By Dan Darrow

November 20, 2022

Today's Trade Ideas

Symbol: JNJ

Style: Swing

Strategy: Call Spread


Long Dec16 $175 call

Short Dec16 $180 call

Action Area: $2.00 - $2.40

Comments: JNJ is a fast-developing bullish trade idea. Health Care and Pharma have had a volatile couple of weeks as rotation action knocked the names lower two weeks ago but came back into the group this past week. Heavy-weight JNJ finished green each session this past week, and Friday’s rally put it above key recent resistance at 175, opening the stock up for even more upside. Following the clean break of 175, JNJ now has a path to 180 to retest the July high, and the Dec16 call spread will be targeting an initial move to 178+ to begin locking in money. The swing trade will have a tight stop below 174.50 (a failed breakout) or a 30-40% net debit loss, whichever happens first. 

Symbol: DG

Style: Event

Strategy: Strangle


Long Nov25 $265 call

Short Nov25 $270 call

Long Nov25 $250 put

Short Nov25 $ 245 put                

Action Area: $1.10 - $1.45

Comments: DG is a speculative, short-term strangle idea. In recent quarters, DLTR and DG would report on or around the same day, removing the potential for a sympathy play of one on the other. This quarter is different. DLTR will report earnings Tuesday morning, while DG is not scheduled until 12/01, and that means the latter’s Nov25 weekly options will be trading at a much smaller premium into DLTR’s report. The two have not always traded closely in tandem with one another, but since August, they have had a .99 correlation, and the setups are currently similar as they both hang around year-to-date resistance. The DLTR Nov25 straddle is pricing in a ~9% move, whereas the DG Nov25 straddle is only pricing in a ~2.5% move, so the short-term strangle will be targeting a move of $7+ in either direction on DG to exceed what is expected. The options expire on Friday and will have no stop until after Tuesday morning, while a lack of a large move in sympathy to DLTR’s report will take a toll on the short-term contracts, so be sure to plan your size accordingly.

On The Radar

Our next option session will be the following Monday (11/28) not tomorrow because it is a holiday week and many people are either out of office or traveling. Getting together the last week of November/first few days of December will allow us to prep for the monthly jobs report (12/02), while also discussing possible scenarios for the final month of 2022. If you are taking the week off, I hope you have a wonderful few days and a happy Thanksgiving. If not, expect the nightly letters and updates during the session as usual. 

After a massive rally post-CPI, the market took a breather this past week. QQQ and SPY began to digest the large recent run this past week, with the indices alternating gains and losses but beginning to stabilize at higher levels. QQQ and SPY both closed Friday above their 8day ema and 20day sma (important momentum indicators), while the former has a path to the 100day sma (291.98) and the latter is within striking distance of the key 200day sma (405.81). With less news expected this coming week due to the Thanksgiving holiday, momentum may remain with the bulls following the constructive recent action, and that means our trade mix needs to continue to slightly favor bullish strategies as well.

Following the large recent rally on QQQ and SPY, the Dec16 hedges have moved further out-of-the-money, and we will need to adjust those higher soon. Lately, we have rolled up/out the hedges around major economic events, and the next market-moving economic number probably won’t come until the jobs report at the beginning of December (though the CPI and FOMC rate decision mid-December are much bigger). Unless there is a short-term retracement under the 8day ema and 20day sma this coming week, we will plan to hold off adjusting the hedges until the beginning of December to line the contracts up better to the big catalysts. 

ABBV had a solid finish to the week on Friday, and the move to 155 sent the Dec16 call fly roll up into the money again (the stock popped Wednesday above 155 as well). When it comes to flys, exits can be tricky, and our usual rule of thumb is to close the strategies early and realize a smaller winner or close the strategy late (near expiration) to try and maximize the full potential of the fly. For ABBV, because the contracts don’t expire for a month, the plan will be to watch for a 70-80%+ gain on the call fly to lock in more money. We will also tighten the stop on the trade to 148.25 moving forward. 

Open Positions

* The following Open Positions pertain to the Options In Play trade ideas from this and previous editions. Disclosure of the Trader Co-Author’s actual portfolio holdings, as of the date of each publication, is made below under "Trader Author Portfolio Holdings.".

Trader Author Portfolio Holdings

**As of 4pm ET November 18, 2022