A Tactical Short-Term Trade to Make Ahead of the Election

by Options Sensei |

Market rally regardless of the election outcome

The stock market has been herky-jerky over the past two weeks as it reacts to every bit of news regarding a new stimulus package and awaits election results. Although I doubt any stimulus will come to fruition prior to 2020’s end, I think the market will rally regardless of the election outcome — as it removes an unknown.

Hence, I’ve become more tactical in my trading. This means taking a more defensive posture for existing positions by focusing on premium collection and establishing delta-neutral iron condors for new positions, expecting most stocks to remain mired in a range for the next week.

Case in point: Last week, our Options360 service initiated bullish diagonal spreads in Wal-Mart (WMT) and Zillow (Z) with short legs set to expire today. Normally, I’d hold off until Thursday or Friday to roll the short leg. However, with both stocks drifting sideways, I decided to issue alerts on Wednesday to ensure we didn’t get caught in a downdraft.

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Additionally, to make sure we were collecting a solid premium and reducing cost basis — and therefore risk — I rolled short calls to lower strike prices, neutralizing the positions so that we can bide our time through next week. Paypal (PYPL) is an example of a new neutral position I established.  The digital payment company had a big jump Wednesday on news it would start accepting Bitcoin and other cryptocurrencies for payment on its platform.

On Thursday, it backed all those gains and then some.  This is when I stepped into an iron condor on the theory it would hold above the recent breakout above the $200 level but stay below the high printed on the bitcoin news. At least until the company reports earnings on Nov.3.

paypal holdings chart

To quote myself in the alert, “I think it will hold within a range ahead of the report and we can sneak in some premium collection with an iron condor ahead of the event”

The position established in Options360 consisted of

-Buy to open 2 contracts PYPL Oct (10/30) 190 Calls

-Sell to open 2 contracts PYPL Oct (10/30) 195 Calls

-Sell to open 2 contracts PYPL Oct (10/30) 215 Calls

-Buy to open 2 contracts PYPL Oct (10/30) 220 calls

For a Net Credit of $1.50  (+/-0.10)

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paypal snapshot analysis

This is an opportunistic or tactical short term trade designed to generate income while the market waffles ahead of the election. This is a time to become tactical rather than predictive.

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