Big Volatility Swings Are What This Trade Idea Was Built For

Each morning, in addition to telling some pretty hilarious jokes that I call “dad jokes,” I let members know what they need to look out for by providing them with the details of the day’s calendar.

Trust me when I tell you that things can get awfully busy during the trading day, so having that daily reminder of what to look out for is invaluable.

This past Wednesday’s FOMC minutes is a perfect example of one of those key events that traders should always pay attention to because of the potential for things to get a little wacky leading into and following the release of these minutes.

While volatility did indeed spike in the wake of Wednesday afternoon’s FOMC minutes announcement, the good news for traders is that history shows volatility spikes usually produce tradable buying opportunities

Today, I am going to show you how I’m playing this volatility. And the beauty of this trade? Well, it has the potential to work in either direction. 

Before we get going, I gotta tell ya, I haven’t been so excited to make it to the weekend in a long time.

Not because I had a tough week in the markets, but because I nearly died while riding my bike this week.

That’s right, I had my life pass before my eyes and everything else you hear about from folks that have had a near-death experience. 

Let this be a lesson that if you’re crossing a 4-way intersection and you see a box truck that’s about 300 yards away, don’t just assume that that truck is going to slow down for you. 

Anyway, I’m safe, and I am grateful to be here talking markets with all of you. 

Now, it’s important to understand that large tech companies saw some of the steepest losses on Wednesday because the language contained in those minutes warned of the Fed’s intentions to hike interest rates a bit more aggressively than the market originally thought.

You see, large growth stocks like NVDA (Nvidia Corp.) are valued based on future discounted cash flows.

Therefore, the higher rates go, the lower the present value of that future stream of earnings.

Like so many things in life, though, when stocks move too far, too fast, the potential for them to bounce back to the mean increases, sort of like a rubber band.

But, I also respect the possibility that the market may be vulnerable to additional volatility in the days ahead.

That’s why I decided to go with a trade that has the potential to work in either direction. 

That trade is a “long strangle” options strategy on NVDA.

Here’s the setup:

In my Thursday night update to members, I noted the interesting setup developing on both the daily and 30 min charts with the LottoX Squeeze setup aligning accordingly.

Here’s the 30-minute chart:

Here’s the daily chart:

Now, you’ll notice on these charts that I provided a few key levels that should be influential over the days ahead.

But it’s important to understand that for my long-term strangle trade, I chose to look out to the 14 Apr 22 contract to give myself enough time for the volatility to play out.

Here are the details of my NVDA trade idea:

Buy 1 14 Apr 22 NVDA 400 call at  (6.70)

Buy 1 14 Apr 22 NVDA 220 put at  (4.80)

Net cost =                              (11.50)


So why do I think there is potential for NVDA to move as high as 400 or as low as 220 before this window ends? 

Because that’s what the market makers think.

Specifically, as I’ve highlighted below, the implied move for NVDA is + or – $63 by April 14th. 

Now that you know why I like a strangle trade and why I chose these strike prices, let’s discuss the mechanics of this type of trade.

Why would a trader use a “long strangle” options trade?

It is important to highlight the strangle trade I am using in this particular case is a long strangle. I’ll explain the difference between a long strangle and a short strangle in a moment.

A trader uses this strategy to capitalize on large price moves in the underlying asset, in either direction.

In other words, the favored forecast is for a large price move in the stock to occur, in either direction.

With a long strangle, a trader buys one call with a higher strike price and also buys one put with a lower strike, both of which have the same expiration date.

This trade is established for a net debit and profits if the underlying stock rises above the upper break-even point or falls below the lower break-even point.

This compares to a short strangle, which is constructed by selling one call and selling one put of the same expiration date, thereby creating a net credit and profits if the underlying stock stays between the upper and lower break-even points.

What is the profit potential of a long strangle?

The potential profit picture for this trade is unlimited on the upside because, in theory, there is no limit to how far a stock’s price can rise.

On the downside, yes profit potential is limited because the lowest a stock can fall is limited to zero. However, there is still substantial room to profit if the stock falls sharply.

What is the loss potential of a long strangle?

The maximum a trader can lose on this trade is limited to the total cost of the strangle plus commissions.

Maximum loss occurs when, at expiration, the underlying stock price closes between the breakeven points of the trade, causing both options to expire worthless.

How are the 2 breakeven points calculated?

Top breakeven point = higher strike price plus total premium paid:

In this example: 400 (strike) + 6.70 (premium) = 406.70

Bottom breakeven point = lower strike price minus the total premium paid:

In this example: 220 (strike) – 4.80 (premium) = 215.20

How does time affect a long strangle?

Since this is a net-long options strategy, the trade will have to fight the effects of time decay.

And since the strangle consists of two long positions, these trades tend to lose money more rapidly if volatility does not pick up as was originally anticipated.

With this in mind, it’s important to make sure you give yourself enough time for this trade to work out.

How does volatility affect a long strangle?

As mentioned earlier, this trade is meant for situations when volatility is expected to rise substantially. So, it goes without sayin’ the trader wants things to get crazy (big price swings beyond the breakeven points are desired) in terms of price movement when this trade is implemented.

What about the risk of early assignment, you ask?

Well, since the trader owns the options in this strategy (the trader bought both calls and puts to open the trade), they decide when they want to exercise the options. Therefore, there is no risk of early assignment.

Let’s have a great weekend and until next time…

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