January has started on a very weak note so far, and although we saw a temporary relief rally in the S & P 500 and the Nasdaq-100 last week, markets are still struggling. Additionally, we are approaching a seasonally weak February, which typically brings a lot of corrections. Let’s find a cost-effective way using options to profit from a further pullback. Tech earnings kick off next week with Netflix reporting on Tuesday and Tesla on Wednesday. If these tech giants paint a rosy picture, market sentiment could turn around for the Nasdaq. However, expectations are high, and any miss in EPS, revenue, or forward guidance could spell trouble for the tech-heavy Nasdaq. With this view in mind, I am looking to place a small bet against the tech sector using Snowflake (SNOW) as my primary trading vehicle. To confirm my bearish bias on SNOW, I have used the following technical indicators: Price Action: After experiencing a mind boggling 45% rally in the last two months of 2023, SNOW is showing signs of exhaustion. Price is unable to make new highs and the chart is forming lower highs, lower lows in a descending price channel. RSI (Relative Strength Index): Using the RSI indicator is straightforward. If it moves above 70 that means the stock is overbought. Once overbought, a trader needs to wait for the stock to drop below the 70 area for a bearish setup to form. Note that SNOW was overbought from Nov. 29 to Dec. 28. But RSI has dropped 70 in 2024 and has been constantly trending downward. The Trade Setup: SNOW $195-$190 Bear Put Spread The trade structure I am using here is called a bear put spread, also known as a put debit spread. To construct my bear put spread, I need to buy a $195 put and sell a $190 put as a single unit. Most trading platforms will offer a bear put spread (or long put spread) as a trade type and automatically construct the trade for you. All one needs to do is make sure that they pick the right strikes and expiration dates. Here is my exact trade setup: Buy $195 put, Feb. 9 expiry Sell $190 put, Feb. 9 expiry Cost: $250 Scaling up: I am using 1 contract as an example. But scaling up this trade is as easy as adding more contracts. Eg. Adding 10 contracts would risk $2,500 to make $2,500 (i.e 100% ROI) on this trade. Profit target If SNOW is trading at $190 or below on expiration date, this trade will double my money and return a 100% ROI on money invested. As soon as I get filled on this trade, I can place a GTC (good till canceled) closing order for $4.85 on this trade. That way, the trade will close on its own when it reaches its full profit target. I like to close profitable trades around 94% ROI. This helps avoid waiting until the last few days of expiration week, thereby reducing gamma risk. If the trade goes against me, I would want to get out of the trade if I lose 50% of my initial investment (i.e $1.25). By simply doing this, every winner will cancel out two losing trades. -Nishant Pant Founder: https://tradingextremes.com Author: Mean Reversion Trading Youtube, Twitter: @TheMeanTrader DISCLOSURES: (None) THE ABOVE CONTENT IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY . THIS CONTENT IS PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND DOES NOT CONSITUTE FINANCIAL, INVESTMENT, TAX OR LEGAL ADVICE OR A RECOMMENDATION TO BUY ANY SECURITY OR OTHER FINANCIAL ASSET. THE CONTENT IS GENERAL IN NATURE AND DOES NOT REFLECT ANY INDIVIDUAL’S UNIQUE PERSONAL CIRCUMSTANCES. THE ABOVE CONTENT MIGHT NOT BE SUITABLE FOR YOUR PARTICULAR CIRCUMSTANCES. BEFORE MAKING ANY FINANCIAL DECISIONS, YOU SHOULD STRONGLY CONSIDER SEEKING ADVICE FROM YOUR OWN FINANCIAL OR INVESTMENT ADVISOR. Click here for the full disclaimer.
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