Below is a daily chart of SPDR S&P Biotech ETF (XBI), $71.00.
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Trade: We recommend shorting 10 May 74/77 bear call spread (17 DTE) for mid-point (currently, $.43/share).
Technical Setup: Bearish engulfing at Major Resistance daily chart.
Option Strategy: Bear Call Credit Spread (BCS). Defined risk strategy where you make maximum profit (net credit received) if the stock closes below the short call strike at expiration. We sell call strike price above resistance where the pattern suggests that the stock will not close above at expiry, and simultaneously purchase higher strike call than the one sold as a hedge and to reduce margin.
The return on investment (ROI) is the credit received divided by the maximum loss (i.e., width of strike prices less premium received). The break-even is the short strike price plus credit received (i.e., also your cost basis if assigned the stock).
Considered a mildly bearish strategy since we are not buying puts (or shorting stock) and just calling a short-term top in the pattern. Trade has positive theta (meaning you make money on time decay) making it a high probability trade since we time entry with the technical pattern.
Max Gain: Credit received. Cost basis if assigned is lower strike plus Credit.
Stop Loss: $73.02.
Adjustments and Comments on Open Advisory Letter Trades (Note: We have started posting our trade updates in a separate Report in the Member’s Area. Please see that document for a current reflection on all Open and Closed Trades which will be updated nightly). But here are the current Open Trades and Adjustments.
BYD – Bought 10 Bull Call Diagonal as follows: buy Jun $20 calls and selling May $23 calls for $2.05/share. Note: We typically like to leg into BCD but with earnings 4/25/17 and mixed market internals, we want to sell the OTM call immediately to generate some time decay and lower cost basis of long call. Move stop loss breakeven. Note: earnings 5/2/17 so holding is higher risk.
GNC – Shorted 10 Jun 7.5/5 bull put spread for $.35/share. Stopped at $.65/share for $300 loss.
DIA – Sold 10 May $208/212 bear call spread for $.73/share, stopped at $1.45/share. Sold 10 May $203 naked puts for $.79/share to generate additional time decay since the gap/pattern turned bullish. Stop on short put is $203.58.
LRCX – Shorted 10 May 150/155 bear call spread for $.85/share. Stop Loss: None for now, we will use Adjusting Strategies if necessary; however, ideally, it should not trade over today’s high.
PM – Under $109.75, we recommend selling 10 Jun 115/120 bear call spread (45 DTE) for mid-point (closed at $.55/share). Stop Loss: $115.64.
INTU – Shorted 10 May $120/115 bull put spread for $.27/share. Stop Loss: None.
AXP – Sold 10 May 81.5/84.5 bear call spread and sold 10 May 76.5/73.5 bull put spread (Iron Condor) for $.48/share. Stop Loss: None.
Happy trading! If you have any questions or comments, please e-mail Greg Capra at Greg@mastertrader.com or Dan Gibby at Dan@mastertrader.com
All the best,
Greg Capra
Managing Director and Pristine Founder
Dan Gibby
Chief Options Strategist
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Twitter: @GregCapra
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