When multiple, longer-term time frames come into alignment, we deploy what we call core, or “wealth building” trades. The use of options makes them even more profitable. Below is the weekly chart of FIT:
After its climactic fall from $52 post-IPO to under $12 earlier this year, it has been consolidating and forming a large bottoming pattern. Last week it closed with a bullish engulfing bar, engulfing the prior weeks of bullish consolidation. It has made a higher high and higher low and looks poised for a new uptrend on the longer-term weekly chart. Although not shown, the monthly chart also has a bullish double bottom formation following a climactic sell off. Both time frames have what we call “loose overhead supply” suggesting a longer move higher.
Below is the daily chart of FIT:
Last week it closed with a bullish +123 setup. This means that there was a bullish wide range bar (+WRB) followed by a bullish inside day. This +WRB closed at the top of its resistance range which is bullish, and suggesting a continued move higher. The chart above was taken mid-day 9/19 so it shows that the stock has already triggered to move higher. However, since it is a longer-term trade and we will use options to reduce our cost basis over time, it is not too late to enter.
We are recommending a bullish diagonal. This involves buying a longer term option and selling a closer expiration call option against it. We recommend buying in-the-money (ITM) options to pay less extrinsic value and sell an out-of-the-money (OTM) option against it to reduce the cost basis. We are recommending buying the May 2017 $13 calls and selling the Oct 17 calls for a net debit of $4.00/share. Our goal will be to continuously sell the front month calls against the long call. If the Oct 17 calls expire worthless, that will be fine; if they expire ITM, we will advise which strike to roll them to later. Our initial stop loss on the trade is below $14.40.
Income Trade Idea on IBB
Below is the weekly chart of IBB (the biotech ETF):
After making a higher high last month, it retraced in a controlled manner and closed with a bullish +WRB/engulfing bar. This higher low now gives us a major support area around $275. Since the amount of upside is questionable, we want a trade where we are speculating that this support area will hold.
We are recommending selling an Oct bull put spread under support. This involves selling one strike put and buying a further OTM put as protection and to reduce margin. We recommend selling the Oct 260 puts ($15 under the $275 major support) and buying the Oct 240 puts for a net credit of $.80/share as shown below:
Our goal will be for the entire spread to expire worthless. If you were to sell a 10-lot of this put spread, which would generate $800, less commissions. Please a stop loss on the trade below $275.
Happy trading! Note that with the FOMC announcement on interest rates this Wednesday, trading will be higher risk.
If you have any questions or comments, please e-mail Dan Gibby at Dan@gregcapra.com
