Posted on April 28, 2022
With the market making increasingly large intraday moves, we expect a volatility event in the coming weeks.
And what does that mean?
Essentially, that we’re about to face an uncontrollable surge on the part of the major market averages that will create liquidity outages and/or ‘spread failures’ on the trading floor.
A ‘spread failure’, for the uninitiated, is a condition that strikes infrequently. Most often in the midst of a steep selloff, a ‘spread failure’ means traders simply cease offering a bid/ask spread on a security.
It means, in essence, that the market has broken.
We’ve heard many stories of this sort, though we’ve seen it only once, back in October, 2008.
We were looking to close and couldn’t find numbers anywhere.
They didn’t exist.
Until the selling had calmed and the market (and that particular stock) had bounced somewhat, there was nothing to do; no spreads to be seen.
And that’s not right.
With that in mind, we’re now turning to oil and gas giant ConocoPhilips (NYSE:COP) to buttress our fortunes.
Because not only is oil about to spill, but the majors, too, are headed for the tar pit.
Now look at the chart –
Now, pay attention, squirt –
A Jew and His Gold recommends you consider selling the COP May 20th 91/96 CALL spread* for a credit of $2.05 (5.35/3.30) and buying the COP May 20th 93/88 PUT spread** for $2.31 (4.80/2.49). Total debit on the trade is $0.26.
Rationale: for $0.26 we buy the opportunity to make $4.74 NET. That’s 1823%.
Max loss is $5.26 (difference between the CALL strikes plus the initial credit).
Time is a consideration. Expiry is in three weeks; not the usual duration we allot to our trades. That said, COP looks wobbly and ready to spill at any moment. Go further out if you need to buy more time.
Our breakeven arrives at $91.74, just 1.4% below the stock’s current price.
Full profits (1823%) are achieved with a decline of just 5.4%.
This looks like a swim in the pond, folks.
Barring any unforeseen oil slick.
Many happy returns,