By Dan Darrow
October 09, 2022
Today's Trade Ideas
Strategy: Put Spread
Long Nov18 $43 put
Short Nov18 $39 put
Action Area: $1.20 - $1.50
Comments: KR is a bearish trade idea. Selling in September hit many areas within the market, including those that had been less sensitive to volatility over the previous few months. KR stabilized following its July dip below 45, and the stock was working its way back into the 50s, with a decent earnings report briefly sending it to 52. That was two sessions before the September CPI, and KR began to steadily slide lower after the disappointing reading. It dropped below the July low (44.34) two weeks ago and has formed a tight consolidation underneath it as the 8day ema provides overhead pressure. The stock is now setting up for another leg lower, and a clean break of 43 should start a move down into the 40 level to retest key support from late 2021. The Nov18 put spread will be targeting an initial move to <41.50 to begin locking in money, and the swing trade will have a tight stop above 45 or a 40-50% net debit loss, whichever happens first.
Strategy: Put Spread
Long Nov18 $115 put
Short Nov18 $105 put
Action Area: $3.30 - $3.85
Comments: MRNA is a bearish trade idea. We recently had to back off a bearish trade idea on MRNA when the stock gapped sharply higher on chatter the company was working on an agreement to supply vaccines to China. The pop ended up being short-lived as the agreement never materialized, and MRNA has steadily slid lower over the past several weeks to retest the low of the year. The bounce on Tuesday stalled before reclaiming the 20day sma, and Friday’s sharp reversal lower put the stock back below the 8day ema and within striking distance of its recent low (115.03). A decisive break of 115 should trigger a major move lower now, with the 100 level a key focus level underneath. The Nov18 put spread will be targeting an initial move to <113.50 to begin locking in money, and the swing trade will have a tight stop above 126.75 (above the 20day sma) or a 40-50% net debit loss, whichever happens first.
On The Radar
Easy come easy go. It shouldn’t be a surprise at this point in 2022 that indices can swing dramatically on key economic readings, but a ~3-4% drop on QQQ and SPY following a better-than-expected jobs report is still eye-opening. The huge washout on QQQ and SPY on Friday put them back within striking distance of their recent low, and it wiped out most of the rally that had developed earlier in the week. Both are below their 8day ema again, so the action continues to favor the downside, but the CPI reading on Thursday will be another huge economic event that could lead to another fast move. Having a good mix of bullish and bearish trade ideas and hitting targets/stops quickly is extremely important right now. Also, as we saw in September, we could see a large swing this week on the CPI reading, so keeping size down and overall risk lower may be smart until after the report.
The action on Friday is exactly why we try to stick with some bearish positions even when the market is aggressively squeezing higher. The huge drop following the jobs report knocked most stocks lower, and after looking like it was attempting to turn the corner earlier in the week, AFRM quickly slid back to the 18-19 range. AFRM had buyers in this range the past two weeks, but the fast swing in momentum lower should lead to a near-term breakdown on the lagging stock. The July low (16.24) is a clear downside target, so we will give the Oct21 put spread roll down a few sessions to see if it begins to make a push into that area. If it struggles to extend lower by Wednesday, we will need to make a decision on the shorter-term position (i.e. roll out to buy more time or close the trade).
The volume still hasn’t come in on the MDGL Nov18 options, so the wait goes on. The company is scheduled to report Phase 3 NASH data in either October or November, so there is some time to be patient with the strangle initiation, but if the volume doesn’t increase and the bid/ask spreads tighten over the next week, we may have to adjust the trade. Ultimately, what’s most important is finding a strategy with a solid risk to reward, and if that isn’t possible due to illiquid options, we have to reevaluate the strategy.
Trader Author Portfolio Holdings
**As of 4pm ET October 07, 2022