Trade Ideas for a Turbulent Market
Taking a look at opportunities to buy when others are selling.
This service is for general informational and educational purposes only and is not intended to constitute legal, tax, accounting or investment advice. These are my opinions and observations only. I am not a financial advisor.
Markets rally and then they correct, and I don’t care how “healthy” or “overdue” the correction is they are never any fun.
Even when you are taking advantage of great opportunities, it rarely feels like you’re making great decisions in the moment.
Over the past 30 days the energy sector ETF ticker XLE was up 8% while the S&P500 was down 4% over the same period.
That didn’t matter last week as every name mentioned had a rough five days. Support didn’t hold so no upside trades were able to be taken in the energy space.
But I do like the strength in the sector.
This week I think you will want to continue to keep your eyes on energy again for more upside, but I also see opportunity elsewhere.
NVDA reports on Wednesday and if guidance continues to be strong there could be quite a bit of bounce that follows for semiconductor stocks.
And that is what this week’s newsletter is focused on.
If you find another newsletter covering energy one week and semiconductors the next, let me know. I will want to subscribe!
Semiconductors - Risk vs Reward
Ahead of earnings this Wednesday, NVDA held above support at $420 nicely, spending less than 40 minutes of Friday's session below.
The rest of the day was spent moving back up to the 50-day moving average and closing the day a penny shy of $433.
Very nice.
Earnings could be the catalyst that pushes not only NVDA higher but also the semiconductor sector.
The weekly candles for SMH, an ETF that tracks the semiconductor space, have bounced cleanly off of the 20-week moving average.
Taking a position ahead of earnings is a higher risk, higher potential reward scenario. A trade in the wrong direction could quickly drop to zero because of the big moves NVDA makes.
Bulls are looking to hold $420, break above the 50-day SMA at $435, and then return to $480.
This will all depend on positive earnings on Wednesday. Plain and simple.
There is not a lot of support below and shares could conceivably drop back to $318 on a bad report.
A drop like that would hit the gap that formed in May and could potentially be a really nice buying opportunity if shares bounced after filling the gap.
I am not thinking this is the more likely scenario, but it is possible and therefore must be considered.
Overall, I would not recommend buying options ahead of earnings. Implied volatility (IV) is at extremely high levels which means the price of options are jacked up a little extra.
Post earnings we will see the IV drop off, creating the “IV crush” that will shrink the price of options across the board.
This is why I think the best trade here is to sell call options that are far out of the money, if you own 100 shares.
If you don’t own shares but want to collect premiums, consider cash secured puts.
You must have enough money to cover buying 100 shares at the strike price. That money can lock up some additional cash quickly this week.
As of Friday’s close, you could collect $1,750 for a single cash secured put at the $420 strike expiring this Friday, Aug 23rd. If shares were to drop below $420 and you were assigned, the effective price would be at $402.50 per share.
Not bad! But you can do even better.
For those that are a little more patient, the same strike price will bring in $2,500 if you move out to the September 22nd expiration date.
Why would you consider this?
The additional time allows shares to recover ground after a big sell off. The popularity and interest in NVDA makes it likely buyers will step in following a big move down.
This recovery is another positive for the seller of put contracts. Combining the drop from extremely high IV levels with the timeline to allow for recovery makes selling cash secured puts here a great trade.
If the share price of NVDA is too high for your account, there are other stocks in the same sector that you can consider.
Look around in the semiconductor space. I like names like MRVL, ON, and RMBS.
There are other names like INTC that have plenty of volume traded in options and will allow you to take a position in the semiconductor space.
The same trade ideas apply for these stocks as well. They all have elevated options prices due to high levels of implied volatility and therefore make for great contracts to sell.
Using alternate tickers can be less expensive way to trade NVDA earnings, but keep in mind that there is no guarantee that these other companies will trade in lockstep with NVDA.
If you want to follow my small account portfolio, I’ve added ON, MRVL, and RMBS last week and you can track every move and note at Savvy Trader.
Subscribe for free and join over 500 other traders!
I also review trade ideas in more detail on all of these names and many more, live every Sunday on YouTube. Subscribe for free to The Trading Triangle!
I hope you are navigating these choppy markets with a measured approach and a solid trading plan. Stay disciplined and remember to be quick to take profits when they’re in front of you.
Have a great week!