On 8/3/16, we discussed our bullish bias on USO (the oil ETF) based on the compelling daily and weekly chart patterns. Below is the current daily chart of USO:
Although at the time we discussed various types of bullish option trades, I entered a bull call spread. I purchased the Sep. $8 calls and sold the Sep $9.5 calls for $1.10/share. My maximum gain is $.40/share (the difference in strike prices less debit paid). This represents a 36% return in 44 days (the expiry) and will be achieved if USO closes above the short strike price of $9.50. My break even at expiry is $9.10 (so the trade in essence gives me $.50 of wiggle room to go against me and I do not incur any losses).
Rolling the Short Strike Higher as Means of Getting More Bullish on USO
On 8/4/16, after having confidence of the anticipated short-term bottom, I added to my position (increased deltas) with a long Sep $8/10 bull call spread. Then on 8/11, after it retraced and took out the prior bar’s high and looked like a “bullish measured move” setup, I rolled my short Sep 9.5 calls and sold the Sep $10 calls. I did this to increase the deltas and to sell more extrinsic (time) value for theta decay.
Closing the USO Call Spreads Into Strength For Near-Maximum Profit
Today, as USO rallied for the fourth consecutive day and is approaching the target/resistance area, I closed all positions for a nice profit. (Note that with the market internals approaching bearish levels, i have been tightening my stops on many bullish positions.) Although the short calls on the bull call spreads are deep ITM and still could expire with the maximum profit, with 31 days to expiry and having approached my maximum gain, it is my style to close into strength and not have to sit through pull backs. This made it a 12-day trade (with management along the way) versus a 44-day trade if waited to expiry. I prefer to “get off the train” and patiently wait for another compelling setup. Nice trade!
Two Other Bullish Trades Made Today: CHK and MNK
I get many trade ideas from Greg Capra and his daily posts. In his morning Free Trading Newsletter, among other observations, he said “Chesapeake Energy (CHK) finally started to move higher today. In [Greg’s] July 31st letter, [he] said this was one of the better looking charts in the sector. With [yesterday’s] bullish Wide Range Bar (+WRB) that was accompanied by the increase in volume that it should. CHK is resuming the move higher it started last month.”
Above is a daily chart of CHK. With the bullish morning action in CHK suggesting a continued bullish move higher, I decided to sell the Sep $5 puts for $.20 despite the low volatility. This is a generous ROI for a $5 stock and gives me a cost basis of $4.80 if assigned. My stop loss, however, is under $4.90 major support (the majority of the time I trade options for speculation and not with the intent to get assigned the underlying).
Shorting OTM Weekly Puts on Bullish MNK
On 8/5/16, I discussed why I sold $90 naked puts on MON for 25 cents (I sold a 10-lot for $250) based off the mispriced options and bullish chart pattern. Below is my current position monitor and quotes showing a current quote of $.04 x .07 for the 90 puts which expire this Friday. With MON trading almost $16 over the $90 strike, the odds favor the 90 puts expiring worthless.
I found a similar trade on MNK today when scanning. Greg Capra Tweeted on 8/2/16 that MNK was a core long candidate based on the Igniting Gap (from earnings) and bullish monthly chart. I agree and have been watching for a bullish entry on a pull back. Below is the daily chart.
The strength is obvious, and MNK has given no ideal low-risk entry for initiating a bullish position (except for when announced on 8/2). Although I was actually looking at the option quotes to possibly short Sep puts, I noticed the inconsistent quotes on some of the Aug OTM strikes which expire this Friday.
Above is my current position monitor MNK which also showing various quotes for options which expire this Friday. I sold a 10-lot of the Aug 73 puts for $.10 and a 10-lot of the Aug 74 puts for $.15. This gives me a maximum gain of $250 (less commissions) if MNK closes over $74. Notice that the 73 and 74 strikes I sold are now $0 bid, which is a good sign. I am happy with the reward-risk considering the very bullish pattern, particularly with the Sep options being too spready (illiquid).
Happy trading! If you have any questions or comments, please e-mail Dan Gibby at Dan@gregcapra.com
