A Low-Risk, High-Reward Trade That Could Have a 165% Gain
I don’t usually post Options360 trade recommendations on this site in real-time. But, with my conviction being sky-high and the set-up being so clean, I felt compelled to share it with you, the OptionSensei readers.
By now, you’ve probably heard about Achegos, a multi-billion dollar fund that blew up last week. It had heavily-concentrated and highly-leveraged positions focused on Chinese technology and international media companies.
Archego’s holdings big drop in a matter of days
When banks such as Goldman Sachs (GS) and Morgan Stanely (MS) — acting as Archegos’ prime brokers by creating derivative swaps — decided too much was at risk and initiated a forced liquidation causing a cascade of selling. This resulted in a number of Archego’s holdings such as DGX Technology, (DGX), Vipshop (VIPS) to drop 50% in a matter of days. Viacom (VIAC) and Discovery Networks (DISCA) were also caught in the melee, with their shares doubling in the prior 90 days, only to be slashed in half last week.
Misuse of leverage is bad
This widely-reported story has many intriguing aspects with new details still being revealed. However, when a fund, firm, sector, or individual blows up the one element that never changes, leverage. A majority of people think that “leverage is bad.” In my experienced-based opinion, I think this is wrong, and that in actuality, it’s the misuse of leverage that’s bad. Furthermore, the lack of hedging or risk management is bad.
JD.com position to take advantage of the fallout from the Archego blow-up
That’s the reason that when Options360 does apply leverage, we also use spreads to hedge, or apply risk management parameters, to define any potential loss. Let me show you how I recently established a position in JD.com (JD) to take advantage of the fallout from the Archego blow-up. And what action you can take now to still participate.
Before last Friday morning’s market open, the news was spreading that GS was shopping large, to the tune of multibillion dollars, buying blocks of stock in names such as VIAC and DGX.
I had already been eyeing some Chinese big-cap tech companies because… well, I’ll let the Alert I sent to Options360 Service members at 10:20 AM ET on Friday convey my thoughts…
“JD.com (JD) has been under pressure along with other Chinese tech stocks as the companies face both regulatory pressure from within China and continued delisting concerns from the SEC here in the U.S.”
“JD posted strong earnings two weeks ago and seems less under the microscope than competitors such as BABA and BIDU. “
“The stock is staging a nice reversal today leaving a bullish island and could see an extended rebound in the coming days”
The upshot was that I felt JD’s final push below the $80 was due to it being collateral damage to the still-unfolding Archego debacle presenting a buying opportunity.
Position with an unlimited upside, but with a well-defined risk
The initial trade I laid out for members was a diagonal call spread using the 82 strike with an April 16th expiration as the long leg and the April 1st 85 strike as the short. Using a spread gave us a hedged position with the flexibility to make adjustments.
On Monday, when the stock dipped back and held the $80 level, I became more confident that last week’s reversal represented a buying opportunity. I issued an Alert to cover the short leg for $0.25, leaving us outright long the 81 strike at a reduced cost basis. We now have a position with an unlimited upside, but with a well-defined risk — the proper application of leverage.
Purchase JD April 16th 82 strike call
This is a position you too can now participate in. My recommendation is to purchase the JD April 16th 82 strike call for around $3.00 per contract. My price target is $90 per share, which would give the call a value of $8.00 minimum for a 165% gain. To limit our potential downside, we’re using last Thursday’s close as a ‘stop-loss’ level. Meaning, if shares drop back below $79 we’ll exit the position. At that level, the call will be worth around $2.00, or what would be a 33% loss. In other words, the position’s reward to risk is now over 5:1. I like those odds.
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