בס״ד

2800% in Your Needy Pocket, and… Cadillac Trades on a Fiat Budget (IAA, ROCK, MED/VDC)

Posted on November 2, 2020

[In honor of the 30th yahrzeit of Rabbi Kahane ZT”L, HY”D, this trade is being offered free to all readers.]

We’re shutting down two bug-eyed, Batflu-inspired trades that paid off NICELY.

So without further ado…

And Stew the Fondue!

We start with our August 19th initiative, Shock Knock! Stock Jock Mocks ROCK Stock: “‘Tick Tock’ on the Clock before the Hemlock’s Unlocked!”

There we urged you to sell the ROCK February 19th 75 CALL for $3.50 and buy the ROCK February 19th 55 PUT for $3.60.  Total debit was a dime.

And today?

The long 55 PUT sells for $3.80, and the short 75 is worth $0.90.  Sell the first, buy back the second, and you take home $2.90 on ten cents spent.

And that’s a glorious 2800%.

Next was our MED/VDC initiative from August 3rd, all the details of which can be found here.

Currently, the trade has an $11.38 credit and we’re holding two (2) short VDC November 161 CALLs whose current price is $3.90 (each).

Our best thinking is it’s time to buy them back.

In so doing, you exit the trade with $3.58 on an initial outlay of $1.07.

And that’s 234%.

This week we turn to car wreck profiteers IAA Inc. (NYSE:IAA), online corporate junk dealers non pareil.

IAA has fully rationalized the car parts sourcing and sales business and has grown very quickly since their IPO in the summer of 2019.

But in so doing, we believe price has gotten ahead of itself.

First, the fundamentals.

  • The stock trades with a P/E of 46,
  • Pays no dividend,
  • Has no Price to Book ratio, and
  • Has posted Q/Q sales and earnings losses in the latest quarter (of -19% and -35.5% respectively).

And yet the stock has continued higher.

Now, granted, there’s expansion happening.  But we insist that stock prices remain within the realm of the rational.

At least, mostly we do.

Here’s the daily chart since the Batflu bottom –

Technically, IAA looks ready to roll over –

  1. Two RSI overbought reads have led to negative divergence since September (in green),
  2. Price has broken strongly from her initial, principal trendline (in red, at top) and now rests on the short term moving average.  A break below that line would lead technicians to take profits and set shorts.
  3. Two significant gaps (in blue) remain open, bookmarking the first Fibonacci retracement line at 45.  That level also emerges as major support, as the longer term MAs are bunched there.

And for all of the above, we’re recommending a calendar spread that looks like this –

A Jew and His Money recommends you consider selling the IAA November 20th 60 PUT for $4.60 and buying the IAA December 18th 60 PUT for $5.80.  Total debit on the trade is $1.20.

Rationale: we want to take advantage of a declining price in IAA for the least possible outlay.

Selling the near term PUT to buy the longer dated one effectively accomplishes that.

There are a number of ways to profit here.

First, from the decay in time value on the short option, second from movement in the underlying (in the expected, southerly direction).

Because IAA has been resilient of late, a calendar spread offers the most logical means of allowing the short (near term) PUT to expire worthless, while still giving us downside exposure.  That is, if IAA remains at current levels for several weeks before declining, we win from the time decay on the first option.

We may close at any time.  If the move lower happens as the near term expiry approaches, we may buy back that (November) PUT – which will possess little to no time value – and sell the longer dated, which will still be rich in both time and intrinsic (along with a nutritious helping of implied volatility, the Good Lord willing).

If the trend is flat to lower toward the November expiry (or even stagnant at current prices), we may choose to buy back the short option and let the long dated (December) ride.  That, in the hope that momentum will gather to the downside as year-end approaches and our long option can gain considerably in value.

Maximum loss on the trade – if the stock moves higher, and we do nothing – is $1.20.

Maximum gain is too difficult to determine on a calendar spread due to the number of moving parts and permutations.

Stay tuned.

With kind regards,

Hugh L. O’Haynew

 

3 responses to “2800% in Your Needy Pocket, and… Cadillac Trades on a Fiat Budget (IAA, ROCK, MED/VDC)”

  1. Jim Rodgers says:

    Hello Hugh,
    Asking for your advice. Calculating number of contracts to put on per trade by taking a fixed percentage of overall account value and dividing it by the max loss per trade to arrive at number of contracts to put on.
    Ex: 50000 x 1.5% = $ 750 / $ 120 ( max loss on IAA trade ) = 6.25 or 6 contracts.
    Is this a reasonable method?
    Also rep at TD said to always consider the possibility of your options being assigned. What do you think?
    Not sure how much schooling, if any, can be doled out, but you can always exercise the “option” of saying, ” You’ve used up your quota of questions for this month Jimmy! “

  2. Hugh L. O'Haynew says:

    Hey Jimmy,
    Always a pleasure. Keep ’em coming.
    A few things here:
    First, we recommend never using more than one to two percent of your RISK capital for each trade. That means your house, your retirement, your vehicles, any indentured servants, are kept strictly out of the picture.
    Outside of that, your approach looks principled, and that’s dynamite. But what’s more important is that you have the DISCIPLINE to stick with it.
    Lots have been lost to a great plan that got tossed away in a moment of pride or despair…
    As for your options being assigned, we assume the rep was talking about early assignment, which happens very rarely.
    Only in-the-money short options are at risk, and only near expiry, when there’s little to no time value remaining.
    The other possibility is when you’re short a CALL option and a dividend is coming up that’s LARGE — and that, too, is now a thing of the past (or mostly).
    That said, it can happen, and there’s nothing to be done about it when it does.
    There are a great number of scenarios that would lead to a desperate scramble for a solution, and the same number that wouldn’t make you blink.
    It all depends on the trade set and your broker’s policies. Each situation is unique.
    Too many permutations and combinations to be taken up here.
    For all intents and purposes, it’s really not something that can be planned for.
    Hope that helps.
    Now back to this election charade!
    All the best,
    Hugh

  3. Jim Rodgers says:

    Hello Hugh,
    Thank you for taking the time to answer.
    Jim

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