By Dan Darrow

October 16, 2022

Today's Trade Ideas

Symbol: ZM

Style: Swing

Strategy: Strangle


Long Dec16 $85 call

Short Dec16 $90 call

Long Dec16 $60 put

Short Dec16 $55 put

Action Area: $1.90 - $2.50

Comments: ZM is an interesting setup for a strangle. A disappointing August report sent ZM sliding into the low-80s and the previous 2022 low, and after a three-week consolidation, it began to steady drop into the mid-to-low 70s. The stock has tightened up in a range over the past several weeks, with sizable overhead resistance at the 8day ema and 20day sma. The quiet recent action on this historically volatile name is leading to a drop in option prices, but a resolution of the range seems likely as we enter the heart of earnings season (multiple peer reports), and the stock should see a large move once it breaks out/down out of the current pattern. The Dec16 strangle will be a targeting a move of $11+ in either direction over the next month, with the contracts going through the company’s own report (tentatively late November) to provide an additional catalyst. The trade will use a 40-50% net debit loss to begin with, and we can institute a technical stop once one side of the position is managed.

Symbol: LCID

Style: Swing

Strategy: Put Spread

Contracts: Nov18 $12 put

Action Area: $1.40 - $1.70

Comments: LCID is a bearish trade idea. LCID reaffirmed 2022 production targets on Wednesday, but the modest numbers failed to inspire bulls. The stock traded at a 52-week low the day before the headline and only saw a small pop on the news, with the stock struggling to reset the key 8day ema. After a weak finish on Friday, LCID has now formed a week-long bear flag under previous year-to-date support (13.50) and triggered a near-term breakdown, with open room lower to the downside. The Nov18 put will be targeting an initial move to <11 to retest the October low, and the swing trade will have a tight stop above 13.15 or a 40-50% net debit loss, whichever happens first.

On The Radar

Our next Option Session is tomorrow (Monday 10/17), and we have lots to catch up on. In addition to breaking down the CPI number and the action following the release, we will spend a good portion of time strategizing earnings plays as earnings season kicks into high gear over the next two weeks. It will be a busy session, so I hope you all can make it!

Volatility is good for trading. Erratic action is tougher. A massive red-to-green rip following the hotter-than-expected CPI on Thursday was followed up with a large selloff on Friday, making for a confusing stretch of action. The CPI reading has set the tone for market action the last few months, but we need to wait and see how QQQ and SPY respond following the wild swings to wrap up the week. On one hand, the huge volume low on Thursday may give bulls confidence that a near-term bottom is in, but on the other hand, both QQQ and SPY are below their 8day ema and 20day sma and well within the recent monthly downtrend. One takeaway is that we need to continue to have a balanced mix of bullish and bearish trade ideas, and keeping risk/size at a manageable level is important. We will also be on the hunt for quality earnings setups as the reporting period heats up. 

Banks kicked off the quarter with a busy session of headlines on Friday, but the XLF had a mixed session. After opening and running to 32+ quickly, XLF turned lower fast, sliding to turn red by mid-morning and grinding lower in the afternoon to finish around 31. The drop put XLF back near the top of the bear portion of the Oct21 strangle, and the downside will be our focus tomorrow. Because the options expire this Friday, we need to closely manage the position, and we will be watching for continuation lower on Monday to close/roll the bear portion of the strangle.

Something has to give on GME soon. The stock has been in an increasingly tight range around 25, with consistent overhead resistance from the 8day ema and 20day sma. The latter is now under 26 and pressuring the stock lower, and either a breakdown or a breakout should happen soon. Action across Retail is weak right now, and GME has been acting weaker since August, so it looks set up well for a breakdown, but we will need to be patient with the Nov18 put spread to let the trade develop. We can tighten the stop on the trade to 27.50 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 October 14, 2022