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

[In honor of the 30^th 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 19^th 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 3^rd, 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 20^th 60 PUT for $4.60 and buying the IAA December 18^th 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

Follow @HughLOHaynew