What a start to the week!  After a very bullish run in the market to end last week, Tuesday’s CPI number put a real wrench in the rally, causing a 1.5%+ pullback in tech and more than a 4% pullback in small caps.

These kinds of moves certainly illustrate why it’s important to have a list of potential entries and then execute the plan when the entry signal hits.  Today, I want to focus on a name I highlighted in my Outlier Watch List over the weekend, and it’s one of the few names that performed exceptionally well on Tuesday – Jet Blue:

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From a technical standpoint, I was looking at JBLU as a laggard to the broad stock market that may have some perceived value by a larger fundamental investor, and there was an indication that this may be happening was driven by the recent rally.  A technical input for the bullish bias was a simple move above the 200-Day Moving Average, which occurred on Monday. With that, it would be time to evaluate the options landscape, and with this screenshot from CBOE LiveVol, we can see that JBLU options premium was near 6 months low (Implied Volatility in red):

This would then lead to an evaluation of the options landscape to find my targeted option in the ~1 month to expiration and 30-Delta range with a reasonably cheap implied volatility.  Here, we see the term structure of implied volatility indicates a rise on Monday with various March options looking roughly equally attractive for an entry:

After this, it was time to look at individual strikes, targeting a 30-Delta call in March 8th, 15th, or 22nd for the expiration:

This evaluation leads me to conclude that the March 22nd $7 calls for $0.195 would fit my parameters best, with low implied volatility and a ~30-Delta for the strike.

So, what happened next?  Carl Icahn announced his position, the stock spiked, and the rest is history, as the $7 calls highlighted increased in price from $0.195 to $0.845 – a 333% increase in just one day:

Not every trade works out this well this quickly, but when they do, they certainly help motivate the one to do the homework ahead of time in order to be prepared for a potential trade entry.  And that’s why I generate my Outlier Watch List every week!

As always, please go to http://optionhotline.com to review how I traditionally apply technical signals, volatility analysis, and probability analysis to my options trades.  And if you have any questions, never hesitate to reach out.

Keith Harwood

Keith@optionhotline.com