The market is on edge. Every bit of news seems to cause a knee-jerk reaction, and Tuesday’s manufacturing data was no different. This week, we still have the Fed’s beige book, jobless claims, and non-farm payrolls to contend with. Next week, we have a presidential debate.
So, in preparation for a plethora of economic and political information, one certainly must consider the benefit of defining risk in case of being very wrong very fast. At the same time, the leverage of an options position can reward one for being very right very fast.
But the VIX is rising, and doing so in a relatively aggressive manner, so options are certainly pricing in a bit more volatility for the next few days or weeks:
Even with the spike in implied volatility of options on Tuesday, there are still individual stocks out there that have attractive combinations of technical setups and option prices. If I can identify a stock that has a real chance of a large move when the options market is discounting that, I can generate a great trade concept with a high expected value.
One such setup appears to be looming in Trade Desk, Inc – stock symbol TTD:
When the market tried to collapse at the end of July and into the first few days of August, TTD initially fell in a similar manner to today’s move, then the stock re-tested highs before ultimately falling more than 20% by August 5th. A few days later, earnings came out strong and propelled the stock to new highs. I could see a similar result here as the stock either seems to be setting up for a similar recovery and grind higher if the market turns out to be okay, or a major spike lower if the data and news this week from a global market perspective repeats the chart formation from about a month ago. And I can set up an options trade that profits in either of those scenarios – all I must do is find the trade-off I’m willing to accept. In my case, I could structure a trade that speculates that the stock won’t be down a little bit – in my scenario, I believe it’s more likely that it’s either down a lot or back to re-test the highs.
That’s the fun of options for me – I can structure any directional trade I want with any rate of change I expect and find an opportunity to express that view. I simply must put in the effort to scan through a large list of stocks, find the right setups, and do the options analysis.
If you’d like to get a list of ideas and setups just like this that could be of interest for trading opportunities, check out my Outlier Watch List.
And 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
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