk of the put option sold.

I was also watching TJX and LOW yesterday for similar trades but they did not pass the above check list for me either.

BMY on Watch List After Further Selloff

As an aside, BMY has gotten crushed lately and approaching major support on the monthly chart (below).  With volatility increasing on this sell off, I will be watching BMY as a put selling candidate with an exhaustion sell off on the daily, coupled with some type of bullish hourly chart.

8-17-2016 BMY

Happy trading!  If you have any questions or comments, please e-mail Dan Gibby at Dan@gregcapra.com